Definition
An Offer For Sale (OFS) is a method used by companies to sell their shares to the public in an efficient manner. This process is typically used by larger corporations to divest shares to public investors, without the need for issuing new shares. By doing so, the company reduces its equity capital but increases the public participation in its equity.
Key Takeaways
- Offer for Sale (OFS) is a simplified method of share sale through the exchange platform primarily used by promoters to dilute their holdings. The method ensures transparency, efficiency and fairness in the pricing of the securities being offered.
- The OFS is open to all category of investors. However, a certain portion (usually 10%) of the shares on offer is reserved for retail investors who are those applying for shares of value not more than Rs. 2 lakhs.
- The OFS route provides an alternative to promoters for achieving minimum public shareholding in a transparent and efficient manner. It’s considered as beneficial for both promoters and investors due to its simplicity, short time duration, hassle-free procedures and instant liquidity.
Importance
The finance term “Offer for Sale (OFS)” is important as it provides an efficient and transparent method to offload shares in a company.
It is typically used by promoters of listed companies to dilute their holdings and is often a mechanism embraced during the disinvestment process of a public sector unit.
For shareholders, it provides a transparent process of price discovery and is considered a cost-effective way of share sales.
Also, it offers retail and non-retail investors the opportunity to participate in the process and purchase company shares often at a discounted price.
Therefore, the significance of the term “Offer for Sale” lies in its ability to streamline disinvestment, ensure price transparency, and promote a more balanced distribution of shares among the investing public.
Explanation
The purpose of an Offer for Sale (OFS) is to allow promoters of a company, or significant shareholders, to reduce their shareholding in a transparent and effective manner. Primarily used to dilute existing shareholdings, the OFS mechanism has played a pivotal part in helping companies to comply with requisite shareholding patterns as mandated by regulatory bodies.
Large shareholders often leverage this route to sell portions of their stake, thus making it a preferred choice to enhance public participation and promote diversification of shareholding. An Offer for Sale often comes into play when a publicly traded company needs to comply with the minimum public shareholding rules where public ownership has to be at least 25% or when the promoters wish to exit the company.
It can also be used by governments to divest their stakes in public sector undertakings. By using an OFS, companies can ensure that the process of share sale is not only transparent but also provides a fair opportunity for all market participants, including retail and institutional investors, to partake in the offering.
This method also avoids the potential operational complications such as those seen during rights issues or open offers.
Examples of Offer For Sale
Offer for Sale (OFS) refers to a mechanism where promoters in a listed company sell their shares directly to the public. Here are three real-world examples:
Facebook’s OFS: In May 2012, the world-famous social networking site, Facebook, conducted an Offer for Sale which is considered one of the biggest in tech history. It was not a typical initial public offering (IPO) as the majority of shares sold were from existing shareholders, notably Facebook’s CEO, Mark Zuckerberg.
L&T’s OFS: In January 2022, Larsen & Toubro (L&T) Infotech conducted an Offer for Sale (OFS) for about 2% of the paid-up equity shares. The intention behind the OFS was largely to enhance public shareholding and compliance with Securities and Exchange Board of India (SEBI) norms.
Royal Mail’s OFS: In 2013, the UK government used an Offer for Sale to sell a majority stake in the Royal Mail to public investors. A majority of the shares were sold to institutional investors, and a portion was reserved for retail investors who could buy shares either directly or through intermediaries. It was one of the most significant privatisations in the UK for years.
FAQ: Offer for Sale
What is an Offer for Sale?
An Offer for Sale (OFS) is a mechanism where promoters and other large shareholders of a listed company sell their shares in the open market. Instead of issuing new shares, the promoters and large shareholders use this method to sell their own shares and reduce their stake in the company.
How does an Offer for Sale work?
An Offer for Sale involves the sale of shares by existing shareholders such as promoters or holding companies. Through OFS, these shareholders are able to reduce their stake in the company by offering their shares to the public. The offer is made at a pre-determined price or a price range, and the total number of shares on offer is also determined in advance.
What is the purpose of an Offer for Sale?
The main intention behind an Offer for Sale can be to either comply with SEBI’s minimum public shareholding norms or to raise quick capital. The promoters and institutional investors sell off a part of their stake to the public, thus achieving greater public ownership in the company and enhancing the liquidity of shares.
What are the benefits of an Offer for Sale?
The benefits of an Offer for Sale include increased liquidity, greater public ownership, and transparency in the selling process. Since the process is managed by the exchanges, all transactions and processes are transparent and readily traceable.
What is the difference between an Offer for Sale and an Initial Public Offering?
An Initial Public Offering (IPO) involves the issue of new shares by a company, thereby increasing its public shareholding. An Offer for Sale, on the other hand, involves the selling of shares by existing shareholders. Therefore, in an OFS, the number of shares in the company remains the same, unlike an IPO.
Related Entrepreneurship Terms
- Underwriter
- Initial Public Offering (IPO)
- Securities
- Prospectus
- Shareholders
Sources for More Information
- Investopedia: A comprehensive source for financial terms and definitions.
- Financial Times: A British international daily newspaper with a special emphasis on business and economic news.
- Bloomberg: A global business and financial information and news leader.
- The Economist: A weekly international news and business publication.
