Editorial     

Published: Jan 15, 2023
Updated: Jan 15, 2023

OFS window for large investors: Boon for retail investors

The recent guidelines issued by the Securities and Exchange Board of India (SEBI), the regulator of the Indian capital market, allowing non-promoters of a company to sell their shares through an offer for sale, is a step in the right direction. Till now, this avenue was available only to promoters or promoter group entities of companies that are eligible for trading and are required to increase public shareholding to meet the minimum public shareholding requirements of the regulator. Now, under the recently revised guidelines, week, any shareholder can use the offer-for-sale route as long as he/she is selling shares worth over Rs 25 crore. Furthermore, the cooling-off period required between two offers-for-sale has been reduced to just two weeks from 12 weeks at present. This will help companies to sell shares in one or more tranches to ease liquidity pressure. Once the market regulator notifies the norms, several private equity players or large investors will be able to test the new offer-for-sale framework. Thus, this route could emerge as a strong alternative to the block deal mechanism as the offer-for-sale mechanism offers better flexibility in terms of pricing.

This modification will prove to be a boon for institutional investors and other large investors who are willing to enable a company promoter to promote a corporate entity with the hope that they will be able to sell their shares through the offer-for-sale route. In other words, this means that the SEBI move will give a fillip to the offer-for-sale mechanism which now allows promoters as well as other large shareholders to divest their equity holdings. This is bound to be emerge as a strong alternative to the block deal mechanism as the former offers better flexibility in terms of pricing.

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 shares sales via this mechanism becomes a challenge, particularly during volatile market conditions. Thus the revised offer-for-sale route looks promising and will gain a lot of traction. Again, when sales were effected through block deals it was not possible for retail investors to participate.

With this modification, SEBI has attempted to broaden the spectrum across investors for undertaking big-ticket transactions. The modification in norms allowing non-promoters to participate in an OFS will encourage more participation and better price discovery with relatively lower slippage versus a bulk deal mechanism.

As the SEBI chairperson has elaborated, under the block deal mechanism there is a restriction in pricing which is a one per cent band above and below the market price. OFS can be done at whatever price one wants and it is open to the market. So, this mechanism has far more flexibility. If companies wish to take this route, SEBI will be happy to welcome them. While the earlier window had a cap on pricing, this one does not. Thus, the SEBI move will certainly give a boost to the OFS mechanism.