Companies need funding all the time. As the business grows, more capital is required to supplement the increased demand, meet expansion plans, and improve product usability. If the company is listed on the stock exchange, it may take the Follow-on Public Offer (FPO), also called further public offer, route and raise more money from the open market and fund its requirements. An FPO proceeds the Initial Public Offer (IPO) and is nothing but a fresh issue of shares.
That said, there’s no guarantee that the FPO will suffice the company’s capital needs. It might fall short, which could affect the business in the short as well as long run. In such a scenario, the company can go with an offer for sale (OFS) to raise additional capital.
What is an OFS?
Introduced by the Securities and Exchange Board of India (SEBI) in February 2012, an OFS is a method through which promoters can dilute their shares in the company. Non-promoters holding at least 10% of the share capital in the company can also participate in an OFS and “sell” their shares on the stock exchange. Market participants like retail investors, companies, foreign institutional investors (FIIs), and qualified institutional buyers (QIBs) can then bid for these newly available shares.
How does an OFS work?
The bidding for an OFS is similar and yet different from an IPO or FPO. Once the promoters have decided to raise funds through this method and they’ve informed SEBI about their intentions, they must fix a “floor price”. Interested investors must then bid for the shares at a price higher than the floor price.
Unlike in an IPO where the bid price cannot be more than one, in an OFS investors can place multiple bids above the floor price. This is followed by the allotment of shares, which is more transparent than that for IPOs as the system runs on a real-time basis.
The shares can, meanwhile, be allotted in one of the following ones:
- Single clearing price
- Multiple clearing price
In the former, shares are allotted at the same price to all the investors. In the case of multiple clearing prices, though, the shares are allocated on a priority basis, meaning the investor who placed a higher bid will be given preference. Fortunately, there’s another option — cut-off price — wherein shares are allocated at the lowest price during an OFS.
How can investors bid for an OFS?
Assuming that you’re a retail investor, you need a Demat account and a trading account in order to participate in an OFS. If you have that, you can bid from an online portal or let your broker do it for you.
The good thing is that retail investors can place bids in the retail as well as the non-retail category (the non-institutional investors (NII) category). SEBI has also made it mandatory for companies to offer a minimum 10% reservation for retail investors in an OFS.
Bear in mind, however, that the cumulative bids for relative investors cannot exceed ₹2 lakh. If that happens, the bids become ineligible.