What Is an Offer for Sale in an IPO? 

When a company comes out with an IPO, you often see two components in the offer structure: fresh issue and Offer for Sale (OFS). Most beginners assume that both are the same, but they serve completely different purposes. An OFS is essentially a way for existing shareholders to sell part of their holdings to the public without the company raising new capital.

Over the last few years, OFS has become extremely popular among promoters, venture capital funds, private equity investors, and the government. You might would have noticed this in recent IPOs and standalone OFS events. For example, many government divestments are routed through OFS, allowing the public to buy shares directly from promoters at transparent and regulated prices.

For retail investors, understanding what OFS means in an IPO, how it works, and how to evaluate it before investing is crucial. This guide breaks down everything in simple terms.

What Is an Offer for Sale in an IPO? 

An Offer for Sale (OFS) is a mechanism that allows existing shareholders (usually promoters, early investors, venture capital firms or financial institutions) to sell part of their holdings directly on the stock exchange. Unlike a fresh IPO, where a company issues new shares to raise money, an OFS simply transfers existing shares from current owners to new investors. This means the company does not dilute equity or bring in new capital. Instead, it provides a transparent exit route for large shareholders.

Key things to know about OFS include:

• Only certain shareholders are eligible to offer shares, typically promoters of listed companies or shareholders holding at least a 10% stake in the company.
• It is used only by companies already listed on the exchanges, making it different from an IPO, where the listing process is still underway.
• OFS windows usually remain open for just one trading day, making it time-sensitive compared to multi-day IPO bidding.
• OFS allows transparent price discovery, since bids and allocations happen through exchange bidding platforms.

How Does an Offer for Sale in an IPO Work? 

Even though the term “IPO” is used interchangeably in casual conversations, an OFS does not always form part of an IPO. Rather, it is a separate mechanism for listed companies. However, both operate through bidding and public participation, which often leads to confusion among investors.

Here is how an OFS works in a simple and easy-to-follow manner:

Step-by-step Flow of OFS Process 

1. Promoters Announce Their Intention to Sell 

A company’s promoter or major shareholder notifies the exchange about their plan to sell a specific number of shares. This includes revealing the minimum price, also known as the floor price.

2. Stock Exchanges Publish the OFS Notice 

The notice includes details such as:

• number of shares offered
• floor price
• date of the OFS
• allocation rules for retail, institutional and non-institutional investors

3. Investors Place Bids Through Their Broker

 
On the OFS day, investors can place bids above the floor price. Retail investors often get a reserved quota and may receive discounts.

4. Bids Are Collected and Verified 

  
The exchange system gathers all bids, checks eligibility, and filters out invalid entries.

5. Allocation Happens Based on Bid Prices and Demand 

Investors who bid at or above the cut-off price typically receive shares. If oversubscribed, allocation is done in proportion or via lottery for retail investors.

6. Shares Are Credited to Your Demat Account 

Once allotted, shares usually reflect in your Demat account within the T+1 settlement cycle.

Significance of Offer for Sale (OFS) for Companies and Promoters 

Even though companies do not raise money through OFS, it still plays a major role in capital markets. For promoters and firms, OFS brings transparency, liquidity, and regulatory compliance benefits.

Why Companies & Promoters Use OFS  

• Helps promoters reduce stake to meet SEBI norms
  If a promoter group’s shareholding is above the permitted threshold, OFS allows them to reduce it in a structured and compliant way.
• Creates liquidity in the stock
  When more shares enter the market, it improves trading volumes and visibility.
• Provides a fair exit route for large investors
  Early investors or institutional holders who want to partially exit can do so without dumping shares in the open market.
• Builds investor confidence
  Transparent disclosures can signal good governance and strength in the company’s internal processes.

Key Features of an Offer for Sale in IPO 

To understand OFS easily, let’s look at its core characteristics. These features differentiate it from IPOs and other fundraising or share-selling methods.

Main Characteristics of OFS 

• Only for listed companies
  Unlike IPOs, OFS is available only when the company is already trading on NSE or BSE.
• One-day bidding window
  Investors must bid within a single trading session, creating urgency but ensuring quick execution.
• Floor price transparency
  Promoters must announce the minimum acceptable price in advance.
• Separate quota for retail investors
  A portion is reserved for retail applicants, and discounts may be offered.
• Faster settlement cycle
  Shares are usually credited on T+1, making OFS faster than IPOs.
• No dilution of equity
  Because shares come from existing holders, the company’s capital structure remains unchanged.

Offer for Sale vs IPO: Key Differences 

Here is a crisp comparison table to help you quickly differentiate between the two:

How to Participate in an OFS? 

Participating in an OFS is simpler than most investors assume. If you have a trading and Demat account, you can apply directly through your broker’s platform. If you don’t, then you can open a free Demat account through online brokerages like m.Stock in no time. Thereafter:

• Log in to your trading platform
  Look for the OFS section, usually under the IPO or corporate actions tab.
• Check the floor price and details
  Review the minimum price, available discounts, and investor quotas.
• Place your bid
  Enter the quantity and price you wish to bid at. You may also choose the “cut-off price” option if available.
• Ensure funds are available
  Your broker will block the amount until allotment is finalised.
• Wait for the allotment result
  If allotted, shares will reflect in your Demat on the next working day.

How the OFS Bidding Process Works 

The OFS bidding process is designed to ensure fairness and transparency. Here’s how it works:

• Bids are collected throughout the trading session on the OFS date.
• Institutional investors usually bid first, guiding early demand trends.
• Retail investors place bids at or above the floor price, often using a cut-off.
• All bids are evaluated post-market, and a cut-off price is determined.
• Shares are allocated based on demand, starting from the highest bid downwards.
• Unsuccessful bidders get their funds unblocked immediately.

An example: Suppose a large shareholder wants to sell 50 lakh shares of Company X with a floor price of ₹400. If the bids range from ₹420 to ₹450, with demand higher than supply, the cut-off may land near ₹440. All bids below the cut-off are rejected. Those bidding at or above the cut-off get shares. If demand is low, allotment may happen closer to the floor price.

Example of an OFS in India 

OFS has been used frequently by promoters of major listed companies. For instance:

• The Government of India often uses OFS to divest stake in public sector companies, allowing retail investors to buy shares at discounted prices. Recent examples include large PSUs such as General Insurance Corporation of India (GIC Re), Mazagon Dock Shipbuilders Ltd., and Cochin Shipyard Ltd.   
• Also, OFS has been used in private sector companies for promoter stake reduction to meet SEBI’s regulatory norms.

These examples help illustrate how OFS is not just a fundraising method but a governance and compliance tool as well.

Advantages of an Offer for Sale (OFS) 

OFS brings multiple benefits for both shareholders and regular investors. Here’s a detailed breakdown:

Benefits for investors

• Better price transparency
  Because the floor price is declared upfront, investors know the minimum acceptable level.
• Chance to buy shares at a discount
  Many OFS issues, especially government divestments, offer retail discounts.
• Lower market volatility risk
  Since shares are offered directly through the mechanism, prices remain controlled compared to open-market block deals.

Benefits for promoters and companies 

• Smooth and compliant stake reduction
  Useful when meeting SEBI rules on minimum public shareholding.
• Efficient price discovery
  The bidding system reflects actual market demand.
• Promotes liquidity
  More floating shares often improve daily trading volumes.

Important Factors to Check Before Investing in an OFS 

Before participating in an OFS, investors should carefully evaluate more than just the floor price. These checks help avoid impulsive decisions and align the investment with your goals.

Key things to review 

• Company fundamentals
  Make sure the business is financially sound and the promoter's sale is not due to distress.
• Reason for stake sale
  Promoters may sell for personal liquidity, regulatory compliance or diversification. Understand the reason.
• Historical performance
  Check how the stock has behaved in the last few quarters. High volatility may impact short-term returns.
• Discounts & pricing
  Retail discounts improve the attractiveness of OFS, especially in government-led divestments.
• Market sentiment
  OFS done during bearish phases may receive lower demand, affecting allotment chances.
• Your investment horizon
  OFS works best for long-term investors who believe in the company's story.

Conclusion 

An Offer for Sale is an important capital market mechanism that allows existing shareholders to sell their stake in a fair, transparent, and exchange-regulated way. While it does not bring fresh funds to the company, it increases liquidity, widens ownership, and helps promoters meet regulatory shareholding norms.

For investors, OFS can be an attractive opportunity when pricing is favourable, company fundamentals are strong, and promoter intent is well understood. Using platforms like m.Stock makes the process easy, fast, and seamless.

Always review floor price, discounts, past promoter behaviour, and market conditions before participating.

Also Read: https://www.mstock.com/articles/8-factors-before-buying-an-ipo