While other equity fundraising avenues dried up in FY18, OFS issues stood out

In fiscal year 2019, equity fundraising activity fell to about a fourth of the levels in the previous year. Initial public offerings (IPOs) and qualified institutional placements fell more than 80% in value terms. However, there was one equity fundraising product that stood out, the offer-for-sale (OFS) route that company promoters can use to sell shares.

Last year, promoters raised about ₹21,686 crore through the OFS route. This was 26% higher than the year-ago figure and is even more than the ₹16,294 crore raised through IPOs.

As much as ₹11,000 crore was raised in the last quarter, when the broader markets were in an upswing. These secondary-market sales are being carried out to comply with the new listing norms, which stipulate that listed stocks should have a minimum 25% public shareholding. The recent Prudential Corporation Holdings Ltd sale of a 3.7% stake in ICICI Prudential Life Insurance Co. Ltd was aimed at reducing its promoter holding to below 75%.

Besides, the government has utilized the OFS route to carry through its divestment programme in some cases.

Till recently, the OFS route was available only to the top 200 companies (by market capitalization). In December 2018, however, the Securities and Exchange Board of India eased the rules. Companies with a market capitalization of more than ₹1,000 crore can now use the route. This was done to enable smaller public sector firms to raise funds through this window.

An OFS does not require the usual paperwork that an IPO entails as the deal is between the promoter and the buyer.

“It is usually the promoters who are making an offer for sale. Hence, the process does not take more than a week. Most promoters will look at this when the markets are looking up,” says V. Jayasankar, senior executive director and head (equity capital markets) at Kotak Investment Banking.

In the last quarter, nearly all the stocks that came out with OFS issues are currently quoting at a slight premium to the offer price. Nevertheless, that’s a paltry arbitrage, unless investors are seeking newer investing themes that warrant exposure.