Should YOU “Cash IN” on ongoing OFS?

There has been a spate of Offer for Sale (OFS) issuances in the past few weeks. This has opened up another avenue for retail investors, such as you, to invest in shares of good companies at a discounted price.

What is OFS?

Securities Exchange Board of India (Sebi) had introduced a regulation, which capped promoters’ holdings in private sector companies at 75%. The capital markets regulator had given a deadline of June to reduce the promoter holding to this stipulated level. As a result, the companies lined up these OFS issuances.

Through this process, the promoter could reach out to retail investor for buying a stake in his/her company. On one hand, the promoter will lower his/her stake in the company. On the other hand, retail investors, had an opportunity to buy shares of such companies, usually at a discounted price.

The concept of OFS is very similar to an FPO (follow on public offer). However, there is a marginal difference. It does not involve heavy documentation such as issuing of prospectus, filling out lengthy forms and waiting for investors after subscription of the issue. An OFS cuts out the time element, which makes it a convenient option for investors as well as the promoter.

Keep an Eye on the Price

In an OFS, a company can price it equal to the current market price or at a discount. At present, many companies sold stocks at a deep discount of 5-10% through their OFS. The company promoters were keen on luring the investors who were shy of investing in stocks after witnessing a recent crash in mid-cap stocks.

However, the current discounts have helped the promoters to regain investors’ attention towards the stock market. As an investor, such discounts give you a perfect arbitrage opportunity (gaining from price difference) in the short-term. If you are looking at these stocks from a long-term perspective, they can be good value buys at such prices.

Company Check

Some companies have even offered a discount of 40% on the floor price. But more need not be always better in such cases.
A share price has to be backed by a financially sound company, irrespective of its size. Hence run a check on the basic financials of the company. Look for research reports or analysts view on the fundamentals of the stock and the company.

Secondly check the past performance and the outlook on the sector and its peers’ performance.

Lastly check the promoter’s credentials before investing in a company. This will give you a fair idea if the OFS pricing is fairly valued.

Act Quick

Unlike IPOs, which are open for subscription for few days, OFS is open for subscription for one trading day. Hence do your homework and math on the company’s offer before the issue hits the market. This will ensure you spot the right opportunity and make an informed decision.