On February 1, 2012, the Securities and Exchange Board of India (“SEBI”) had introduced the mechanism for offer for sale through the stock exchange (the “Stock Exchange OFS”) with the intention of facilitating offloading by promoters and promoter group members in listed companies. It was expected to bring in transparency in secondary transactions as well as draw wider participation. The introduction of the Stock Exchange OFS was also a recognition of limitations of then existing methods for achieving minimum public shareholding (the “MPS”), i.e. taking the public issue route, which was both time consuming and cumbersome.
The Stock Exchange OFS was also introduced to address certain regulatory concerns around block sale transactions, which were presumably undertaken by private entities wherein price was discovered outside the market through negotiated deals and hence lacked transparency. Initially, this route was available only for those promoters / promoter group members who had to meet MPS requirements for offloading and for promoter(s)/ promoter group members of top 100 companies based on average market capitalization of the last completed quarter. However, in the last 10 years, the eligibility of sellers has been expanded significantly along with certain other relaxations.
Since its introduction, the Stock Exchange OFS has been used by promoters and promoter group members of several listed companies to pare their shareholding to meet the MPS requirements and also for the purposes of divestment by the Government in certain public sector entities, as seen in the recent trades in shares of Axis Bank, IRCTC and ONGC.
In addition to transparent book-built pricing, other advantages of the Stock Exchange OFS include ability to freely determine the floor price and drawing employees and retail participation. Further, whilst in a large number of Stock Exchange OFS transactions, eventual allotment price would have been close to the floor price determined by the seller, in several transactions such as Stock Exchange OFS in shares of Butterfly Gandhimathi Appliances and GR Infra, the discovered price was 10% or higher than the floor price determined by the respective sellers.
However, the Stock Exchange OFS has not become a popular method for sale of listed shares beyond trades specifically for meeting the MPS requirements. For instance, per the NSE data, there have been only seven Stock Exchange OFS transactions in FY 23, 15 in FY 22 and 26 transactions in FY 21, which is paltry compared to the large secondary trades undertaken on the floor of the exchanges. Almost all the aforesaid, the Stock Exchange OFS transactions have been undertaken to meet the MPS requirements. The lack of popularity could be due to several reasons including strict eligibility conditions for sellers mandating 10% threshold for non-promoter sellers and a 12-week cooling off period, absence of a concept akin to anchor investors available for public issues, earmarking/reserving minimum allocation for retail investors and compelling retail investors to participate above the cut-off price determined on the T day, availability of other viable routes to meet MPS requirements such as QIP, block deal of up to 2%, etc.
By way of the revised comprehensive framework on offer for sale of shares through stock exchange mechanism issued on January 10, 2023, SEBI has proposed to address some of these concerns (the “OFS Amendment“).
The key changes introduced through the OFS Amendment are set out below:
- Extension of class of eligible sellers: The Stock Exchange OFS regime had allowednon-promoter shareholders of eligible listed companies (market cap of INR 1000 crore and above) to sell by way of the Stock Exchange OFS provided that such shareholder held at least 10% of share capital of the eligible listed company. The requirement of minimum holding of 10% for non-promoter shareholder has been done away with. This is a key change as it would allow wider base of shareholders to take advantage of the Stock Exchange OFS mechanism. There were also certain concerns in the past that 10% shareholding requirement did not recognise eligibility of holding by a group of shareholders or shareholders acting in concert holding 10% or more together.
SEBI’s rationale for this relaxation stems from the apparent inconsistency observed in the existing framework as a non-promoter shareholder meeting the value threshold of minimum OFS size requirement of INR 25 crore may not be able to use the Stock Exchange OFS mechanism unless such shareholder also meets 10% shareholding requirement. SEBI felt that the requirement relating to minimum offer size is more substantive than the minimum shareholding percentage since the guiding principle of the Stock Exchange OFS is that the large order must not distort the market/price discovery mechanism.
- Relaxation of cooling off period on the basis of liquidity of shares: The Stock Exchange OFS regime required that the seller could neither purchase or sell shares of the relevant listed company 12 weeks period prior to the OFS nor sell or purchase shares in the 12weeks period after the OFS. There was an exception for undertaking another OFS or QIP within two weeks from the last OFS or QIP presumably only for meeting MPS requirements recognizing the possibility of a time crunch in meeting MPS requirements.
SEBI felt that for a very liquid stock having minimal market impact, the existing cooling off period requirement may not be appropriate. The logic behind the cooling off requirement was to prevent a seller from manipulating the stock by undertaking or causing artificial trading prior to the OFS to create a conducive market environment. The possibility of such mischief would be significantly reduced if the relevant stock was very liquid.
In light of the above, SEBI has now introduced graded relaxations to the cooling-off requirements, both in terms of the timelines and eligibility of companies based on the liquidity and impact cost of the shares involved. SEBI has prescribed lower cooling off period of two weeks for ‘most liquid shares’, four weeks for ‘liquid shares’ and have retained the existing 12-week period for ‘illiquid shares’. SEBI has noted that shares of almost half of the eligible listed companies would qualify as ‘most liquid’ or ‘liquid’ and therefore, this exemption will be useful for shareholders of listed companies.
The classification of stocks into ‘most liquid’, ‘liquid’ and ‘illiquid’ has been undertaken on the basis of classification prescribed by SEBI in February 2005 as part of the comprehensive risk management framework for the cash market. The liquidity of shares is to be determined on the basis of their periodical trading frequency and ‘impact cost’, which is a measure of volatility of share price.
Some of the other changes introduced by the OFS Amendment are set out below:
- The requirement to notify the stock exchanges of the intention of undertaking OFS by 5 pm on T-1 day has been extended to 6 pm after recording reasons;
- It has been clarified that the spill-over in case of under-subscription can happen both ways – from retail into non-retail category and from non-retail to retail category. Earlier, spill over from only non-retail to retail portion was permitted in case of under-subscription;
- Stock exchange OFS mechanism has been extended to unit holders / sellers of the listed real estate investment trusts and infrastructure investment trusts to offer their holdings;
- Certain inconsistency in the existing framework for bidding by retail investors at cut-off price or floor price has been addressed and it has been clarified that retail investors can bid only at cut off price decided basis bidding on T day; and
- In case of under subscription in the Stock Exchange OFS where the relevant shares are either liquid or illiquid and if the original Stock Exchange OFS was made for compliance with the MPS norms, the promoter(s) and promoter group entities are allowed to offer the unsubscribed portion of the Stock Exchange OFS only for the purpose of meeting MPS compliance in the open market with a gap of two weeks from the closure of the Stock Exchange OFS. Accordingly, in case of undersubscription in the OFS, the promoter and the promoter group will have three options to offload immediately after two weeks: OFS, QIP and open market for up to 2% share sale.
In conclusion, the OFS Amendment has addressed some of the primary concerns such as increasing the scope of eligible sellers and relaxation in the cooling-off period. However, to bring the Stock Exchange OFS closer to the popularity of the typical stock exchange secondary trades, concepts akin to anchor investors with necessary safeguards, changes with respect to participation by retail investors at least for the Stock Exchange OFS undertaken by non-promoter shareholders, etc. could be considered by SEBI.