Face-Off. How an offer for sale differs from an FPO

When the Government put a chunk of its shares in Coal India up for sale two months ago, all the 63 crore shares were bid for and bought in a single day. But when the Government sold part of its stake in Engineers India last year, the issue was open for almost a week.

The difference between the two offers is that the Coal India disinvestment was done through the OFS (offer for sale) mechanism while the Engineers India issue used the FPO (follow-on public offer) route. BHEL is set to do a share sale next month, reportedly via OFS and not an FPO. Here’s how the two routes differ.

The OFS mechanism has been around only for three years. It was allowed to help promoters comply with minimum shareholding requirements. The OFS route is used by promoters to sell their shares to the public. The cash raised goes straight to the promoters. There is no fresh issue of capital that can go to fund the company’s expansion projects or other needs. According to SEBI rules, apart from promoters, non-promoter entities holding more than 10 per cent of the shareholding can also offload stake through an OFS.

What’s more, an OFS can be done only by the top 200 companies by market capitalisation.

An FPO is the mode you are familiar with. Any listed company which wants to raise fresh funds or whose promoters want to sell stake can use the FPO route.

While FPO and OFS have a similar purpose, they are poles apart when it comes to the actual procedure. An OFS steals a march on an FPO due to its simplicity.

One, an OFS is open only for a single trading session. The company defines a floor price (though declaring this is not mandatory) below which bids will be rejected. It’s up to investors to decide what price they want to buy the share. Contract notes are received just as with normal trades.

An FPO, on the other hand, defines a price band within which bids should be placed. The offer will be open for at least three and up to 10 days.

Two, in an OFS, you will know your allotment a couple of hours after the offer closes and settlement is done the day after this. If you want to improve your chances of securing the shares, an OFS also allows you to place multiple bids at different price points.

Allotment in an FPO can begin only after the issue closes. The time taken for allotment to be made and the new shares listed is usually up to 12 days. Multiple bids aren’t allowed.

Three, in an OFS, you can apply for even one share, unless the seller specifically insists on a minimum size. In an FPO, each bid will have to be for a specific number of shares — say five or 10 shares — called the lot size. You may therefore have to invest more money than you are comfortable with.

An OFS doesn’t require promoters to file a prospectus and obtain approvals, making it a quicker process. In an FPO, a company needs to draft a prospectus, file it with SEBI for comments, appoint lead managers, and so on.

Of course, a fast-track route is available to companies that meet a set of criteria.

But on the flip side, because an OFS closes in a day, you need to pay the entire money upfront when placing the bid. Applications in an FPO, if done through the ASBA facility, will not see the whole amount going out of your account unless you receive allotment.

An OFS also attracts STT and brokerage charges.

For both OFS and FPO, you need to have a demat account and a PAN card. You can modify bids in both if you wish as long as the offer is open. Both earmark a defined proportion of the issue for retail and institutional investors.

Another shared feature is that retail investors can bid at the cut-off price. The cut-off option allows them to be allotted shares at whatever price is decided upon once the issue is closed.

Now, in an FPO, all shares are allotted at the issue price. Allotment will be done on a proportionate basis in case of oversubscription. But in an OFS, the company can allot shares through the price-priority method, where bids at the highest prices get priority in allotment.

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