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Offer for Sale (OFS) Demystified & FAQ's

We all are aware of the word Disinvestment which has been the buzz of the govt corridors as they are trying to cap the current account deficit i.e. CAD by going for it. In this process govt tries to offload portion of its stake in PSU companies and this whole process called as divestment - an important means of increasing its revenue. The government expects to earn as much as Rs 43,000 crore by selling portion of the government's stake in various state-owned companies. Of this, Rs 2,000 crore is expected to come from the sale of 5% stake in the Steel Authority of India (SAIL). Media reports suggest that a 10% stake sale in Coal India is also in the pipeline, which could earn the ex-chequer as much as Rs 23,000 crore.

As a retail investor, it may be time to get ready for multiple Offers for Sales or OFS. This is exchange - based process of selling promoters' stakes in listed companies in the market in a transparent manner. It also allows a wider participation through an exchange-based bidding platform.

It is important to you as a retail investor, which is why you should be ready for many offers for sales (OFS) in the near future.

Here are three reasons why:

SEBI Action
 
Securities and Exchange Board of India (SEBI)has been doing a good job off late and in this league lies its efforts to encourage retail participation in Offer for Sale (OFS).

With this in mind, it recently expanded rules so that the top 200 companies by market capitalization in any of the last four completed quarters can go the OFS way. Earlier, it was only available to the top 100 companies by market-cap. SEBI has also introduced a minimum 10%  reservation for retail investors. It is worthwhile to mention here that a retail investor is anyone who places a bid for shares below Rs. 2 lakhs.

Apart from retail investors, at least 25% of the total shares offered are reserved for mutual funds and insurance companies. Retail investors can also bid in both the retail and general categories. This provides them a greater scope for winning bids.

Discounted price
 
During an offer for sale, the promoter fixes a particular price at which it will sell the shares. This is called the floor price. It is usually lower than the market price so as to entice investors. The discounted price is one of the key reasons to buy shares during an offer for sale and not from the secondary Market. For example, the floor price in the 9.33% stake sale in MMTC in 2013 was Rs 60. This was a 72% discount to the then share price. However, the discount may not always be this steep. The floor price in the SAIL OFS in 2013 was Rs 63 when the market price was Rs 63.9. Moreover, retail investors are generally offered a discount on the floor price, especially in OFS of Government companies.

Established companies 
 
Investors are often confused between an offer for sale and an initial public offering (IPO). The key difference is that only a listed company can come up with an OFS, while an unlisted company comes up with an IPO to get listed on the stock markets. The key advantage of investing in an OFS over IPO is that the company is already listed and has a trading history. You get details of its past performance easily once it is listed. An IPO, on the other hand, is more risky.

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