What is OFS and how it differs from IPO?
The Indian government has announced its plan to disinvest a 3.5% stake in the National Hydroelectric Power Corporation (NHPC) through an Offer for Sale (OFS). This decision has led to a decline in the stock price of NHPC. The government’s stake sale plan has caused NHPC’s shares to fall by as much as 5.9% on the BSE, with the stock opening lower at 5.2% against the previous closing price. The floor price for the stake sale has been set at Rs 66 per share, which represents a discount of over 9% to the previous closing price.
The government, which currently owns a 70.95% stake in NHPC, is expected to offload over 25 crore equity shares in the company, with an option to sell an additional 10 crore shares. This disinvestment is anticipated to generate about Rs 2,300 crore for the government. The market capitalization of NHPC has also been affected, slipping to Rs 69,381 crore.
The stock’s performance over the past year has shown a 65% increase. The government’s decision to disinvest in NHPC is part of its broader disinvestment target, although it has faced challenges in meeting these targets due to the failure of stake sales in other state-owned companies. The government’s ability to achieve its disinvestment goals and the impact of such decisions on the stock market are important aspects to consider in the context of India’s economic policies and the energy sector.
What is OFS and How does it Work?
Offer for Sale (OFS) is a financial mechanism that allows companies to divest shares in the stock market, providing investors with an opportunity to buy shares from the company’s existing shareholders. The OFS process is simpler and more cost-effective than other methods like Initial Public Offerings (IPOs) or Follow-on Public Offerings (FPOs). Here’s how OFS works:
- Promoter’s decision: The promoter of the company decides to sell their shares via OFS.
- Information to exchanges: The company announces the OFS date, and the information is sent to the exchanges at least two days before the OFS.
- Floor price: The seller must provide a floor price on T-2/T-1 day (T being the day of the OFS). The floor price is the price at and above which an investor can place their orders.
- Investor participation: Investors can participate in the OFS through a broker, and a Demat account is compulsory for investing in an OFS.
- Single trading day: The OFS window is open only for a single day.
- Allocation: No allocation will be made in case the order/bid is below the floor price. A minimum of 25% of the shares offered shall be reserved for mutual funds and insurance companies, subject to the allocation methodology. No single bidder other than mutual funds and insurance companies shall be allocated more than 25%.
OFS has several advantages and disadvantages:
Advantages:
- Cost-effective: OFS is a cost-effective way for promoters or existing shareholders to sell their shares in a listed company, bypassing the expenses associated with an IPO or FPO.
- Transparent: The OFS process is more transparent than that for IPOs.
- Flexibility: The seller can choose the number of shares they want to sell and decide not to sell shares if the bids do not meet their expectations.
Disadvantages:
- Limited window to participate: The window to participate in the OFS is usually limited to one trading day, unlike in FPOs where investors get at least three days to place their bids.
- Retail investors receive a lower allocation: Some sellers may opt for underwriting to ensure a successful sale of shares.
In summary, OFS is a simple and cost-effective method for companies to divest shares in the stock market, providing investors with an opportunity to buy shares from existing shareholders. The process is transparent and flexible, but it has some limitations, such as a limited window for participation and lower allocations for retail investors.
How does OFS differ from IPO
IPO (Initial Public Offering) and OFS (Offer for Sale) are two different methods used by companies to raise funds from the public. The main difference between IPO and OFS is that an IPO involves the issuance of new shares to raise capital for the company, while OFS involves the sale of existing shares by shareholders. In an IPO, the company offers its shares to the general public on a stock exchange for the first time, allowing new investors to participate in ownership. On the other hand, OFS is a resale of existing shares by major shareholders, making it a route for existing shareholders, such as promoters or early investors, to monetize their holdings and exit partially or completely. Another difference is that an IPO is a time-consuming and costly process, while OFS is simpler and more cost-effective. In an IPO, the company must submit a SEBI application, prepare a red herring prospectus, and appoint lead managers, while an OFS does not have to meet these requirements. In summary, the main differences between IPO and OFS are the purpose, nature, and process of the two methods.
Citations:
[1] https://www.wintwealth.com/blog/differences-between-ipo-and-ofs-explained-in-detail/
[2] https://www.religareonline.com/blog/difference-between-ipo-and-ofs/
[3] https://aliceblueonline.com/ofs-vs-ipo/
[4] https://upstox.com/learning-center/ipo/what-is-difference-between-ipo-and-ofs/
[5] https://www.nirmalbang.com/knowledge-center/offer-for-sale.html
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