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An offer for sale or OFS is a more straightforward method in which the promoters of the public companies can sell their shares and transparently reduce their holdings through a bidding platform for the exchange. In general words, the offer for sale is when the promoters sell their shares to the general public. It is a transparent process which only takes place on the stock exchange. The company resort to OFS when it requires additional capital to meet its goals. The company’s promoters will dilute their stake by selling their shares to the companies, retail investors, Foreign Institutional Investors and Qualified Institutional buyers on an exchange platform. In OFS, the company sets a floor price and in response to which, the bidders are not allowed to quote less than the floor price. The buyer can even bid for a single share in the bidding process as there is no minimum limit to participating in the sale offer. To regulate this structure, the SEBI has issued a comprehensive framework which will be discussed in this article in detail.
Table of Contents
The eligibility conditions for the facility of an offer for sale are:
1. Exchange: The facility of an offer for sale shall be available on the Bombay Stock Exchange (BSE), National Stock Exchange (NSE) & Metropolitan Stock Exchange of India (MSEI).
2. Sellers: The eligible conditions for the seller are:
3. Buyers: All the investors registered with the stock exchange brokers are eligible to purchase shares through an offer for sale. However, the promoter or promoter group entities are excluded from buying the said shares, but they can purchase the share if the non-promoter shareholder offers them.
4. Cooling-off Period: The cooling off period of the transaction (i.e. purchase or sale before and after the offer) in the shares of the company for promoter or promoter group entities & non-promoter shareholders for offering the shares through Offer For Sale mechanism should be based on the liquidity of the shares on exchanges and would take place in the following manner:
Exception: The promoters or promoter group entitiesof companies whose shares are either liquid/illiquid could offer their shares only through an Offer for sale or Qualified Institutional Placement (QIP). With a gap of two weeks between the two offers.
Under subscription of OFS: Thepromoters or promoter group entities can offer the undersubscribed portion of the OFS only for compliance with Minimum public shareholding norms. The offer shall be made in the open market with a gap of two weeks from the closure of OFS.
The size of the offer for sale must be a minimum of Rs 25 Cr. However, the size of the offer can be less than that if the promoters or promoter group entities want to achieve minimum public shareholding in a single tranche.
The advertisements about the offer for the sale of shares through the stock exchange should be made after the notice or announcement of the OFS of shares to the stock exchange. Further, all the expenses in relation to the offer for the sale of shares should be borne by the sellers.
The operational requirements are divided into the following parts:
1. Broker Appointment: The seller needed to appoint a broker for the purpose of an offer for sale. The seller’s broker can also undertake transactions on behalf of the eligible buyers.
2. Announcement or Notice of the OFS of Shares: The seller is required to announce the intention to the sale of shares latest by 5 PM on T+1 days to the stock exchange, where T is the day of the OFS. The stock exchanges will then notify the market immediately upon the receipt of the said notice. However, the stock exchanges can allow this on case to case basis and, on the request of the seller, extend this time by 6 PM subject to recording the reasons in writing. The seller can also announce the intention to the sale of shares by providing the following information:
3. Floor Price: The conditions for floor price are discussed below:
4. Discount by the seller: The seller can offer a discount to the retail investor. However, the details of the discount and percentage of reservation for the investors should be disclosed upfront in the notice of OFS to the exchange. The manner of giving a discount to retail investors shall be as follows:
a. Multiple clearing price Offer for Sale
b. Single-Clearing Price OFS
The duration of the offer for sale should be as per the trading hours of the secondary market. However, on the commencement of the offer for sale on the T day, only non-retail investors should be permitted to place their bids. Also, the cut-off price should be detrained based on the bids received on T days. The retail investors should bid on the T+1 day and the seller must make appropriate disclosures in the OFS notice. Further, the order shall be placed during trading hours.
1. Separate Window: The separate window should be created for the sale of shares through an offer for sale. The following orders must be valid in the offer for sale window:
2. Option to bid in Retail and on-retail categories: The investors have the portion to bid in the retail and non-retail category. However, if the cumulative bid value of the investor increases by Rs 2 lakhs, in that case, the bids in the retail category will become ineligible.
3. Placing bids at a cut-off price: The sellers should provide the retail investors with the option to place their bids at the cut-off price in addition to the placing price bids. In doing so, the following conditions need to be fulfilled:
4. Cumulative Bid quantity is provided online: The cumulative bid quantity should be provided online to the market throughout the trading session in specific intervals if the orders include 100% upfront margin & separately in respect of orders placed without any upfront margin. Further, the indicative price should be disclosed to the market in case of non-retail bids. The indicative bids will be determined based on all bid orders.
5. Normal segment price band to not apply for an order on OFS: in case the shares have a price band in the normal segment, the same should not apply for the orders placed in the offer for sale.
6. Shares under OFS to continue: The trading will continue in the normal market in case of shares under offer for sale.
7. Limit orders or bids: The non-retail investors are restricted to place only limited orders or bids. Howe, multiple orders from a single buyer could be permitted.
8. Orders or bids below the floor price to be rejected: on the trading day, the orders or bids below the floor price must be rejected. On T+1 day, the orders or bids below the cut-off price on the non-retail category or the floor price should be rejected.
1. 100 % Margin in cash collection from institutional and non-institutional investors: The clearing corporation must collect 100% margin in cash from non-institutional investors. Further, the confirmation of the custodian is needed within the trading hours if the institutional investor places an order or bids with a 100% upfront margin. The confirmation should be as per the existing rules for secondary market transactions. The funds collected should not be utilised against any other obligation of the trading member and co-mingled with other segments.
2. Clearing corporation to collect margin: the clearing corporation should collect a margin of 100% of the order value in cash or its equivalents if the bids are related to the bid category. Further, the pay-in and pay-out for retail bids should take place according to secondary market transactions.
3. Modification or cancellation of order or bid: In case of order or modification or cancellation, the clearing corporation can release or collect funds on a real-time basis.
The allocation shall take place as per the following method:
1. Reservation for Mutual Funds and insurance companies: A minimum of 25% of the shares offered shall be reserved for Mutual Funds & insurance companies, subject to allocation methodology.
2. Reservation for retail investors: A minimum of 10% of the shares should be reserved for retail investors. The retail investor in this regard will mean an individual investor who places bids for shares of a total value of not more than Rs 2 lakhs aggregated across the exchanges. Further, if the cumulative bid value across exchanges increases by Rs 2 lakh in the retail category, bids are liable to be rejected in such cases.
3. Cut-off price to be determined based on all bids: The cut-off price should be determined based on all bids. Further, the bids received on retail and non-retail categories shall be determined separately. After determining the cut-off price, the offer price size reserved for retail investors should be allocated to eligible bids of retail investors.
4. Bids of Non-Retail to carry forward to T+1 days: to ensure that shares reserved for retail investors are allocated due to insufficient demand, the bids will be allowed to carry forward to T+1 days. Further, the unsubscribed portion of the non-retail segment should be allowed for bidding in the retail segment.
5. Unsubscribed shares of retail investors to be allocated to non-retail investors: the unsubscribed portion of shares of the retail investor can be allocated to the non-retail bidders on T+1 day. The allocation price should be a price equal to the cut-off price or higher as per the bids. For this purpose, the option could be provided to such non-retail-bidders in order to indicate their willingness to carry forward their bids to T+1 day. If they choose to carry forward to T+1 day, the non-retail investors are permitted to revise such bids. Further, cash settlement will occur as per the rules applicable to the secondary transaction.
6. Accumulation of order on DSE: The order should be accumulated by the designated stock exchange on the close of the offer. The designated stock exchange will further draw up the allocation on a price priority basis or proportionate basis.
7. Single bidder could be allocated up to 25% of the size of an offer for sale: The single bidder can be allocated up to 25% of the size of an offer for sale except for mutual funds and insurance companies.
The obligations and the resulting allocation should be intimated to the brokers or clearing members on T day. The settlement provisions are further discussed below:
1. Settlement on trade for trade basis: The settlement will take place on a trade for trade basis. Further, the settlement shall take place on T+1day for non-institutional orders and institutional orders with 100% margin and in case of orders or bids of institutional investors with no margin, the settlement will take place as per the rules applicable for secondary market transactions.
2. Settlement of bids received on T+1 day: The settlement of bids for T+1 days shall be carried out in terms of rules applicable to secondary market transactions.
3. Funds to be allocated to bidders: The funds collected from the bidders should be released after the download of the obligation if they have yet to be allocated the shares.
4. Transfer of shares from designated Clearing Corporation to other interoperable clearing corporations: The designated clearing corporation of the seller broker working under the framework of interoperability must transfer such number of shares to the other interoperable clearing corporations on the day before the settlement. The other interoperable clearing corporation will then transfer funds consideration to the designated Clearing Corporation on the settlement day. Further, the excess settlement will be returned to the seller broker. The credit of the shares will take place directly in the DEMAT account of the successful bidder, provided the bidder or broker indicates the manner of credit.
The default in payment by an investor shall be handled in the following ways:
1. Default in pay-in by any investor: The 10%% of the order value will be charged as a penalty to the investor and collected from the borrower. The funds received shall be transferred to the IEPF of the stock exchange.
2. Price could not be revised on T day: The price determined on the allocation on T day will not be revised due to any default in pay-in.
3. Option to seller: The seller can cancel in full or conclude the offer.
4. Dissemination of allotment details: The stock exchanges shall disseminate the allotment details.
5. Consolidation of allocation details: The Designated Stock Exchange will consolidate the allocation details after the settlement and the excess shares are returned by the clearing corporation to the seller broker.
6. Non-availability of Settlement Guarantee funds scheme: the settlement guarantee fund scheme will not be made available for the offer for sale through the stock exchange.
The brokers are required to issue contract notes to the client. It should be based on the allotment price and quantity as per the terms of conditions specified by the exchange.
The offer for sale can be withdrawn before its proposed opening. In that case, there will be a cooling-off period of 10 trading days before the withdrawal date and before an offer is made again. Further, the stock exchange is required to disseminate the withdrawal details.
The prospectus of cancellation of the offer is not permitted during the bidding period. However, if the seller fails to receive sufficient demands from the non-retail investors at or above the floor price on T day, in that case, the seller can choose to cancel the offer, post bidding in full (both retail and non-retail) on T day and will stop from proceeding further with the offer to retail investors on T +1 day.
The offer for sale or OFS provided the company’s promoter with a way to raise funds through a normalised channel. The facility of an offer for sale is provided only to the Bombay Stock Exchange, National Stock Exchange and Metropolitan Stock exchange of India. Also, in order to regulate the market of an offer for sale segment, the minimum size of the offer shall be RS 25 crore. This would entail the limit and aim to make the segment to work more uniformly across all exchanges.
Read Our Article: SEBI Guidelines for Making Public Offer
An Advocate by profession, Nikhil Mogha holds experience in the field of Business and Securities law. He has done his Masters of Law in Corporate Law from Guru Gobind Singh Indraprastha University, New Delhi. He is also versed with the drafting and research work in the field of Company Law, Banking Laws and Contract Laws.
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