Things OFS investors need to remember

With Sebi allowing investors to bid at cut-off price, getting allotment could become easier

For companies that already have a record in the stock market, the offer-for-sale (OFS) route might soon become the preferred option because of the sheer speed and simplicity of the option. For retail investors, too, it is good news.

With the Securities and Exchange Board of India (Sebi) allowing 10 per cent quota for retail investors in OFS, the latter can buy shares of companies that have a record.

Also, instead of locking in money in the bank till the allotment, which could be 10-15 days, in follow-on-offers (FPOs), they will now get the shares on the same day.

With the government planning divestment of Rs 50,000 crore, retail investors can participate in the process more aggressively.

However, the recent SAIL divestment saw many retail investors not getting the five per cent discount because of data entry issues.

Unlike IPOs or FPOs, no physical application forms are issued to apply for OFS shares, and the process is online. Also, there is no leverage or margin funding available to place bids on the OFS platform and investors are required to pay an upfront margin or full amount to buy shares. The only way investors can avoid full payment is through an informal arrangement with their brokers.

Investors can use their online trading accounts to place bids. However, it is likely investors will not be able to place bids online directly but will have to get in touch with their brokers offline. “Since OFS is not a regular affair, most online platforms don't have an interface designed for placing OFS bids,” said Girish Dev, managing director and CEO, Geofin Comtrade. OFS shares are allocated either on a price-priority basis at multiple clearing prices or on a proportionate basis at a single clearing price. If it's the former, retail investors would do well to bid at a price suitably higher than the floor price. That is because in this case, the higher the price, the better the chances of allotment. For instance, if A puts in his bids at Rs 90 and B bids at Rs 89, A will be given the first preference during allotment. A higher bidding price also makes sense if the company is giving a discount and the investor intends holding the stock for the long term. The good news is the market regulator has given retail investors the option to bid at the cut-off price in an OFS issue. In future OFS issues, investors can simply bid at the cut-off price and be assured of an allotment, doing away with the need for price discovery.