OFS on Zerodha

An Offer for Sale (OFS) is a mechanism through which promoters or large shareholders of a listed company sell their existing shares to the public through the stock exchange platform, without the company issuing new shares. OFS is used primarily by:

• Promoters of listed companies reducing their stake to comply with minimum public shareholding (MPS) norms.
• The Government of India for disinvestment of Central Public Sector Enterprises (CPSEs).

Zerodha enables retail and non-institutional investors to participate in OFS through Kite, similar to IPO applications. OFS transactions do not attract brokerage from Zerodha.

Regulatory framework

SEBI OFS guidelines

SEBI introduced the OFS mechanism through Circular CIR/MRD/DP/18/2012 and subsequently revised it. SEBI’s framework requires:

• OFS is available only for Top 200 companies by market capitalisation (as at the end of the preceding quarter), or as relaxed by SEBI for specific categories.
• A minimum of 10% of shares offered must be reserved for retail investors (applications up to Rs 2,00,000).
• Retail investors receive a minimum 5% discount to the cut-off price determined in the non-retail portion of the bidding (this discount is not guaranteed by regulation but is common practice for government OFS).
• The OFS window is open for one or two trading days.

Minimum Public Shareholding (MPS) compliance

SEBI’s MPS norms require listed companies to maintain at least 25% public shareholding. Companies whose promoters hold above 75% are required to divest through mechanisms including OFS. SEBI Circular CIR/CFD/DIL/10/2010 set the MPS requirement. Many OFS transactions are triggered by this compliance need.

OFS process on Zerodha

Bid placement

When an OFS is announced, Zerodha notifies eligible clients through Kite and email. The bidding period is typically one trading day (T). Retail investors (bids up to Rs 2,00,000) place bids either at:

• The floor price (the minimum price set by the seller).
• A price above the floor price (limit bid).
• Cut-off price (retail investors can opt to accept whatever price is determined).

On Kite, investors navigate to the OFS section (similar to the IPO section) and enter their bid quantity and price.

Fund blocking

Unlike UPI ASBA for IPOs which blocks funds before the T+1 settlement, OFS settlement works differently. OFS uses the existing exchange settlement mechanism:

• The bid is placed using available cash or margin in the trading account.
• On T+1 (the business day after OFS), successful bids are settled by debiting the bid amount from the trading account and crediting shares to the demat account.
• Unsuccessful bids have no financial impact.

Cut-off determination

At the close of the non-retail bidding session, the seller and the exchange determine the cut-off price based on orders received. Retail investors who bid at the cut-off or above the cut-off are allocated shares at the cut-off price (or the cut-off price less the retail discount, if applicable).

Retail investors who bid below the cut-off price are not allotted shares. All successful retail bidders receive shares at the same cut-off price regardless of the price they bid (subject to the retail discount).

Allocation

When OFS is oversubscribed:

• Non-retail portion: Proportional allotment at or above cut-off price.
• Retail portion (10% reserved): If oversubscribed, the allotment is by lottery in most cases, or proportional depending on the OFS structure.

Shares allotted under OFS are credited to the investor’s demat account at CDSL on T+1.

Brokerage and charges

OFS transactions are facilitated through the exchange OFS platform. Zerodha does not charge brokerage on OFS bids. However:

The exchange transaction charges on OFS purchases are typically lower than secondary market equity charges.

Post-allotment trading

Shares allotted under OFS are regular listed equity shares and can be traded on NSE or BSE from the next trading session after allotment. OFS shares are not subject to a lock-in period for retail investors.

The capital gains holding period starts from the date of allotment:

• STCG: Sold within 12 months; taxed at 15% under Section 111A.
• LTCG: Sold after 12 months; taxed at 10% on gains above Rs 1 lakh under Section 112A.

Government disinvestment OFS

The Government of India uses OFS as a primary tool for disinvestment of CPSE stakes. Examples include OFS transactions for Coal India, ONGC, Hindustan Copper, and IRCTC. These OFS offerings frequently include a floor price set at a discount to the prevailing market price to attract retail participation.

CPSE OFS transactions are announced through the Ministry of Finance’s Department of Investment and Public Asset Management (DIPAM) and the respective exchange websites. Zerodha notifies clients of active CPSE OFS through Kite.

OFS vs IPO vs Block Deal

References

1. SEBI Circular CIR/MRD/DP/18/2012, OFS framework.
2. SEBI Circular CIR/CFD/DIL/10/2010, Minimum Public Shareholding norms.
3. DIPAM, CPSE Disinvestment Programme documentation.
4. Income Tax Act, 1961, Sections 111A, 112A.
5. NSE/BSE, OFS bidding platform operational guidelines.