Learn about OFS (Offer for Sale) — Stock-Market notes

WHAT is an OFS?

WHY does OFS exist? SEBI mandates that most listed companies keep at least 25% of shares with the public (public shareholding). If a promoter holds too much, an OFS is a fast, transparent way to dilute that stake on the exchange in one day — far quicker than a fresh public issue.

OFS vs IPO vs FPO — the key contrast

Feature	IPO	FPO (fresh)	OFS
Company status	Unlisted → listing	Already listed	Already listed
Shares	New	New	Existing
Money goes to	Company	Company	Seller (promoter)
Duration	~3–5 days	~3–5 days	1 trading day
Platform	ASBA/registrar	ASBA/registrar	Exchange bidding window

HOW an OFS works (step-by-step)

Derivation of who gets allotted (first principles):

Seller offers total quantity $Q$ shares at floor $P_f$ .
Investors submit $(P_i, q_i)$ pairs. Only $P_i \ge P_f$ survive.
Sort survivors by $P_i$ descending.
Accumulate quantity: allot to bid 1, then bid 2, … until cumulative $\sum q_i$ reaches $Q$ .
The price of the last share allotted = cut-off $P_c$ .
Allotment rule: everyone whose bid $P_i > P_c$ gets full allotment. Those exactly at $P_c$ may get pro-rata if oversubscribed at that level.

Retail benefits

Also, at least 25% of the OFS is reserved for mutual funds and insurance companies, and 10% for retail — protecting small investors from being crowded out.

Figure — Learn about OFS (Offer for Sale)

Worked Examples

Worked example Example 2 — Finding the cut-off

Seller offers $Q = 1000$ shares, $P_f = ₹100$ . Bids:

Investor	Price	Qty	Cumulative (high→low)
X	₹120	400	400
Y	₹110	400	800
Z	₹105	400	1200 → stop

Why sort high→low? To maximise the seller's realisation. Cumulative crosses 1000 during Z's bid. So cut-off $P_c = ₹105$ .

X (₹120) and Y (₹110): full allotment (800 shares).
Z: only $1000 - 800 = 200$ of his 400 requested → pro-rata. Why this step? Only 200 shares remain when we reach Z's price level.

Common Mistakes (Steel-manned)

Active Recall

Recall Quick self-test (hide and answer)

Who receives the money in an OFS? → The selling shareholder (promoter), not the company.
New or existing shares? → Existing.
How long is the OFS window? → One trading day.
What is a floor price? → The minimum price below which bids are rejected.
Why do OFS exist for promoters? → To meet minimum 25% public shareholding / raise cash quickly.

Recall Feynman: explain to a 12-year-old

Imagine your uncle owns 100 of the 100 marbles in a jar, but the rule says at least 25 marbles must belong to other kids. So one afternoon your uncle holds a quick sale: kids write down how many marbles they want and how much they'll pay, but nobody can pay less than the price uncle wrote on the board. The kids who offer the most get their marbles first. Important: the marbles are uncle's — so the money goes to uncle, not to the marble factory. That afternoon sale is an OFS.

Flashcards

What is an OFS (Offer for Sale)?

A mechanism where existing large shareholders/promoters sell their already-owned shares to the public via the exchange bidding platform in one trading day.

In an OFS, who receives the sale proceeds?

The selling shareholder (promoter) — NOT the company.

Are OFS shares newly issued or existing?

Existing shares.

How long does an OFS typically last?

A single trading day.

What is the floor price in an OFS?

The minimum bid price; bids below it are rejected.

Condition for a valid OFS bid?

Bid price P_i must satisfy P_i ≥ floor price P_f.

Why do promoters use an OFS?

To meet SEBI's minimum 25% public shareholding rule and/or to raise cash quickly by exiting part of their stake.

How is the cut-off price determined in an OFS?

Sort valid bids high→low, allot until shares run out; the price of the last allotted share is the cut-off.

Formula for retail price with discount d on cut-off P_c?

P_retail = P_c × (1 − d).

Difference between OFS and IPO in money flow?

IPO raises new capital for the company; OFS transfers cash to the selling shareholder.

What reservation exists for retail investors in an OFS?

At least 10% of the offer is reserved for retail; 25% for mutual funds/insurance.

Bidding "at cut-off" as a retail investor means?

You accept whatever the final cut-off price turns out to be.

Connections

Primary vs Secondary Market — OFS is secondary in nature (existing shares) but happens on a special exchange window.
IPO (Initial Public Offering) — contrast: IPO raises fresh capital.
FPO (Follow-on Public Offer) — FPO can be fresh-issue or offer-for-sale type.
Minimum Public Shareholding (MPS) — the 25% rule that motivates many OFS.
Book Building & Price Discovery — cut-off / floor-price mechanics parallel book building.
Promoter Holding & Stake Sale — OFS is a key promoter exit route.

Concept Map

Hinglish (regional understanding)

Intuition Hinglish mein samjho

OFS ka matlab hai Offer for Sale. Socho ek company already listed hai, aur uske promoter ke paas bahut zyada shares hain. SEBI ka rule hai ki kam se kam 25% shares public ke paas hone chahiye. Toh promoter ek din ke liए exchange par ek bidding window kholta hai aur apne purane (existing) shares public ko bech deta hai. Sabse important baat: yeh paisa company ko nahi, balki bechne wale promoter ko milta hai — kyunki shares uske the, company ke naye shares nahi bane.

Kaise chalta hai? Seller ek floor price set karta hai — matlab minimum price. Aap us se kam bid karoge toh reject ho jaayega. Sab valid bids ko exchange highest price se lowest tak sort karta hai, aur upar se neeche allot karta jaata hai jab tak shares khatam na ho jaayein. Jis price par aakhri share allot hua, wahi cut-off price ban jaata hai. Retail investors ko aksar ek chhota discount bhi milta hai cut-off par (jaise 5%), taaki chhote log bhi participate karein.

Yeh important kyun hai? Kyunki students aksar OFS ko IPO samajh lete hain. Yaad rakho — IPO = company ko fresh paisa; OFS = promoter ko purane shares bech kar paisa. OFS sirf ek trading din ka hota hai, fast aur transparent. Mnemonic yaad rakho: Old shares, Floor price, Seller ko paisa. Bas itna clear ho gaya toh OFS ka poora concept aapke haath mein hai!

Test yourself — Primary vs Secondary Market & IPOs

Connections