Ever wondered why stock prices shoot up prior to any OFS announcements?

For starters, let me tell you what an OFS is.

Offer for Sale (OFS) mechanism has been introduced to facilitate promoters to dilute/offload their holding in listed companies. Hence, no new shares are created as promoters are the sellers and investors (retail/non retail) are buyers. In an OFS, company sets a ‘floor price.’ Buyers cannot bid at a price below the floor price. Once the bids are placed, shares are allocated to the different buyers. Usually an OFS is priced at a small discount to the existing share price.

However, the trend these days makes me wonder why prices surge up just prior to OFS.

Well not just that, most of the times share price shoots up prior to the OFS and then OFS is announced at the time when the stock is priced at its high with a floor price which is paired with some discount to the surged up price (which eventually is its original stock price before the stock run) and post OFS stock price is probably lying near to its discounted/original price for about months.

Is the game play just to attract investors so that they apply for the OFS?

Be it the OFS of HAL, IRCTC, HDFC AMC or GMM Pfaudler in 2020. All of them probably went through a very similar trend. No doubt they surely are strong companies some even having monopoly in the sector. But what is the price rally for just prior to OFS announcement, is seriously a mystery to crack!

Let us consider IRCTC.

On 9/12/2020, Government proposed to sell 2,40,00,000 equity shares (15%) plus 80,00,000 equity shares (5% under green shoe option) of IRCTC in order to comply with minimum public shareholding norms eventually reducing its stake from 87.4% to 67.4%.

The floor price for the same was INR 1,367 (15% discounted to its closing price on 9/12/2020).

OFS was reserved for the non-retail investors on 10/12/2020 wherein issue got subscribed 1.98 times of base size at a clearing price above the floor price.

Whereas on 11/12/2020, retail investors could apply and OFS was closed with 109.84% subscription.

Here’s the detail of price and volume chart of IRCTC

On 4/12/2020, just prior to the OFS, there appears a spike in volume to 1,04,32,630 and stock price increases by 15% from its opening indicating more of buyers. This rally no doubt must have induced other buyers considering technicals leading to additive buyers and thus on 8/12/2020 stock price of IRCTC reaches an all time high of INR 1800. On 9/12/2020, company announced OFS at 15% discount at its closing price of 1617.75 and on 10/12/2020 there appears to be offloading of shares and volume reaching a high to 1,71,86,934 .

Let me also introduce you to this concept of Pump and dump scenario.

These are stocks that shoot up like a rocket in a short period of time, only to crash down just as quickly shortly thereafter.

Not referring all the OFS as a pump and dump scenario, however just to connect the dots here Phase 2 - Distribution looks like the announcement of OFS.

Imagine Company announcing OFS at Phase 1 – Markup; floor price of the OFS then would’ve been even more discounted and hence Company would receive less amount via OFS.

The below mentioned article quite sums up the OFS of GMM Pfaudler and one must read it to get some more insights :

https://www.livemint.com/market/mark-to-market/the-gmm-pfaudler-ofs-has-important-lessons-for-indian-investors-11600860306919.html