The central government launched ONGC’s offer for sale (OFS) to divest up to 1.5 per cent of its stake to raise Rs 3,000 crore. The OFS, which was open on March 30 and 31 for retail investors, garnered 303 million bids (1.6 times of 188.7 million shares put on the block). Ruchi Soya’s follow-on public offer (FPO) closed on March 28.
Although the mechanism of an OFS and an FPO look similar, they are not the same.
OFS is a mechanism through which a promoter or a person who holds at least a 10 per cent stake of a company sells his or her shares to investors (both retail and institutional). The total number of shares neither increases nor decreases by way of OFS. It is simply an exchange of shares between two entities. So, when a company comes out of OFS, the EPS and the total number of shareholders remains unchanged.
As per present rules, only the top 200 companies by market capitalisation can use the OFS mechanism to sell shares and raise funds.
"OFS was first introduced by the Securities and Exchange Board of India (Sebi) in 2012. Earlier, the OFS option was available only for promoters of listed companies; however, the segment has been extended to non-promoters, who hold at least 10 per cent of the share capital of the company. OFS was mainly introduced to help promoters of listed companies to reduce their stake in the company while complying with the minimum public shareholding norms. The minimum public shareholding norms suggest that all listed companies should hold a minimum of 25 per cent of share capital in the company," says Arvind Agarwal, co-founder and CEO of C4D Partners, a social impact investing company.
The intent and mechanism of an FPO are the same as an OFS but there lies a difference in their basic structure. In an FPO, either the company can sell new shares or offer existing shares to investors, i.e., dilutive FPO and non-dilutive FPO. For example, in the Ruchi Soya FPO, there was a fresh issue of equity shares worth Rs 4,300 crore, so it is a dilutive FPO issue as the promoter’s shareholding in the company will come down post the FPO issue.
"An FPO is an option where companies can raise additional funding by issuing fresh shares, or promoters of companies can sell their existing stake or both. However, FPO is a lengthy and time-consuming process, where the issuing company is required to submit the new prospectus with Sebi, and the sale of shares can happen between three and five days," adds Agarwal
The EPS can be calculated using two methods:
OFS: In an OFS, no new shares are being created; only existing shares are offered. "There will be no effect on a company's EPS since the total number of outstanding shares will remain the same even after the OFS. At present, only the top 200 companies by market capitalisation can use OFS," says Anup Bhaiya, managing director, Money Honey Financial Services. For example, if a company’s income after tax was Rs 10 lakh and it had 200,000 shares outstanding, the EPS would be Rs 5 (10,00,000/200,000). After an OFS, the total number of shares continues to be 200,000, so there is no effect on EPS.
FPO: If the company in the example above came out with a dilutive FPO by offering to create 200,000 new shares and take its total outstanding shares to 400,000, then with the income after-tax being the same (Rs 10 lakh), the EPS will be Rs 2.50.
