This article has been written by Mr. Hemant Kumar, a 2nd year LL.B student from Faculty Of Law, Delhi University.
Introduction:
When a company offers its shares for sale to the public, it is called an initial public offering (IPO). But there can be other circumstances where certain members of a company may want to sell their shares. Such a sale of shares is called an offer for sale (OFS). In this article, we will discuss what an OFS is, who can make an OFS, the legal provisions governing OFS, and some recent examples and case laws related to OFS.
What is an Offer for Sale (OFS)?
An offer for sale (OFS) is a mechanism through which certain shareholders of a company can sell their shares to the public without going through the process of an IPO. In an OFS, the shares are offered for sale at a fixed price to the public through a stock exchange. The price of the shares is determined through a process called the book-building process. This process involves collecting bids from investors and then setting a price based on the demand and supply of shares.
Who can make an Offer for Sale (OFS)?
According to the Securities and Exchange Board of India (SEBI) regulations, the following entities can make an OFS:
- Promoters of a company
- Members of the promoter group
- Directors of a company
- Venture capital funds and foreign venture capital investors
- Any other shareholder holding more than 10% of the shares in the company.
Legal Provisions governing Offer for Sale (OFS):
The legal provisions governing OFS are laid down in the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018. The key provisions are as follows:
Eligibility criteria for making an OFS: The entity making an OFS must have been a shareholder of the company for at least one year prior to the date of filing the draft offer document with SEBI.
Minimum public shareholding: The minimum public shareholding in a listed company must be maintained at 25% at all times. Therefore, if the promoter group holds more than 75% of the shares in a company, they must sell their shares through an OFS to comply with the minimum public shareholding requirement.
Pricing of shares: The price of shares offered in an OFS must be determined through the book-building process. The maximum discount allowed in an OFS is 5% of the floor price.
Disclosures: The entity making an OFS must disclose certain information in the offer document, such as the number of shares being offered, the price of the shares, the reasons for the OFS, and the financial and operational details of the company.
Examples of Offer for Sale (OFS):
HDFC Life Insurance: In 2020, HDFC Life Insurance Company Limited made an OFS of 5.19% of its shares. The OFS was made by HDFC Standard Life Insurance Company Limited, one of the promoters of HDFC Life Insurance. The OFS was oversubscribed, with the final price fixed at Rs. 575 per share.
Indian Railway Finance Corporation (IRFC): In 2021, Indian Railway Finance Corporation (IRFC) made an OFS of 13.64% of its shares. The OFS was made by the Government of India, which is the promoter of IRFC. The OFS was oversubscribed, with the final price fixed at Rs. 26.25 per share.
Recent Judgments:
In recent years, there have been several judgments related to the offer of sale of shares by certain members of a company. One such judgment was issued by the Securities Appellate Tribunal (SAT) in 2019 in the case of Karvy Stock Broking Limited. In this case, the SAT upheld the SEBI’s order which barred Karvy Stock Broking from taking new clients and executing trades for existing clients due to violations related to the offer of sale of shares.
Another recent judgment related to the offer of sale of shares was issued by the Supreme Court of India in 2021 in the case of Securities and Exchange Board of India v. Kishore R. Ajmera. In this case, the Supreme Court upheld SEBI’s order which had imposed a penalty on Kishore R. Ajmera for failure to comply with the guidelines related to the offer of sale of shares.
Case Laws:
SEBI vs. Sahara India Real Estate Corporation Ltd. & Ors., (2012) 8 SCC 1:
This case involved the issue of offer of sale of shares by Sahara India Real Estate Corporation Ltd. The Securities and Exchange Board of India (SEBI) had passed an order directing Sahara to refund the amount raised from the public through its optionally fully convertible debentures (OFCDs) with interest. Sahara challenged this order on various grounds, including that the OFCDs were not securities and hence were not subject to SEBI regulations.
The Supreme Court held that the OFCDs issued by Sahara were indeed securities and that Sahara had violated various SEBI regulations in issuing and selling these OFCDs. The Court also held that Sahara had to refund the entire amount raised from the public through these OFCDs, along with interest.
MCX Stock Exchange Ltd. vs. SEBI, (2013) 4 SCC 712:
In this case, the issue was whether the MCX Stock Exchange Ltd. (MCX-SX) had complied with the SEBI regulations on offer of sale of shares by certain members of a company. MCX-SX had filed an application with SEBI seeking approval for an offer for sale of shares by certain members of the company. SEBI had rejected this application on the ground that MCX-SX had violated various SEBI regulations in the past.
The Supreme Court held that SEBI had not properly considered MCX-SX’s application for approval of the offer for sale of shares. The Court directed SEBI to reconsider the application and decide it afresh.
United Bank of India vs. Satyawati Tondon, (2010) 8 SCC 110:
This case involved the issue of whether an offer of sale of shares by a member of a company was a transfer of property under the Transfer of Property Act, 1882. Satyawati Tondon had entered into an agreement with United Bank of India (UBI) to sell her shares in the bank. However, UBI had failed to complete the transaction, and Tondon had filed a suit seeking specific performance of the agreement.
The Supreme Court held that an offer of sale of shares was not a transfer of property under the Transfer of Property Act, 1882. The Court held that the rights and obligations of a shareholder in a company were regulated by the Companies Act, 1956, and not by the Transfer of Property Act, 1882.
Tata Sons Ltd. vs. Greenpeace International & Ors., (2015) 8 SCC 61:
This case involved the issue of whether a shareholder of a company could be held liable for the actions of the company. Greenpeace International, an environmental NGO, had accused Tata Sons Ltd. of various environmental violations. Tata Sons Ltd. had filed a suit against Greenpeace International and others seeking damages.
The Supreme Court held that a shareholder of a company could not be held liable for the actions of the company. The Court held that a shareholder had limited liability and that liability for the actions of the company could only be imposed on the company itself.
REFERENCES:
- www.indiacode.nic.in
- www.ca2013.com
- www.corporatelawreporter.com
- SEBI vs. Sahara India Real Estate Corporation Ltd. & Ors., (2012) 8 SCC 1
- MCX Stock Exchange Ltd. vs. SEBI, (2013) 4 SCC 712
- United Bank of India vs. Satyawati Tondon, (2010) 8 SCC 110
- Tata Sons Ltd. vs. Greenpeace International & Ors., (2015) 8 SCC 61