1. INTRODUCTION
In our alert in October last year on the press release dated September 30, 20221 issued by the Securities and Exchange Board of India's ('SEBI'), we discussed about the modifications approved by SEBI in the offer for sale through stock exchange mechanism ("OFS"). Subsequently, the SEBI released its circular on January 10, 20232 ("Revised Framework"), which has formalised such changes and revised the provisions of the existing OFS regime (the "Existing Framework")3 . The Revised Framework will come into effect from February 9, 2023, and the Existing Framework issued through various SEBI circulars shall be rescinded. We will discuss below the key changes introduced by SEBI through the Revised Framework.
2. KEY CHANGES
2.1 Eligibility
The Existing Framework allows non-promoter shareholders who are holding at least 10% of the share capital of eligible companies4 to avail the OFS route for sale of shares. Under the Revised Framework, the minimum shareholding requirement has been removed. The intent seems to popularize the OFS window, given the benefit and flexibility it offers to sellers as well as buyers. However, the minimum OFS issue size of at least INR 250 million is still applicable. We believe this will attract the attention of institutional shareholders to explore OFS as an alternative to negotiated deals.
2.2 Reduction in cooling-off period
Under the Existing Framework, the cooling-off period (i.e. purchase or sale prior to and after the offer) for promoter, promoter group entities and non-promoter shareholders was 12 weeks irrespective of the nature, type and size of the listed companies. The Revised Framework has introduced three different cooling-off periods basis the liquidity of the shares, i.e. two weeks (for most liquid shares), four weeks (for liquid shares) and 12 weeks (for illiquid shares).
The criteria laid down for assessing the liquidity of shares are as provided in the table below:
| S. No. | Nature of shares | Identification Criteria | Cooling off Period |
| 1 | Most liquid shares |
Securities forming part of Group I securities as per SEBI circular5; and Mean Impact Cost = up to 0.05% for a trade of Rs. 100,000 |
Two weeks |
| 2 | Liquid shares |
Securities forming part of Group I securities as per SEBI circular6; and Mean Impact Cost = more than 0.05% but less than 0.10% for a trade of Rs. 100,000 |
Four weeks |
| 3 | Illiquid shares | Securities not forming part of serial numbers 1 and 2 above | 12 weeks |
The mean impact cost is calculated by taking four snapshots in a day from the order book in the past six months and such four snapshots are randomly chosen from within four fixed ten-minutes windows spread through the day. The impact cost is the percentage price movement caused by an order size of INR 1 Lakh from the average of the best bid and offer price in the order book snapshot. The impact cost is calculated for both, the buy and the sell side in each order book snapshot7.
Basis review of the data provided by the National Stock Exchange of India Limited on impact cost of NIFTY 50 companies as of December 20228 , the impact cost of such companies is in the range of 0.01 to 0.03. This implies that all the NIFTY 50 companies fall under the category of most liquid shares and therefore, cooling-off period of two weeks will be applicable.
We believe the identification of liquidity of shares for listed companies, for the purposes of an OFS, should be provided by the stock exchanges. However, in order to operationalize the liquidity criteria there would be some clarity required from stock exchanges on (a) frequency of upload of such information; (b) whether the information will be separate for each exchange; and (c) assessment of liquidity of shares, if the mean impact cost for the stock exchanges is different.
However, the cooling off period is subject to two exceptions:
- Exemption from successive OFS/QIP
Promoters and promoter group can undertake a successive QIP or an OFS with a cooling off period of two weeks for liquid and illiquid shares. However, the two-week dispensation is not available to other sellers/shareholders of the listed company. - Exemption for open market sale
In case of undersubscription of an OFS for compliance with the minimum public shareholding norms, the SEBI has also permitted open market sale after a gap of two weeks from the closure of OFS as an additional window to offload the unsubscribed portion of such OFS.
2.3 Extension of time for announcement of OFS notice
As per the Existing Framework, the sellers are required to announce intention of sale of shares latest by 5 pm on the T-1 day (i.e., a day before opening of the OFS) to the stock exchanges. In the past, due to certain exigencies the OFS announcement had been delayed, which was subject to ad hoc approval. The SEBI has formalized the approach of granting such exemptions under the Revised Framework. On a case-to-case basis, upon receipt of request from the seller, the stock exchanges are permitted to grant an extension till 6 pm on T-1 day after recording reasons for such an extension. Since the exemption would be provided by the stock exchanges, the sellers would have to apply to both the stock exchanges for approval. However, the Revised Framework is silent on the procedure for making such an exemption application as well as factors which stock exchanges should consider for grant of such an extension.
2.4 Undersubscription in the non-retail category
Under the Existing Framework, only non-retail bidders were allowed to carry forward their bids on T+1 day. Carrying forward of their bids enables allocation of shares if retail investor portion remains undersubscribed. As a gesture to recognise the growing retail investor base, the SEBI has under the Revised Framework permitted the retail investors to bid for the unsubscribed portion of the non-retail investors. This will provide further flexibility to the sellers of listed companies with higher retail investor participation, to continue with the OFS despite lukewarm non-retail participation.
2.5 OFS for sale of units of REITs and InvITs
The OFS method for sale of Real Estate Investment Trusts ("REITs") and Infrastructure Investment Trusts ("InvITs") is not permitted under the Existing Framework. Under the Revised Framework, SEBI has allowed unitholders of publicly listed REITs and InvITs to sell units via the OFS route. This would primarily benefit sponsors, sponsor group entities and institutional unitholders. Given the requirements on the minimum size of trading lots for privately listed InvITs under the SEBI (Infrastructure Investment Trusts) Regulations, 2014, as amended, SEBI has not permitted OFS route for such units. While the Revised Framework suggests that the OFS framework for REITs and InvITs shall be same as the framework prescribed for shares of listed companies, the operational challenges would need to be ironed out.
2.6 OFS vs negotiated deals
The changes to the Existing Framework have allowed OFS route to emerge as a strong alternative to the negotiated deals, as the former offers more flexibility in terms of pricing. Secondly, transactions undertaken through OFS route are exempted from the trading window restrictions under Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015, as amended9 . However, OFS compared to negotiated deals do not offer a comfort on allocation, which may be a concern from a potential investor's perspective.
3. CONCLUSION
We believe that the abovementioned changes are aimed at further popularizing the OFS method for sale of shares compared to negotiated deals. The discontinuation of minimum shareholding requirement for nonpromoter shareholders will broaden the selling shareholders' base and facilitate non-promoter shareholders to offload their stakes with higher pricing flexibility. Rationalization of the cooling off period would further enable the sellers to undertake a follow-on OFS, thereby further bolstering the OFS process and may lead to greater adoption of the OFS method for sale of shares.
Footnotes
1 SEBI Press Release no. 29/2022 dated September 30, 2022.
2 SEBI Circular no. SEBI/HO/MRD/MRD-PoD-3/P/CIR/2023/10 dated January 10, 2023.
3 Section 21 of Chapter 1 of the "Master Circular for Stock Exchange and Clearing Corporation" issued by SEBI through its circular no. SEBI/HO/MRD2/MRD2_DCAP/P/CIR/2021/0000000591 dated July 5, 2021.
4 Listed companies with market capitalization of INR 1,000 Cr. and above, with the threshold of market capitalization computed as the average daily market capitalization for six months' period prior to the month in which the OFS opens.
5 As per SEBI circular no. MRD/DoP/SE/Cir-07/2005 dated February 23, 2005, the securities having mean impact cost of less than or equal to 1 and having traded on at least 80% of the days for the previous six months have been categorized as Group 1 securities.
6 Same as above.
7 Paragraph 3.3, SEBI circular no. MRD/DoP/SE/Cir-07/2005 dated February 23, 2005.
8 Impact Cost NIFTY 50, NSE Monthly reports available at https://www1.nseindia.com/products/content/equities/indices/homepage_indices_monthly.htm
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