What is Offer for Sale in IPO?
- 4 min read
When you read of an offer for sale (OFS) in an IPO, what it means is that existing shareholders, sometimes promoters or big-ticket investors, are selling a portion of their holding to the public. Contrary to a fresh issue of new shares, here the shares already exist — they’re just being transferred. This helps promoters divest their holdings and provides an opportunity for investors to take a stake in the company.
Understanding the meaning of OFS
The offer for sale (OFS) definition is simple — it’s a mechanism by which existing shareholders of a listed firm sell their shares directly to the public at the stock exchanges. Rather than the company raising cash for expansion, the sellers receive the proceeds. The entire transaction takes place on an open, electronic platform run by the exchanges, making it equitable for all parties. Over the last few years, offer for sale through IPO route has been widely utilized, particularly by promoters or even the government to dilute their holding in firms.
How does an OFS Work?
In an OFS IPO, eligible shareholders announce their intent to sell shares through a stock exchange platform. Investors can place their bids during the trading window, generally open for a single trading day. Bidding is conducted electronically, and allotment depends on demand and investor category, such as retail or institutional. Once bidding closes, shares are allocated, and funds are transferred. The process is quick, cost-effective, and ensures wider participation in equity ownership.
Features of OFS
Following are some of the significant features of offer for sale:
- Promoters or shareholders owning above a specified threshold alone are eligible to offer through OFS.
- The facility is available only for listed entities.
- The bidding window will normally be open for one trading day.
- Investors may submit bids at the floor price or above.
- The mechanism is overseen by SEBI to maintain transparency.
- Separate reservation for retail investors is usually made.
- Allotment is bid received and category preference-based.
Benefits of OFS
An offer for sale in IPO provides several benefits. Promoters have an easy method to dilute shareholding as per regulatory requirements. Investors get a transparent and accessible option to buy shares of well-established firms. The bidding scheme provides fair pricing with discount rates for retail participants. As it is carried out through exchanges, the costs are less than with other mechanisms of fund-raising. In addition, government disinvestment schemes extensively employ OFS for shedding holdings in public sector undertakings, thus making it a reliable mechanism.
Risks Associated with OFS
While an offer for sale has its merits, it also carries risks. Share prices may face downward pressure after the OFS if demand is weak. Since no fresh funds enter the company, there is no direct impact on its growth or operations, unlike a fresh issue. Small investors may find it difficult to secure allotments if institutional demand is high. Market sentiment and timing also play critical roles—if broader conditions are unfavourable, the issue might not perform as expected. Therefore, investors should evaluate carefully before bidding in an OFS.
FAQ’s on OFS in IPO
1. What is the difference between IPO and OFS?
An IPO issues fresh shares to raise funds for the company, whereas offer for sale consists of existing shareholders offering their interests for sale. In IPO, money reaches the company; in OFS, money reaches the selling shareholders.
2. Which is better, OFS or fresh issue?
Neither is inherently better. A new issue facilitates company expansion with fresh money, whereas an OFS IPO enables promoters to decline stake openly. Investors must consider their motives and the outlook of the company before making a selection.
3. When can I sell OFS?
You can sell shares received in an offer for sale after they are credited to your demat account, usually within two working days of allotment, following standard trading guidelines on the exchange.
4. What happens to share price after OFS?
After an offer for sale, share prices can fall for some time because of higher supply. But it depends on market demand, investor sentiment, and overall company fundamentals.
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Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
