Offer for Sale of shares would be Hassle-free; SEBI relaxes OFS norms for Retail Investors shareholders

1. Background

Earlier, SEBI vide. Circular No. Dated, July 18, 2012, issued ‘Comprehensive Guidelines on the ‘Offer for Sale (OFS)’ of shares by the promoters through the stock exchange mechanism. The mechanism was introduced to enable divestment by promoters to achieve minimum public shareholding in listed companies. Since then, the provisions have undergone many changes. The last significant modification was done in December 2018.

2. New Framework on ‘Offer for Sale’

SEBI received feedback from various market participants, discussions with Stock Exchanges, Clearing Corporations and deliberations in the Secondary Market Advisory Committee (SMAC) of SEBI, to modify certain provisions of the existing OFS framework through the Stock Exchange Mechanism.

Accordingly, the SEBI vide circular no. SEBI/HO/MRD/MRD-PoD-3/P/CIR/2023/10, dated 10.01.2023 has issued a comprehensive framework for relaxing the provisions for ‘Offer for Sale’ of shares through a Stock exchange mechanism. Now, any promoter, promoter group entity, or non-promoter shareholder of such companies may offer shares through an Offer for Sale (OFS).

This write-up aims to provide an in-depth analysis of the SEBI’s framework on the Offer for the sale of shares through the Stock Exchange Mechanism.

3. Applicability of the new OFS Mechanism

Offer for Sale (OFS) mechanism is applicable to the following –

3.1 Promoters/Promoter group entities of specified companies

All promoters/promoter group entities of companies that are eligible for trading and are required to increase public shareholding to meet the minimum public shareholding requirements in terms of regulation 38 of SEBI (LODR) Regulations, 2015 read with SCR Rules, 1957 are eligible

3.2 Companies with a market capitalization threshold of Rs 1000 crore and above

OFS mechanism shall also be available to companies with a market capitalization of Rs 1000 crore and above with the threshold of market capitalization computed as the average daily market capitalization for six months prior to the month in which the OFS opens.

Further, any promoter or promoter group entities or non-promoter shareholders of such companies may also offer shares through this mechanism.

3.3 Non-promoter shareholders can offer their shares through OFS mechanism without the requirement of min. shareholding

Earlier, any non-promoter shareholder holding at least 10% of the share capital of any eligible company could sell the shares through the OFS mechanism. However, the minimum size of OFS should be at least Rs 25 crore or more. Thus, an inconsistency is observed as a non-promoter meeting the value threshold (i.e. 25 Cr.) may not be able to use the OFS mechanism unless she/he also meets the shareholding percentage threshold (i.e. 10%).

Now, the non-promoter shareholder of any eligible company can offer their shares through the OFS mechanism. Thus, the SEBI has done away with the existing requirement of 10% shareholding for non-promoter shareholders. The only requirement is the minimum offer size shall be Rs. 25 Cr.

3.4 Eligible buyers i.e. all investors registered with brokers of BSE/NSE/MSEI

All investors registered with the brokers of the Bombay Stock Exchange (BSE), National Stock Exchange (NSE) and Metropolitan Stock Exchange of India (MSEI) shall be eligible to buy the shares under the OFS mechanism.

However, the promoters/promoter group entities shall not be included in the category of investors.

Comments –

With the relaxation in the extant eligibility criteria for OFS, more and more non-promoter would be eligible to off-load their shares via the OFS mechanism. The 10% minimum eligibility criteria under the extant norms was arbitrary. For e.g. A non-promoter holding 9% of the total share capital of 1000 crores wasn’t eligible whereas a non-promoter holding 10% of 100 crores was an eligible seller.

4. What is the cooling-off period for the offer-for-sale transaction?

4.1 Meaning of the Cooling-off period

A cooling-off period is a time period in which the issuer has the right to withdraw the offer, after the initial offer of securities for sale is made. No trading of the securities is allowed during this period.

4.2 Cooling-off period shall be based on the liquidity of shares on exchanges

Earlier, a cooling off period of (+-) 12 weeks has been provided to the sellers of eligible companies for availing OFS mechanism. This puts a bar on sellers from buying/selling shares during the cooling-off period. The promoter/promoter group entities were not allowed to purchase and/or sell the shares of the company in the 12 weeks period prior to the offer and after the offer.

It was noted that for a very liquid stock having a minimal market impact, the existing cooling-off period requirement may not be appropriate. In this regard, the existing requirement for a cooling-off period was reviewed both in terms of the timelines and liquidity cost.

Now, the cooling-off period for OFS transactions (i.e. purchase or sale before and after the offer) in the shares of the company for the promoter(s) or promoter group entities and non-promoter shareholders shall be based on the liquidity of the shares on exchanges. It can be categorized as:

(a) For most liquid shares: +2 weeks
(b) For liquid shares: +4 weeks and
(c) For illiquid shares: +12 weeks

However, the promoter(s) or promoter group entities of companies whose shares are either liquid or illiquid can offer their shares only through OFS or Qualified Institutional Placement (QIP) with a gap of 2 weeks between successive offers.

Comments –

As per the data provided by NSE, there are over 900 companies that are eligible for OFS. By the above modification, around 180 companies can be categorized as “Most Liquid”, 290 companies are “Liquid” and the rest all the eligible companies are “Illiquid”.

5. Minimum Offer Size for the Sale of shares

The minimum size of the offer shall be Rs 25 Cr. However, promoters or promoter group entities may, make an offer of less than Rs 25 Cr. in order to obtain the minimum public shareholding in a single tranche.

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