The Securities and Exchange Board of India last week expanded its offer-for-sale (OFS) mechanism to accommodate more companies under the framework. Now promoters or large investors in companies with a market capitalisation of ₹1,000 crore and above can opt for this route in case they want to dilute their stakes in listed companies in a hassle-free manner.

The OFS mechanism was first introduced in 2012 by SEBI to help promoters to dilute their stakes to meet the 25 per cent minimum public shareholding norm put in place by it. According to the NSE, since then 98 such issues have hit the market. Some companies such as Hindustan Copper, BGR Energy and SAIL have tapped the market more than once through the OFS mechanism.

Currently, the OFS framework is available to the top 200 companies by market capitalisation. The new proposals are welcome, as over 800 companies will be eligible to tap the OFS window now.

Besides, SEBI has also added a new rule that will make retail investors’ life easier. “If the seller fails to get sufficient demand from non-retail investors at or above the floor price on the first day of the offer, then the seller may choose to cancel the offer post-bidding in full (both retail and non-retail) on the first day itself and not proceed with the offer to retail investors on the second day.”

Big help for retail investors

As the non-retail category, especially high net worth investors, always offers cues on the prospects of an offer, the new norm will help retail investors who have relatively less resources to access information about a company tapping the market.

However, SEBI could consider extending the same criteria to OFS in initial public offerings too. Of late, selling shareholders — promoters and private equity investors — have been garnering a large share of funds raised through IPOs. An earlier study by BusinessLine had revealed that 70 per cent of the funds raised through IPOs went to promoters, PE investors and the staff of these companies. Given the post-listing performance of most of these companies’ share prices, allowing large investors to bid first would definitely help retail investors.

If an issue consists of both fresh issue and OFS, SEBI can separate the process and see the response to the OFS alone.

Also, it would be better to have a minimum number of non-retail investors to mitigate concentration risk. According to the new proposal, if the issue is subscribed even by one large investor, the window will be open for the next day to retail investors. If SEBI moots a minimum of five non-retail investors, it would really give confidence to retail investors about the company.

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