The stock market offers various mechanisms for companies to raise capital and for shareholders to sell their holdings. Among the most significant are the Rights Issue and Offer for Sale (OFS). While both are utilized for fundraising or disinvestment, they differ significantly in purpose, procedure, and implications for investors. In this comprehensive article, Namo Trading Academy delves into the following concepts, their benefits, methods, and relevance in today’s financial markets.
- Introduction to Rights Issue and Offer for Sale (OFS)
- Rights Issue: A Closer Look
- Offer for Sale (OFS): A Closer Look
- Rights Issue vs. OFS: Key Differences
- Strategic Importance in Capital Markets
- Regulatory Framework
- Recent Trends and Examples
- Conclusion
1. Introduction to Rights Issue and Offer for Sale (OFS)
A Rights Issue is a method by which a listed company raises additional capital by offering existing shareholders the right to purchase additional shares at a discounted price. The offer is usually made in proportion to their current shareholding.
An Offer for Sale (OFS), on the other hand, is a mechanism that allows promoters of a listed company to sell their shares to the public through the stock exchange platform. The government often utilizes OFS to reduce its holdings in public sector enterprises or by promoters aiming to reduce their stake to meet minimum public shareholding norms.
2. Rights Issue: A Closer Look
A. What is a Rights Issue?
A Rights Issue enables a company to raise equity capital by offering shares to existing shareholders at a price typically lower than the market price. These shares are offered in a specific ratio (e.g., 1:5 means one new share for every five held).
B. Purpose of a Rights Issue:
- To raise funds for expansion, acquisitions, or debt repayment.
- To strengthen the balance sheet and improve financial ratios.
- To maintain control within the existing group of shareholders.
C. Process of Rights Issue:
- Board Approval: The board passes a resolution approving the Rights Issue.
- Filing with SEBI: A Letter of Offer is filed with SEBI and stock exchanges.
- Record Date: A record date is announced to identify eligible shareholders.
- Renunciation Rights: Shareholders can renounce their rights in favor of others.
- Issue Opening: The offer opens for subscription, usually lasting 10-15 days.
- Allotment and Listing: Shares are allotted and listed on the stock exchange.
D. Advantages of Rights Issue:
- A cheaper source of capital compared to other fundraising methods.
- Protects existing shareholders from dilution of ownership.
- Demonstrates promoter confidence if they participate in the issue.
E. Disadvantages of Rights Issue:
- If not fully subscribed, it may reflect negatively on the company.
- Can lead to a temporary drop in share price due to dilution fears.
Example:
Let’s assume ABC Ltd. announces a rights issue in a 1:4 ratio at a price of Rs. 100 per share when the market price is Rs. 150. A shareholder with 400 shares is eligible to buy 100 additional shares at Rs. 100 each.
3. Offer for Sale (OFS): A Closer Look
A. What is OFS?
OFS is a mechanism through which promoters or major shareholders can transparently sell their stocks through the exchange. Introduced by SEBI in 2012, it is frequently used by promoters to comply with the minimum public shareholding norms or by the government for disinvestment.
B. Purpose of OFS:
- To comply with SEBI’s minimum public shareholding norms (25%).
- To provide an exit route for large investors.
- To facilitate government disinvestment in public sector undertakings.
C. Process of OFS:
- Announcement: The seller announces the OFS and informs the exchange.
- Floor Price: A minimum selling price is set.
- Bidding Period: Typically held for one trading day.
- Allocation: Shares are allocated on a price-priority basis.
- Settlement: Takes place on a T+1 basis.
D. Key Features of OFS:
Only promoters or shareholders holding more than 10% can use OFS.
- Minimum size: OFS must be at least 1% of the paid-up capital.
- Reservation: A certain percentage is reserved for retail investors.
D. Advantages of OFS:
- A transparent and efficient method of share sale.
- Quick execution (T+1 settlement).
- Beneficial for retail investors with reserved quotas.
E. Disadvantages of OFS:
- No guarantee of allotment due to competitive bidding.
- A short bidding window can limit participation.
Example:
The government decides to sell a 5% stake in XYZ Ltd. through OFS to meet disinvestment targets. The floor price is set at Rs. 300 per share. Investors place bids, and shares are allotted accordingly.
4. Rights Issue vs. OFS: Key Differences
| Feature | Rights Issue | Offer for Sale (OFS) |
|---|---|---|
| Purpose | Raise fresh capital | Divestment by existing shareholders |
| Participants | Existing shareholders only | All investors including retail, institutional |
| Price | Usually at a discount | Floor price declared |
| Duration | Open for several days | Typically one trading day |
| Dilution | Yes, if new shares are issued | No dilution as existing shares are sold |
| Regulatory Filing | Detailed filing with SEBI | Simplified process |
5. Strategic Importance in Capital Markets
Both Rights Issues and OFS play essential roles in Stock markets. While the former is about raising fresh capital, the latter provides liquidity and enables ownership redistribution.
For companies:
- Rights Issues help in growth without taking on debt.
- OFS is a tool for meeting compliance or strategic restructuring.
For investors:
- Rights Issues offer shares at a discount, providing value.
- OFS offers an opportunity to buy quality stocks at a fair price.
6. Regulatory Framework
SEBI governs both Rights Issues and OFS to ensure transparency and protect investor interests. Key regulations include:
For Rights Issue:
- SEBI ICDR Regulations.
- Detailed disclosures in the Letter of Offer.
For OFS:
- SEBI Circular dated July 2012 and subsequent amendments.
- Restrictions on promoter selling, floor price, and allocation norms.
7. Recent Trends and Examples
Many Indian corporates, including Reliance Industries, Bharti Airtel, and Tata Power, have raised significant funds via Rights Issues.
OFS has been extensively used by the Indian government in companies like Coal India, ONGC, and LIC for disinvestment.
8. Conclusion
Rights Issues and OFS are powerful tools in the Indian stock market, serving distinct purposes. While Rights Issues help companies raise equity capital without debt, OFS facilitates efficient promoter exits or disinvestment. Understanding these tools empowers investors to make informed decisions, participate in wealth creation, and contribute to the vibrancy of financial markets.
Investors should investigate every opportunity based on the company’s fundamentals, pricing, and destiny potential before collaborating in either of these offerings. With informed choices, each Rights Issue and OFS may be beneficial avenues for retail and institutional investors alike. Join Us, Namo Trading Academy Stock Market Training. In this Training, we can provide expert guidance from industry experts.
