With the stock market bouncing back in the latter part of 2020, promoters of companies have used this period to offload shares of their companies to the public in droves.

These have been either through primary share sales through initial public offerings (IPOs) to list a company on the stock exchanges, or through secondary share sales of listed companies. Many companies have tried to squeeze through share sales by promoters before September 30, 2020.

UTI AMC, whose IPO is currently open, is an offer for sale by promoters. Chemical equipment maker GMM Pfaudler recently made waves after its offer for sale by promoters priced at a steep discount to the stock’s market price.

Investors are lapping up shares being sold by promoters and wait with bated breath for the shares to list or being allowed to trade.

This can be seen in the response to many IPOs and secondary sales by promoters over the past few weeks. But what exactly is an offer for sale and what does it mean for an investor to buy shares in an OFS?

What is it?

An offer for sale is nothing but a sale of existing shares held by shareholders of a company to the public. Essentially, the promoter is cashing in on the value of the business that he/she has built and pocketing the money.

This can be done either through a sale of shares by promoters of a company, or sale of shares by an existing investor like a private equity or a venture capital fund.

The promoters or existing shareholders can sell their shares in an IPO or through a secondary sale in case of listed companies. To reiterate, an OFS (primary or secondary) means that the money that is being raised from the public is going into the selling shareholders’ pocket and not the company’s coffers.

There is also no change in the capital base of the company selling shares in an OFS. The outstanding equity shares remain the same before and after an OFS.

Why is it important?

Investors buying shares in an offer for sale should know that the company making the public offer does not need your money. The promoters (or existing shareholders) are essentially giving public investors the chance to own a piece of their business. In a bull market phase, this can lead to primary share sales being overpriced. In the current liquidity-led market exuberance, promoters have priced their IPOs with caution to leave enough money on the table for new investors.

On the other hand, when a listed company goes for an OFS, it is usually after a long run-up in the share price of the company. This allows the promoter to sell a lower stake in the company to gain a higher amount through a sale. Again, no money goes into the company’s coffers. An offer for sale may also be used by company promoters to meet SEBI’s minimum public shareholding norms if they perceive that the public holding may fall below 75 per cent.

Why should I care?

An OFS can be a good chance to invest into a company which has good future business prospects. But not all offers for sale are worth investing in, no matter how exuberant the market might be. Given that an OFS results in no capital infusion into a company that can go into propping up future earnings through new projects or business plans, investors need to be doubly careful about investing in them. An OFS can simply be a ploy by promoters to cash out if they feel the market is over valuing their business.

Like any share sale to public, the supply of shares available for trade in the stock market also has a bearing on the market price of those shares. In the case of an OFS by a listed company, an investor should not get hooked by a discount being offered by the promoter on the market price.

The bottomline

Not everything that is on sale is a screaming buy!

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