What is it?
BSE Ltd plans an initial public offer. The issue will be an offer for sale (OFS) and gives an opportunity to existing investors to exit. OFS is the way by which stakeholders of a company sell their holding. The Securities and Exchange Board of India, the capital markets regulator, in July 2012 permitted stock exchanges to set up a separate window, wherein promoters can offload their shares in listed companies. The window has been devised in order to give promoters a smooth option to comply with the minimum public shareholding requirement.
The government of India is using the option to offload its shares in public sector companies under its disinvestment programme. The size of the offer through this mechanism should be at least Rs.25 crore. However, a lower size will be allowed in a single tranche if it is meant to meet the minimum shareholding requirement.
The seller can disclose the offer price on the day before the shares are offered, but after the closure of trading hours and before the end of business hours of the stock exchanges.
OFS and FPO
This new offer for sale window is very similar to the follow-on public offer (FPO) wherein promoters approach the market to either sell their own holding in the company or raise fresh capital. The biggest advantage of the new OFS window over FPO is that companies do not necessarily have to go through the lengthy process of issuing the prospectus and then wait for days to receive applications from investors before the issue is completed. This one saves time for both promoters and investors.
OFS and IPO
In an initial public offer, or IPO, the company has to go through the process of filing a prospectus with the regulator. Once the company has acquired all the clearances from the regulator, it is allowed to enter the capital market. In an IPO, the company may issue fresh shares to the investors, widening the shareholder base, or sell shares of existing investors (OFS) or both. If the company issues fresh shares, the funds are normally used to expand the business activity of the company.
However, when existing investors sell shares in an issue, both during an IPO or later such as through the OFS window, the shares simply get transferred from the old investor to the new investor. It does not affect the business of the company in monetary terms as money does not go to the books of the company. Companies approaching the capital market have to disclose to the investors how they will use the proceeds of an issue.