Offer for sale

3 key takeaways

• An offer for sale allows existing shareholders, usually the company’s promoters or major investors, to sell their shares to the public.
• This process does not raise new capital for the company itself but provides liquidity to existing shareholders and can help broaden the shareholder base.
• It is often part of an Initial Public Offering (IPO) or a secondary market offering to enable the company to become publicly traded.

What is an offer for sale?

An offer for sale (OFS) is a process through which existing shareholders of a company sell their shares to the public through the stock market. Unlike a traditional IPO, where new shares are issued to raise capital for the company, an OFS involves the sale of shares already held by existing shareholders. This mechanism provides a way for existing investors to monetize their holdings and allows the company to comply with regulatory requirements, such as maintaining a minimum public shareholding.

Key features of an offer for sale

• Existing shares: The shares sold in an OFS are existing shares held by current shareholders, not newly issued shares.
• Public offering: Shares are offered to the general public, including retail investors, institutional investors, and high-net-worth individuals.
• Liquidity: An OFS provides liquidity to existing shareholders by enabling them to sell their shares in the open market.
• Regulatory compliance: Companies can use an OFS to meet regulatory requirements for public float and ensure sufficient market liquidity.

Process of an offer for sale

1. Announcement: The company announces the OFS, including details such as the number of shares to be sold, the floor price (minimum price), and the offer period.
2. Bidding: Investors place bids for the shares within the specified offer period. The bidding process typically lasts for one or two trading days.
3. Allocation: Shares are allocated to investors based on their bids and the final offer price is determined. In case of oversubscription, shares are allocated on a pro-rata basis.
4. Settlement: The shares are transferred to the successful bidders’ accounts, and the funds are transferred to the selling shareholders.

Benefits of an offer for sale

• Liquidity for shareholders: OFS provides a convenient way for existing shareholders to sell their shares and realize their investment.
• Broadened shareholder base: By selling shares to the public, companies can broaden their shareholder base and enhance market liquidity.
• Market discipline: Listing through an OFS introduces market discipline and transparency, which can improve the company’s corporate governance and public image.

Differences between OFS and IPO

• Capital raising: An IPO involves issuing new shares to raise capital for the company, while an OFS involves selling existing shares without raising new funds.
• Purpose: An IPO is aimed at funding the company’s growth and expansion, whereas an OFS is primarily to provide liquidity to existing shareholders.
• Shareholding structure: Post-IPO, the company’s shareholding structure changes with new investors coming in, while an OFS transfers shares from existing shareholders to new investors without altering the total number of shares.

Examples of offer for sale

• Company A’s promoters: Suppose the promoters of Company A hold a significant stake and wish to sell a portion of their shares to the public. They announce an OFS to sell 10% of their holding.
• Government disinvestment: Governments often use OFS to divest their stakes in public sector enterprises. For example, the government might offer a 5% stake in a state-owned company to the public via an OFS.

Related topics

If you found the concept of an offer for sale interesting, you might also want to explore these related topics:

• Initial Public Offering (IPO): The process by which a private company issues new shares to the public for the first time to raise capital.
• Follow-on Public Offering (FPO): An issuance of additional shares by a company that is already publicly traded.
• Secondary market: The market where previously issued securities are bought and sold among investors.
• Equity financing: Raising capital through the sale of shares in a company.
• Stock exchange: A marketplace where securities are bought and sold, providing a platform for OFS and other types of public offerings.

Understanding an offer for sale is crucial for investors and companies, as it provides a mechanism for liquidity, regulatory compliance, and broadening the shareholder base without altering the total capital structure.