What Are Offer-for-Sale, Rights Issue & Bonus Shares?
Stock Markets are not just about the buying and selling of shares. Both the company and corporate actions can have an adverse impact on stock price, ownership structure, and investor value. Three common terms one comes across are: Offer-for-Sale (OFS), Rights Issue, and Bonus Shares. These mechanisms operate toward very different ends-from raising money, rewarding shareholders, or meeting regulatory compliance. Let’s delve deep into the significance of these terms, how they work, and what an investor should beware of. Offer-for-Sale – An Easy Mode of Disinvestment An Offer-for-Sale permits the promoters of a listed company to sell a portion of their shareholding to the public by way of a stock exchange platform. No fresh issue of shares is involved, unlike an IPO (Initial Public Offering). It’s rather a transfer of ownership from existing holders to a set of new investors. Real-World Example: In 2023, the Government of India divested its stake in Hindustan Aeronautics Ltd (HAL) through OFS. The issue was kept open for one single day, with shares being offered at a slight discount, and the response was overwhelming from both retail and institutional investors. How Does an Offer For Sale Work? Now that you know what OFS is, let’s understand how OFS works. An Offer for Sale (OFS) is a process where a company or its major shareholders sell their shares to the public. Here’s how it works: 1. Announcement: The seller announces the OFS and sets a minimum price (floor price) for the shares on the stock exchange. 2. Bidding: Investors can place bids for the shares at or above this minimum price during the bidding period. 3. Allocation: The seller reviews the bids and decides how many shares each bidder gets based on their offers. 4. Settlement: Successful bidders have the shares credited to their accounts and the payment is deducted from their bank accounts. If bids are lower than the floor price, OFS fails and shares stay with the seller. OFS helps companies raise funds efficiently and meets regulatory requirements for public shareholding. How to Participate in OFS: Benefits & Risks: Pros Cons Opportunity to buy quality stocks at a discount Limited bidding time Transparent mechanism on exchange Allotment not guaranteed Encourages wider retail participation Price may fall after OFS due to oversupply Rights Issue – A Call to Existing Shareholders A Rights Issue permits a corporation to raise capital without incurring any loan or debt. This typically involves the offer to subscribe to additional shares at a discounted price-the discount having been calculated in a specified ratio between the points of time. Example: In 2020, Reliance Industries Limited (RIL) issued a rights issue for ₹53,125 crore-the highest ever in Indian history. Shares were offered in the ratio of 1:15 at ₹1,257 per share when market prices were at more than ₹1,400. What can shareholders do? Some Common Use Cases: Benefits & Risks: Pros Cons Discounted price to buy more shares May need to invest more capital Avoids debt, strengthens balance sheet Ignoring may dilute your shareholding Right renunciation allows liquidity Lower investor enthusiasm can depress stock Bonus Shares – A Reward for Loyalty Bonus Shares are issued when a company wants to share its profits with shareholders without paying out actual cash. It is like a gift – more shares for free, in proportion to your current holdings. Recent Example: In 2022, TCS declared a 1:1 bonus from 1:1; an extra share was given for every share held. This bonus stock issued increased liquidity and attracted retail interest. Accounting Behind Bonus: Bonus shares are issued from reserves or from surplus profits; hence no new capital is raised. While your shares increase in number, the price of the stock adjusts so that the total value of your investment remains the same initially. Common Ratios for Bonus Issues: Benefits & Risks: Pros Cons No cost involved Price gets adjusted, no real gain More shares can mean better liquidity No impact on company fundamentals Perceived positive signal from management Earnings per share (EPS) may reduce Summary Table: OFS vs Rights vs Bonus Feature Offer-for-Sale (OFS) Rights Issue Bonus Shares Purpose Promoters reduce stake Company raises capital Distribute surplus to shareholders Who gets it? Public investors Existing shareholders Existing shareholders Price At discount to market Discounted price Free Capital Raised? No Yes No Shareholder Dilution No (transfer only) Yes, if not subscribed No real dilution Timeline 1-2 days 15-30 days Declared + credited Investor Insights – What Should You Do? Corporate Action What Should You Do as an Investor? OFS Look at the valuation and discount offered. Use retail quota if available. Rights Issue Assess the reason for capital raising. Subscribe if the company has strong fundamentals. Bonus Shares Enjoy the benefit! Keep holding for long-term gains. It may improve liquidity and stock appeal. Conclusion Understanding corporate actions like OFS, Rights Issues, or Bonus Shares can allow you to spot opportunities and avoid surprises. If you are building a portfolio with a long-term horizon or are making short-term bets, awareness of these events is a clear edge. They are more than just administrative changes by companies; they are strategic signals. Always contemplate their impact on shareholding, capital structure, and stock price before taking action.