'Offer for sale' mechanism to get mega boost as Sebi relaxes norms

Among other things, the cooling-off period required between two OFSs has been reduced to as less as two weeks from 12 weeks at present

Market regulator Securities and Exchange Board of India’s (Sebi’s) new relaxations are set to give a fillip to the offer for sale (OFS) mechanism, which allows promoters and other large shareholders to divest their equity holdings.

Industry players say the OFS route could emerge as a strong alternative to the block deal mechanism as the former offers better flexibility in terms of pricing.

Currently, the use of the OFS route is limited as present rules allow only promoters and those holding more than 10 per cent stake to avail of this mechanism. However, last week Sebi announced major modifications to the framework. Now, any shareholder can use the OFS route as long as they are selling shares worth over Rs 25 crore. Furthermore, the cooling-off period required between two OFSs has been reduced to as less as two weeks from 12 weeks at present. This will help companies sell shares in one or more tranches to ease out liquidity pressure.

Once the market regulator notifies the norms, several private equity (PE) players or large investors could test the new OFS framework, said industry players.

“The main impediment with the block deal mechanism is pricing. A seller cannot offer a huge discount to the prevailing market price. As a result, launching large share sales via this route becomes a challenge, particularly during volatile market conditions. The revised OFS framework looks promising and will gain a lot of traction,” said an investment banker, requesting anonymity.

The OFS route was introduced to help companies achieve the 25 per cent minimum public shareholding (MPS) norms. An OFS is carried out over a two-day period. On the first day, institutional investors can place their bids, while the second day is meant for retail investors, who typically have a 10 per cent reservation. A seller has to decide a floor price for the OFS and bidders are allowed to bid at any price above that. The bidding process for the OFS route is different from the secondary market platform.

"Sebi is trying to broaden both 'the spectrum of available instruments' and 'participation across investors' for undertaking big-ticket transactions.  This move allows non-promoters to participate in an OFS. This would encourage more participation and better price discovery with relatively lower slippage vs a bulk order and block window," said Hemang Jani, Head of Equity Strategy, MOFSL.

Block or bulk deals, on the other hand, are privately negotiated before the execution of the trade. However, as they are carried on the exchange platform, often an intended buyer ends up picking the stake, leaving the negotiated party in a lurch. This has been one of the key grievances of investment bankers and foreign portfolio investors (FPIs) to Sebi.

Calling it a move towards more flexibility, Sebi chairperson Madhabi Puri Buch said, “Under the block deal mechanism there is a restriction on pricing, which is one per cent band above and below the market price. OFS can be done at whatever price you want and it is open to the market. So they have far more flexibility. If companies wish to come through this route, we are very happy to welcome them. That window has a cap on pricing, this one does not.”

In recent months, some of the large transactions that have got executed through the block deal route are PE major Blackstone Group’s eight per cent stake sale in Embassy Office Real Estate Investment; PE major KKR’s entire 27 per cent stake divestment in Max Health; Uber’s entire 7.8 per cent stake sale in Zomato and Abrdn pairing of 5.6 per cent stake in HDFC Mutual Fund.

Currently, the amount mobilised through the OFS route is a tiny fraction of that from block deals. During the first nine months of 2022, block deals worth over Rs 2 trillion have been executed. In comparison, OFS has mobilised only Rs 4,463 crore.

Industry players believe some of this deal flow for large and well-planned deals should shift from block to OFS.