Introduction
Ever wondered how companies manage to raise their capital effectively without going for fresh issuance of shares? The answer lies in an instrument which has been creating a buzz in Indian stock exchange scenario, known as Offer for Sale (OFS), introduced by the Security and Exchange Board of India (SEBI). In a nutshell, the OFS mechanism enables promoters of a company to dilute their holdings in a transparent and efficient way. But how does OFS allotment work? Herein, we will demystify the intricacies of an OFS and draw a comparison between India’s two major stock exchanges, NSE (National Stock Exchange) and BSE (Bombay Stock Exchange).
How the Offer for Sale (OFS) Works
The Offer for Sale mechanism, introduced by the SEBI in 2012, involves promoters selling their shares directly to the public. Here is how it works: a company’s promoters, who wish to reduce their holdings, announce the OFS floor price and the number of shares to be auctioned. The retail and institutional investors then place bids, either at a limit price or at cut-off price. Subsequently, the shares are allocated according to the highest bidder at or above the floor price.
OFS Procedure Across NSE and BSE
The secondary market platforms for OFS are both the NSE and BSE. While both the exchanges play a crucial role in India’s equity market, there are a few discernible differences between NSE and BSE. These differences extend to aspects like trading practices, global reach and indices. A point to note is that the procedure and allotment of OFS works the same way in both NSE and BSE.
Retail Investors and OFS Participation
However, being a non-competitive participant, retail investors are allowed to bid only on the second day of the OFS session. The shares allocated to retail investors are done based on a method known as price priority, and thereafter, on a proportionate basis.
Example of OFS Allocation Process
In even simpler terms, let’s assume the OFS floor price is INR 100. Bids are received as follows:
1) Investor A: 100 shares @ INR 120
2) Investor B: 300 shares @ INR 110
3) Investor C: 200 shares @ INR 100
In this case, A gets first priority for his higher bid and will be allotted the number of shares bid for or the number that the company wants to allocate, whichever is lower. Next in line for allocation will be B, and finally, C.
Comparing NSE and BSE in the Context of OFS
The difference between NSE and BSE primarily comes into picture when we consider the scale and the reach of both these exchanges. While BSE, established in 1875, is the oldest stock exchange in Asia, NSE, founded in 1992, holds a dominant position in terms of transactions. Furthermore, SENSEX is the main index of BSE consisting of 30 well-established companies while NIFTY is the leading index of NSE that includes 50 companies from 24 diverse sectors.
The Offer for Sale mechanism aids in broadening the shareholder base, enhances liquidity, and obtains efficient price discovery without the need for extra capital. Regardless of its apparent advantages, the investors must engage in comprehensive research before making a decision. It is crucial to understand the ins and outs of the company and also the market scenario before investing.
Disclaimer
Stock market investments are subject to market risks. One must understand that the activities carried out in stock exchanges are speculative, which may involve considerable financial risk to contributors. Thorough understanding and expertise of the market conditions and implications are vital for decision-making. It’s advisable for investors to individually assess all the pros, cons and risk factors associated with trading in the Indian stock market. Furthermore, it is recommended to seek assistance from financial advisors to avoid any potential risks.
Summary
The OFS mechanism offers an efficient platform for promoters to dilute their holdings while providing retail and institutional investors with another avenue in the secondary market. Notwithstanding its advantages, appreciate the significant differences between NSE and BSE, understand the market trend, and measure your risk tolerance before diving into investment decisions. A well-informed investor is a successful investor.
