Investing

When a company decides to go public, it offers shares through an Initial Public Offering (IPO). Typically, an IPO is marketed to investors through a subscription process, where investors apply to buy a certain number of shares. 

If demand for these shares exceeds the number offered, the IPO is said to be oversubscribed. In simpler terms, IPO oversubscription refers to the situation where the number of shares investors want to buy is greater than the number of shares available.

Oversubscription happens because investors see the potential for a profitable listing, especially in a favorable market environment. Expecting a strong market debut and the perception that the stock price could rise after listing often drives high demand.

How IPO Oversubscription Affects Retail and Institutional Investors

For retail investors,  oversubscription in  IPO can be both an opportunity and a challenge. While a highly oversubscribed IPO could indicate strong future performance, retail investors might face the risk of not getting an allotment due to the limited number of shares. 

On the other hand, institutional investors—which include qualified institutional buyers (QIBs) and high-net-worth individuals (HNIs)—tend to have a higher chance of securing allotments due to the larger size of their investments.

IPO oversubscription often makes acquiring shares more competitive, particularly for smaller investors.

Definition and Meaning of IPO Oversubscription

IPO oversubscription occurs when more investors apply for shares in an IPO than are available. For example, suppose a company offers 1 million shares in an upcoming IPO, but investors apply for 5 million shares. In that case, the IPO is said to be oversubscribed by 5 times, or a 5x oversubscription ratio. This is a clear indicator of high demand, and it often signals investor confidence in the company’s prospects.

How Oversubscription of Shares Occurs in the IPO Process

When companies set the price band for their IPO, they provide a specific number of shares they wish to sell. The investors then place bids for these shares during the subscription period. However, due to high interest, the demand often surpasses the number of shares available, resulting in oversubscription. The IPO subscription process generally involves different categories of investors: retail investors, HNIs, and QIBs, each of which may subscribe to varying shares.

How IPO Oversubscription is Measured

Subscription Data: Understanding the Numbers

The IPO oversubscription ratio gives investors a sense of the demand for a particular IPO. Here’s how it’s broken down:

1. Retail Investor Subscription

Retail investors are individuals applying for shares worth up to a specified amount. The demand from retail investors is often crucial in determining whether an IPO will be oversubscribed. A high oversubscription ratio in this category indicates strong public interest and sentiment toward the company.

2. High Net-Worth Individual (HNI) Subscription

HNIs are wealthy individuals or entities applying for large quantities of shares. This category can heavily influence the oversubscription ratio, as they typically use for higher amounts of shares than retail investors. HNI oversubscription generally reflects confidence among wealthy investors in the company’s potential.

3. Qualified Institutional Buyers (QIB) Subscription

QIBs include institutional investors like mutual funds, pension funds, and insurance companies. Their demand for shares can significantly impact the oversubscription ratio. Since these entities have access to large capital, they typically hold a significant portion of the shares, influencing the overall subscription status.

What IPO Oversubscription Ratios Indicate for Investors

The oversubscription ratio is a key indicator of an IPO’s popularity and perceived potential. A high oversubscription ratio suggests strong demand and could signify a promising listing. However, the ratio doesn’t guarantee that the IPO will perform well post-listing. Some oversubscribed IPOs may not see significant price appreciation once listed on the stock exchange.

What Happens When an IPO is Oversubscribed?

Impact of Oversubscription on IPO Allotment

When an IPO is oversubscribed, the number of shares allocated to each investor is typically reduced. For example, if an investor applies for 1,000 shares but the IPO is oversubscribed 5 times, they might only receive 200 shares. The allotment process uses a lottery system, especially when oversubscription is significant.

Oversubscribed IPO Allotment Process: How Shares Are Distributed

The allotment process for oversubscribed IPOs is usually done pro-rata or through a lottery. The pro-rata basis means that the number of shares allotted will be proportional to the number of applications received. However, in the case of a large oversubscription, a lottery system is often used to ensure fairness. In both cases, the more an investor applies for shares, the greater the chance of receiving an allotment.

Why Some Investors May Not Get IPO Allotment in an Oversubscribed IPO

Some investors might not receive any allotment despite applying for shares due to high oversubscription. When the IPO is oversubscribed by a large margin, the company and its underwriters might prioritize larger investors or those with a better chance of supporting the stock’s market price. Retail investors, especially those who apply for small amounts, might find it harder to get an allotment in such cases.

Also Read: IPO Allotment Process: The Complete Guide

How to Check IPO Oversubscription Status

Investors can track the IPO subscription status during the offer period. The information is typically available on the stock exchanges where the IPO is listed (NSE, BSE) and on the company’s IPO page. Investment platforms share market advisory services, and financial news websites provide real-time updates about the IPO oversubscription.

How to Track IPO Oversubscription Trends for Smarter Investment Decisions

Tracking trends in IPO oversubscription can help investors make informed decisions. By analyzing subscription patterns, such as whether a particular category (retail, HNI, or QIB) is oversubscribed, investors can gauge the demand and determine if an IPO is worth applying for.

Impact of IPO Oversubscription on Listing Gains

1. High Oversubscription and Its Correlation with Strong Listing Gains

A high oversubscription ratio is often correlated with strong listing gains. Investors rush to buy shares of a highly oversubscribed IPO, anticipating a higher opening price once the company is listed. The market sentiment around such IPOs is generally positive, and the stock price tends to rise post-listing.

2. Exceptions: Why Some Oversubscribed IPOs Fail to Perform Well

However, not all oversubscribed IPOs deliver strong listing gains. Some companies may have high expectations or encounter operational challenges, leading to underperformance despite high oversubscription. Share market advisory experts emphasize the importance of looking beyond oversubscription numbers. Investors should assess the company’s fundamentals, financial health, and growth prospects before making investment decisions.

3. How GMP (Grey Market Premium) and Oversubscription Data Work Together

The Grey Market Premium (GMP) refers to the price at which shares of closed IPOs are traded before they are officially listed on the stock exchange. A high GMP in conjunction with oversubscription signals that there is strong investor demand. However, GMP data can sometimes be misleading, and it’s important to consider other factors, such as the company’s long-term prospects, when making investment decisions.

[Internal Link: Link to “Grey Market Premium: What It Is and How It Affects IPO Listings”]

Tips to Increase Chances of Getting IPO Allotment in an Oversubscribed IPO

When an IPO is oversubscribed, competition for a share allotment becomes fierce, especially for retail investors. Here are some tips to improve your chances of securing an allotment in an oversubscribed IPO:

1. Applying at the Cut-Off Price for Higher Allocation Chances

One of the easiest ways to increase your chances of getting an IPO allotment is by applying at the cut-off price. The cut-off price is the price at which the shares are finally allocated. 

By applying at the cut-off price, you stand on equal footing with other investors, making your application eligible for any excess allocated shares. Since the allotment process is often based on a lottery or pro-rata system, applying at the cut-off price helps ensure you are considered fairly in the distribution process.

2. Using Multiple Applications Under Family Accounts (Legally)

Another strategy to improve your chances of getting IPO shares is to use multiple applications under family accounts. This is legal as long as a distinct individual holds each account and each person applies for a valid quantity of shares. 

While this can increase the number of applications in your favor, following the rules and avoiding fraudulent practices is essential. Family members can include parents, children, or spouses, and by doing so, you enhance the probability of securing allotments across several accounts.

3. Choosing the Right IPOs Based on Subscription Demand

Before applying for an IPO, it’s essential to analyze its subscription demand. Generally, a highly oversubscribed IPO signals strong investor interest and a potential for high listing gains. However, oversubscription can sometimes lead to lower allotment chances. 

Carefully evaluate the type of investors subscribing to the IPO—retail, high-net-worth individuals (HNIs), or qualified institutional buyers (QIBs). By choosing IPOs with the right mix of demand and investor categories, you can better assess your chances of success.

Real-World Examples of IPO Oversubscription

1. Case Study: A Highly Oversubscribed IPO That Delivered Strong Returns

Bharti Hexacom’s IPO, with an issue size of ₹4,300 crore, was a major success, receiving an overwhelming response from investors. The IPO was oversubscribed nearly 50 times, reflecting strong demand from retail and institutional investors. 

Upon listing, the stock made an impressive debut, opening at a premium of 144% above the issue price. This strong performance highlighted investor confidence in the company’s growth prospects and solidified its position in India’s competitive telecom sector.

2. Case Study: An Oversubscribed IPO That Failed to Perform

In 2023, the IPO of Skanray Technologies faced high expectations but failed to deliver post-listing gains. The IPO was oversubscribed nearly 20 times, with an issue price of ₹1,100-₹1,200 per share. 

However, on its listing day, the stock opened at a mere ₹1,050 and continued to decline, closing lower than the issue price. The weak performance was attributed to market volatility and investor concerns over the company’s profitability and growth trajectory in the competitive medical equipment sector.

Understanding IPO Oversubscription for Smarter Investment Decisions

IPO oversubscription is a key indicator of investor demand and can offer insights into the potential success of an IPO. However, investors need to understand that oversubscription is often associated with high listing gains but doesn’t always guarantee strong post-listing performance. Therefore, assessing other factors, such as the company’s financial health and growth prospects, is essential before investing.

How Investors Can Use Oversubscription Data to Choose the Right IPOs

Investors can use oversubscription data as a tool to gauge the level of investor interest and make informed decisions. Investors can improve their chances of success by choosing IPOs with high retail and institutional interest, analyzing subscription patterns, and applying smart strategies to increase allocation chances.

It is also crucial to consider the performance of recently listed IPOs, as their market behavior can offer valuable insights into the potential performance of upcoming IPOs and help refine investment strategies.

Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as a recommendation or investment advice by Equentis – Research & Ranking. We will not be liable for any losses that may occur. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL & the certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.

FAQ

Startups require capital to fuel their growth and bring their ideas to life. They often raise funds from angel investors for these financial needs, who invest in exchange for equity. 

Angel Investing is crucial in supporting innovative startups during their early stages. However, when startups raise funds at a valuation higher than their fair market value, this amount is not fully tax-free under the Income Tax Act and becomes subject to Angel Tax.

In this blog, we will explain the concept of Angel Tax in simple terms and highlight all the key details you need to know.

What is Angel Tax?

Angel Tax is a tax levied on the money raised by startups by issuing shares to investors. In simple terms, when a startup receives funding from an investor and gives them shares in return, the government wants to ensure that this money is genuine and not being used to hide black money.

This tax comes under Section 56(2)(viib) of the Income Tax Act. If a startup issues shares to an investor at a price higher than the “fair market value” (FMV), then the extra amount is taxed as “income from other sources.”

For example, if a startup’s share value is ₹100 per official calculations, but an investor pays ₹150 for it, the extra ₹50 per share is taxed as income. This is what is called the Angel Tax.

Why was Angel Tax Introduced?

The main reason behind the Angel Tax was to stop the practice of money laundering — people showing black money as legitimate investments in startups. However, many genuine startups and honest investors also got trapped in these rules in trying to catch wrongdoers.

How Does Angel Tax Affect Startups?

Imagine being a young entrepreneur trying to raise funds to realize your dream project. Suddenly, you are hit with a heavy tax bill because the government thinks you overvalued your shares.

Here are some real impacts on startups:

• Reduces Funding Opportunities

Investors often shy away from investing in startups if they think the startup might get taxed heavily later. No one wants to get into trouble for trying to help a startup grow. This means less money for innovation and job creation.

• Cash Flow Problems

Startups usually operate with limited funds. Their available working capital is reduced when they are required to pay Angel Tax. This makes it challenging for them to hire talent, develop products, or invest in marketing and growth activities.

• Discourages High Valuation

Sometimes, startups have unique ideas or strong future potential. Investors may be willing to pay a premium (higher price) to own part of the business. But Angel Tax discourages this practice, making startups undervalue themselves to avoid tax troubles.

How Does Angel Tax Affect Investors?

Like startups, angel investors — those who invest their money in young companies — are also affected.

1. Higher Risk for Investors

Investors take big risks when they fund startups. If their investment is treated as taxable income for the startup, it creates unnecessary complications. This “investor tax” may push them away from startup investments and towards safer options like mutual funds or bonds.

2. Reduced Angel Investing Culture

India needs a strong angel investing culture to boost new businesses and ideas. But the Angel Tax makes people think twice before investing, and that’s not good for the economy.

Are There Any Exemptions from Angel Tax?

Yes, the government has provided some relief over the years.

1. Recognized Startups by DPIIT

Suppose a startup is registered with the Department for Promotion of Industry and Internal Trade (DPIIT). In that case, it may get an exemption from Angel Tax, but only if specific conditions are fulfilled. 

These include being recognized as an eligible startup, not investing in certain specified assets, and ensuring that the total paid-up capital and share premium do not exceed the prescribed limit. This exemption helps startups raise funds without facing heavy tax burdens.

2. Valuation by Merchant Bankers

Merchant bankers can certify startups’ share valuations, which can help them justify higher prices to investors and avoid tax issues.

However, the process of registration and valuation is often complicated and time-consuming, which adds to the worries of young businesses.

Impact on India’s Startup Ecosystem

India has become the third-largest startup hub in the world. But Angel Tax has been like a speed bump on this fast-moving road.

1. Hurts Ease of Doing Business

The government talks about making India business-friendly, but complicated tax laws like Angel Tax send a mixed message.

2. Pushes Startups Abroad

Many Indian startups prefer to register in other countries like Singapore and the US, where such taxes do not exist. This leads to a loss of innovation and economic growth for India.

3. Impacts Future of AIFs

If you’re wondering, “what are AIFs?” they are Alternative Investment Funds that pool money from various investors to invest in startups, early-stage companies, and other ventures. These funds include venture capital and private equity. 

AIFs play a crucial role in supporting startup growth. However, unfriendly tax policies like the Angel Tax can hurt AIF, too, because they depend on startups to grow and generate profits. When startups struggle due to heavy taxation, AIFs face difficulties in delivering good returns to their investors.

What Needs to Change?

To make India a real hub for startups, here are a few things that can be done:

1. Simplify Tax Rules

The process of getting exemptions from Angel Tax should be easy and fast. Startups should not waste time on paperwork when they should be focusing on building their businesses.

2. Fair Valuation Methods

There should be more flexible ways to calculate share prices, given that startup valuation is not an exact science—it’s about future potential, not just current assets.

3. Encourage Angel Investing

Instead of taxing investors and startups, the government should give incentives like tax breaks to those who invest in startups, similar to what happens in developed countries.

4. Clarity for AIFs

Since AIFs play a big role in funding startups, clear and friendly tax rules for them will ensure better funding opportunities for entrepreneurs.

Conclusion

Angel Tax was introduced to prevent illegal money transactions, but it has unintentionally become a hurdle for genuine startups and investors. Although there have been improvements in recent years, much more must be done to encourage startup growth and angel investing in India.

If you want to start a business or invest in one, staying informed about taxes and getting help from experts, such as share market advisory services, is essential for better planning. You should also always monitor your returns using tools like a CAGR calculator to understand how your investments grow.

Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as a recommendation or investment advice by Equentis – Research & Ranking. We will not be liable for any losses that may occur. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL & the certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.

FAQ

Investing in the Indian stock market has become much more popular in recent years. With many current IPOs (Initial Public Offerings) creating buzz, investors are actively looking for ways to participate in these opportunities. 

One important category of investors in an IPO is the NII (Non-Institutional Investor) segment. If you’ve heard terms like “NII in IPO” or “IPO NII” but are unsure what they mean, this article is for you. 

Let’s break it down in simple terms and explore the rules and allotment process related to NIIs in India.

NII in IPO: Understanding Non-Institutional Investors

NII stands for Non-Institutional Investor, and it refers to individuals or entities who apply for shares in an IPO but do not qualify as Retail Individual Investors (RIIs) or Qualified Institutional Buyers (QIBs).

NIIs are typically high-net-worth individuals (HNIs), corporations, trusts, or other bodies that invest large sums — generally above ₹2 lakh — in IPOs. They don’t have to be professional investors, but they usually have significant financial capacity to bid higher amounts.

In simple words, NII in IPO means a special category of investors who apply for a large chunk of shares in public offerings and are given separate quotas under SEBI’s guidelines.

Who Are Non-Institutional Investors 

Simply put, NIIs are investors who apply for shares worth more than ₹2 lakh in an IPO.

This group typically includes:

• High Net-Worth Individuals (HNIs) — wealthy individuals with significant disposable income.
• Corporates — companies looking to invest in IPOs.
• Trusts, Societies, and Partnership Firms — legal entities participating in IPOs.
• NRIs (Non-Resident Indians) who apply for shares above ₹2 lakh.

In short, if you apply for more than ₹2 lakh shares in an IPO, you are treated as an NII and not a regular retail investor.

Why the NII Category is Important in IPO Investments

Are you wondering what makes the NII category important? Here’s why:

1. Reserved Quota:
   In every IPO, 15% of the total shares offered are reserved for NIIs. This makes them an integral part of the IPO fundraising process. While retail investors get a 35% reservation and QIBs get 50%, the NII portion ensures that substantial individual investors also get a fair share.
   
2. Investor Confidence:
   When NIIs subscribe heavily to an IPO, it sends a strong positive signal to the market. It reflects that savvy and wealthy investors are confident about the company’s future. This often encourages other investor categories to follow.
   
3. Stabilizing Role:
   Since NIIs typically have a larger investment capacity, their participation can help stabilize the demand in the IPO, especially when retail participation is low.
   
4. Short-term and Long-term Investors:
   NIIs often have diverse investment strategies — some may aim for listing gains, while others may hold for long-term growth. This mix benefits the IPO ecosystem as a whole.
   

If you’re an investor looking to apply as an NII, you can seek help from a stock market advisor who can guide you on analyzing upcoming IPOs and making informed decisions.

Rules for Non-Institutional Investors (NII) in IPOs

Now that we know who NIIs are let’s understand the key rules that govern NII participation in IPOs:

1. Minimum and Maximum Investment Limits – Minimum investment ₹2,00,000 (applications below this amount are considered under the retail category). No upper limit exists, so NIIs can invest as much as they wish, subject to availability and allotment. 

2. Reservation of Shares – As mentioned, 15% of the total IPO size is set aside for NIIs. This means that out of the total shares offered, NIIs compete within their category for allotment. 

3. Sub-categorization within NII – In recent IPOs, the NII category is often divided into two parts for better distribution: – Small NIIs (sNII): Applications between ₹2 lakh and ₹10 lakh. – Big NIIs (bNII) – Applications above ₹10 lakh.

This ensures that even smaller high-net-worth investors get a chance at allotment, not just the biggest players.

4. Margin and Payment Rules– 100% of the application money must be blocked in the bank account when applying (via ASBA — Application Supported by Blocked Amount).  NIIs cannot pay partially; the full amount upfront is mandatory. 

5. Allotment Basis – NII allotment is proportional, meaning shares are distributed based on how much an investor applied for, especially when the IPO is oversubscribed. – Unlike retail investors who get a lottery-based allotment if oversubscribed, NIIs get proportional allotment, ensuring large applicants get more shares.

Allotment Process for Non-Institutional Investors (NII) in IPOs

Let’s simplify how shares are allotted to NIIs once the IPO closes.

Step 1: Subscription and Bidding – NIIs place bids for IPO shares during the subscription period. They specify the number of shares and the price (within the IPO price band). – The application amount is blocked in their bank accounts via ASBA. 

Step 2: Oversubscription Handling– If the NII portion is fully subscribed or oversubscribed, the allotment is done proportionally – For example, if an IPO receives 3 times the NII quota, each NII will receive about one-third of the shares they applied for. 

Step 3: Basis of Allotment Finalization – After the IPO closes, the Registrar to the Issue and the stock exchanges finalize the basis of allotment – Proportional allotment is calculated, and a list of successful applicants is prepared. 

Step 4: Refund and Unblocking of Funds – Once allotment is done, unallotted funds are released (unblocked) from NII bank accounts. – Only the amount corresponding to allotted shares is deducted. 

Step 5: Credit of Shares and Listing – The allotted shares are credited to the demat accounts of NIIs. – These shares become tradeable on the stock exchange from the listing day.

Benefits and Risks of Investing as an NII in IPOs

Benefits:

1. Higher Allotment Chance: Since proportional allotment is used, bigger applications have better chances of getting a reasonable number of shares compared to retail. 

2. Opportunity for High Returns: Many NIIs apply to IPOs for potential listing gains, and some IPOs have delivered substantial profits. 

3. Early Access: IPO investment allows access to shares before they are publicly available on exchanges.

Risks:

1. Capital at Risk: Since NII applications involve large sums, losses can be substantial if the IPO performs poorly. 

2. Market Volatility: IPO prices can fluctuate significantly after listing due to market sentiment, which might impact short-term investors. 

3. Oversubscription: Popular IPOs may get heavily oversubscribed, reducing actual allotment despite large applications.

Conclusion

To sum up, Non-Institutional Investors (NIIs) are essential to the IPO ecosystem. They are high-net-worth individuals and entities investing large sums in IPOs and getting a 15% quota. The NII category helps companies raise significant capital and boosts investor confidence in the IPO process.

However, as an NII, analyzing the company carefully before applying is important, as more significant investments mean higher risks and rewards. Understanding the rules, processes, and risks can help NIIs make informed decisions and participate effectively in the IPO market.

Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as a recommendation or investment advice by Equentis – Research & Ranking. We will not be liable for any losses that may occur. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL & the certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.

FAQ

If you’ve been following the stock market for a while, you’ve probably heard the term stock market corrections thrown around, especially when markets take a sudden dip. But what does it actually mean? Should you be worried when a correction happens, or is it just part of the game?

A stock market correction refers to a decline of at least 10% in a stock index, such as the Nifty 50, S&P 500, or Sensex, from its most recent peak. Corrections can last anywhere from a few days to several months, but they’re not the same as a crash. While a crash is a steep and sudden drop, a correction is a normal and often necessary part of a healthy market cycle.

Understanding stock market corrections can help you make informed investment decisions rather than reacting out of fear. Let’s break it down step by step and learn how you can prepare for them.

Why Do Stock Market Corrections Happen?

Stock market corrections occur for several reasons. Some common triggers include:

1. Economic Factors

Investors become cautious when inflation rises, interest rates increase, or GDP growth slows down. These factors can lead to a temporary decline in stock prices.

2. Overvaluation

Sometimes, stocks become too expensive compared to their actual earnings. When this happens, the market self-adjusts, bringing stock prices back to a reasonable level.

3. Geopolitical Events

Wars, trade disputes, or global pandemics can create uncertainty, making investors pull back possibly leading to a market correction.

4. Profit-Taking

After significant gains, investors might sell their stocks to lock in profits. This selling pressure can cause a temporary dip in stock prices.

5. Interest Rate Hikes

When central banks increase interest rates, borrowing becomes expensive. This reduces corporate profits and consumer spending, which can lead to stock market corrections.

Know More:  SEBI Registered Investment Advisory |  Stock Investment Advisory

How to Prepare for a Stock Market Correction

Instead of panicking when you see your portfolio dip, here’s how you can stay prepared and even turn market corrections into an investment opportunity in a market correction.

1. Stay Calm and Don’t Panic

The worst thing you can do during a correction is make impulsive decisions. Markets go up and down—it’s completely normal. Reacting emotionally could lead to selling at a loss and missing out on future gains.

2. Keep a Long-Term Perspective

A correction is temporary. If you’re investing for the long term, short-term dips shouldn’t worry you. Historically, the stock market has always recovered and grown over time.

3. Diversify Your Portfolio

Don’t put all your money into one stock or sector. A well-diversified portfolio across different industries, asset classes, and geographical regions can reduce risks during a correction.

4. Continue SIP Investments

If you’re investing through a SIP Calculator, keep your systematic investment plan (SIP) running. Market corrections are the best time to accumulate more units at lower prices, which can boost your long-term returns.

5. Keep Cash Ready for Buying Opportunities

Corrections present great buying opportunities. Instead of fearing them, consider them a chance to pick up quality stocks at a discount.

6. Consult an Expert

If you’re unsure how to navigate a market correction, seeking investment advisor services can help you make informed decisions.

Why Market Correction is Better Than a Crash

Stock market corrections might seem scary, but it’s much healthier than a crash. Here’s why:

• Corrections allow overvalued stocks to reset to fair prices, making the market more sustainable in the long run.
• They help remove speculative bubbles, preventing bigger financial crises.
• They create buying opportunities for investors looking to invest at lower prices.
• Unlike crashes, corrections don’t signal economic collapse, just a temporary pause or adjustment in stock prices.

How to Invest During Stock Market Corrections

So, you’ve understood what a stock market correction is and why it happens. Now, let’s talk about how to make the most of it.

1. Identify Strong Stocks on Sale

Corrections give you the chance to buy fundamentally strong stocks at discounted prices. Look for companies with solid earnings, good management, and growth potential.

2. Use SIPs to Your Advantage

Continuing your SIP during a correction means buying more units at lower prices. Over time, this reduces your average purchase cost, increasing your returns when the market recovers.

3. Avoid Overleveraging

It’s tempting to borrow money to buy stocks when prices are down, but corrections can last longer than expected. Invest only what you can afford to keep in the market for the long term.

4. Stick to Your Investment Plan

If you have a well-thought-out investment strategy, don’t abandon it just because of short-term market movements.

5. Look Beyond Stocks

Diversify into bonds, gold, or real estate. These assets can act as a hedge during market volatility.

Final Thoughts

Stock market corrections are a natural and necessary part of investing. Instead of fearing them, understanding their causes and learning how to handle them can make you a smarter investor. Whether investing through a SIP Calculator or making lump sum investments, staying patient and focused on long-term goals is key.

The next time a market correction happens, see it as an investment opportunity in market correction rather than a setback. Stick to your strategy, keep learning, and take advantage of the dips to build wealth over time.

Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as a recommendation or investment advice by Equentis – Research & Ranking. We will not be liable for any losses that may occur. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL & the certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.

FAQ

Introduction

Investing in the stock market can be both exciting and rewarding. Among the various methods companies and shareholders use to buy and sell shares, one that stands out is the “Offer for Sale” (OFS). Understanding the OFS process is essential for investors looking to diversify their portfolios and seize new opportunities.

However, before investing in an OFS, it’s advisable to consult a share market advisor, analyze market trends, and watch current IPOs, upcoming IPOs, and closed IPOs to make the best investment choices.

What is Offer for Sale (OFS), and Why is it Important

Definition and Meaning of OFS in the Stock Market

An Offer for Sale (OFS) is a mechanism that allows promoters or large shareholders of a publicly listed company to sell their shares directly to the public through the stock exchange platform. This method provides a transparent and efficient way for significant shareholders to reduce their holdings, ensuring compliance with regulatory requirements and maintaining market stability. For investors, participating in an offer for sale offers the chance to acquire shares of established companies, potentially at favorable prices.

How Offer for Sale Differs from Other Fundraising Methods

The primary distinction between an offer for sale and other fundraising methods like IPOs and Follow-on Public Offers (FPOs) lies in the sold shares. In an IPO, a company issues new shares to the public to raise capital for various purposes, such as expansion or debt reduction. An FPO is similar but occurs after the company is listed, offering additional new shares to the public. In contrast, an OFS involves only the sale of existing shares by current shareholders, with no new capital being infused into the company.

How OFS Works as a Fundraising Method in the Stock Market

While an offer for sale doesn’t raise new capital for the company, it effectively allows promoters and large shareholders to monetize their holdings. This process ensures that the shareholding pattern becomes more diversified, potentially increasing the stock’s liquidity and attracting a broader investor base. OFS brings more shares into circulation for the market, which can lead to better price discovery and market efficiency.

How the Offer for Sale (OFS) Process Works

Who Can Sell Shares Through an OFS?

Primarily, promoters or large shareholders holding more than 10% of a company’s shares can initiate an offer for sale. This mechanism allows them to transparently reduce their stake in the company, ensuring compliance with regulatory requirements and maintaining market stability.

Step-by-Step Process of an OFS

1. Announcement of OFS by the Selling Shareholders
   The process begins when the selling shareholders announce their intention to divest a portion of their holdings through an OFS. This announcement is made publicly, detailing the number of shares on offer and other relevant information.
2. Price Discovery and Setting the Floor Price
   A floor price, the minimum price at which shares can be sold, is determined. This price is typically set based on market conditions and the company’s stock price. Investors place bids at or above this floor price during the bidding period.
3. OFS Subscription Period and Bidding Process
   The OFS is open for a specific period, usually one trading day. During this time, investors submit their bids through their trading accounts, specifying the quantity of shares they wish to purchase and the price they’re willing to pay, provided it’s at or above the floor price.
4. Allotment of Shares to Investors
   After the bidding period closes, shares are allotted to investors based on their bid prices, starting from the highest bid down to the lowest, until all offered shares are distributed. If bids are received at the same price and there’s an oversubscription, shares are allotted pro-rata.

Who Can Invest in an Offer for Sale?

• Eligibility Criteria for Retail and Institutional Investors

Both retail and institutional investors can participate in an offer for sale. Retail investors invest smaller amounts, while institutional investors include entities like mutual funds, insurance companies, and pension funds. Typically, a certain percentage of the OFS is reserved for retail investors to ensure broader participation.

• OFS Investment Rules for Foreign Institutional Investors (FIIs)

Foreign Institutional Investors (FIIs) are also eligible to participate in an OFS, subject to regulatory guidelines. They must adhere to the investment limits set by the Securities and Exchange Board of India (SEBI) and ensure compliance with foreign investment caps applicable to specific sectors.

• Minimum and Maximum Bid Size for Different Investor Categories

The minimum bid size for retail investors is usually one share, making it accessible for individuals with varying investment capacities. However, the maximum investment amount for retail investors is capped at ₹2 lakh. On the other hand, institutional investors can bid for larger quantities without a specified upper limit, depending on the number of shares available and their investment strategy.

Difference Between Offer for Sale (OFS) and IPO

1. OFS vs IPO: Key Differences Investors Should Know

Understanding the distinctions between an OFS and an IPO is essential for making informed investment decisions:

• Purpose: An IPO aims to raise fresh capital for the company by issuing new shares, often to fund expansion, reduce debt, or for other corporate purposes. An OFS allows existing shareholders to sell their shares, with the proceeds going directly to them, not the company.
• Process Complexity: IPOs involve extensive regulatory procedures, including filing a prospectus, obtaining approvals, and conducting roadshows to attract investors. An OFS is simpler and faster, typically completed within a single trading day.

How OFS Differs from Follow-On Public Offer (FPO)

An FPO involves issuing additional new shares to the public by an already-listed company, whereas an OFS involves selling existing shares without altering the company’s capital structure.

Which is Better for Investors: OFS or IPO?

The choice between an OFS and an IPO depends on the investor’s goals. An IPO may offer higher growth potential, while an OFS could present an opportunity to buy shares in an established company at a reasonable price.

Offer for Sale (OFS) v/s IPO

Feature	OFS	IPO	FPO
Purpose	Sale of existing shares by promoters/shareholders	Issuance of new shares to raise capital	Issuance of additional shares post-IPO
Fundraising for the Company	No	Yes	Yes
Process Complexity	Simple, fast, usually completed in a day	A lengthy process, involves approvals and marketing	Similar to IPO but faster
Impact on Share Capital	No dilution	Increases the company’s capital base	Increases the company’s capital base

Benefits of Offer for Sale for Companies and Investors

1. Easy Exit Option for Promoters and Large Shareholders
   Offer for sale provides a transparent exit route for large shareholders, reducing their stakes without market disruptions.
2. No Dilution of Company’s Equity Structure
   Unlike an IPO or FPO, an offer for sale does not create new shares, ensuring that existing shareholders’ stakes remain unchanged.
3. Quick and Efficient Share Transfer Process
   Since the offer-for-sale process is conducted through stock exchanges, it is faster and involves minimal regulatory hurdles.

Risks and Limitations of Investing in an OFS

1. Limited Participation from Small Investors
   Large institutional investors often dominate the bidding process, leaving limited opportunities for retail investors.
2. Market Price Fluctuations During the OFS Period
   Stock prices may be volatile due to speculation and large share sales.
3. Impact of High Share Supply on Stock Price
   A sudden increase in share supply may lead to short-term price declines.

Recent Examples of Offer for Sale in the Stock Market

1. Case Study: A Successful Offer for Sale and Its Market Impact

Steel Authority of India Limited (SAIL)

In January 2021, the Government of India initiated an offer for sale to divest a portion of its stake in SAIL. The floor price was set at ₹64 per share. The offering received an enthusiastic response, with bids exceeding the shares. This successful OFS helped the government achieve its disinvestment goals and increased the stock’s liquidity, making it more attractive to investors.

2. Case Study: When an Offer for Sale Led to a Stock Price Decline

Coal India Limited

The government reduced its stake in Coal India through an OFS, ensuring compliance with minimum public shareholding norms.

What Investors Can Learn from These OFS Examples

• Market Response Matters: A well-received OFS, as seen with SAIL, can lead to positive outcomes like increased liquidity and stable or rising stock prices.
  
• Timing and Market Conditions Are Crucial: The Coal India example underscores the importance of market sentiment during an OFS. Investors should assess broader market conditions before participating.
  

How to Participate in an Offer for Sale

1. Step-by-Step Guide for Retail Investors
   • Log in to your trading account
   • Check the details of the offer for sale
   • Place your bid within the subscription window
   • Wait for allotment confirmation
     
2. How to Bid in an OFS Using a Trading Account
   Most brokerage platforms provide a direct OFS bidding option for seamless participation.
   
3. Important Timelines and Settlement Process
   OFS transactions are typically settled within T+1 or T+2 days, ensuring quick fund transfers.

Conclusion

Offer for Sale (OFS) is a fast and transparent way for promoters to sell their stakes without diluting company equity. It helps businesses meet regulatory norms while offering investors a chance to buy shares at competitive prices. While successful OFS events, like SAIL, have boosted stock demand, others, like Coal India, show how an oversupply can impact prices.

To make smart OFS investments, analyze the company’s financial health and growth potential. Compare the OFS floor price with the current market price to determine if it’s a good buying opportunity. Keep an eye on market trends, as a bullish market can drive prices up, while weak sentiment may lead to lower returns. 

Assess investor demand—higher bids often indicate strong confidence in the company. Lastly, diversify your portfolio by spreading investments across different opportunities, including current IPOs, upcoming IPOs, and closed IPOs, to minimize risks and maximize potential returns.

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