Offer for Sale by Existing Shareholders in an IPO
- Apr 6
- 24 min read
1. What is an offer for sale in an initial public offering by a company?
An initial public offering (“IPO”) of equity shares may comprise of a fresh issue of equity shares (“Fresh Issue”) by the Issuer company (“Issuer”) or an offer for sale of equity shares held by certain eligible existing shareholders of the Issuer (“OFS”) or a combination of a Fresh Issue and an OFS.
OFS refers to the process where existing shareholders of the Issuer, usually its promoters, members of the promoter group and/or or investors, sell their entire or a portion of their shareholding in the Issuer to the public as part of the IPO undertaken in accordance with the regulatory framework stipulated under the Companies Act, 2013, the rules framed thereunder, each as amended (the “Companies Act”) and the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018, as amended (the “SEBI ICDR Regulations”).
2. Can an IPO be undertaken entirely through an OFS?
Yes, an IPO can be undertaken entirely through an OFS, subject to meeting applicable eligibility, disclosure, lock-in, and compliance requirements specified under the Companies Act and the SEBI ICDR Regulations.
3. Who is a ‘selling shareholder’ in an IPO?
The eligible existing shareholders of the Issuer proposing to sell their shares in the IPO through the OFS process are termed as ‘selling shareholders’. The SEBI ICDR Regulations defines ‘selling shareholder’ as any shareholder of the Issuer who is offering its equity shares for sale in a public issue in accordance with the SEBI ICDR Regulations [1].
4. What are the eligibility criteria for a shareholder to participate in an OFS?
A shareholder proposing to offer equity shares held by it in an IPO must comply with the following requirements:
a. it should not be debarred from accessing capital markets by Securities and Exchange Board of India (“SEBI”) or any other regulatory authority [2];
b. it should not be debarred from buying, selling or dealing in equity shares, under any order or direction passed by SEBI or any other regulatory or governmental authority or any court of law, whether in or outside India;
c. In case of an individual shareholder, he or she must not be a promoter or director in any company which is debarred from accessing capital markets by SEBI; and
d. it must be in compliance with Section 90 of the Companies Act and the Companies (Significant Beneficial Owners) Rules, 2018, to the extent applicable [3].
5. Whether shareholders holding only convertible securities can participate in an OFS?
An Issuer shall not be eligible to undertake an IPO if there are any outstanding convertible securities or any other right which would entitle any person with any option to receive equity shares of the Issuer [4]. However, this shall not apply to any outstanding options granted to employees, whether a current employee or not, pursuant to an employee stock option scheme in compliance with the Companies Act and any fully paid up outstanding convertible securities which are required to be converted on or before the date of filing of the red herring prospectus (“RHP”) (in case of a book built issue) or the Prospectus (in case of a fixed price issue) with the jurisdictional registrar of companies (“RoC”). Accordingly, a shareholder who is only holding compulsorily convertible securities can participate in an OFS if such convertible securities meet the holding period criteria laid down in Regulation 8 of the SEBI ICDR Regulations which is discussed in FAQs 6 and 8.
6. Are all the equity shares held by the selling shareholders eligible to be offered in the OFS?
The equity shares being offered and sold in the OFS should have been held by the selling shareholders for a continuous period of at least one year prior to the date of filing the draft red herring prospectus (“DRHP”) with the SEBI. If the equity shares being offered and sold in the OFS comprise equity shares which have resulted from the conversion of fully paid-up compulsorily convertible securities, then the holding period of such compulsorily convertible securities and the resultant equity shares together is to be considered for calculation of the one year holding period.
Further, to the extent that the equity shares being offered by the selling shareholders have resulted from a bonus issue, the bonus issue should have been on the equity shares held for a period of at least one year prior to the filing of the DRHP and should be eligible for being offered for sale in the IPO including the conditions for bonus issue discussed in FAQ 7.
7. Are there any exemptions provided under the SEBI ICDR Regulations in the event the equity shares are not being held by the selling shareholders for a minimum period of one year?
The requirement of holding equity shares for a minimum period of one year does not apply in the following cases:
a. where the Issuer is a government company or statutory authority or corporation or any special purpose vehicle set up and controlled by one or more of such entities engaged in the infrastructure sector;
b. if the equity shares offered for sale were acquired pursuant to any scheme approved by a high court or a tribunal under the Companies Act, in lieu of business and invested capital which had been in existence for a period of more than one year prior to such approval; and
c. if the equity shares offered for sale were issued under a bonus issue on equity shares held for a period of at least one year prior to the filing of the DRHP, subject to the bonus shares (i) being issued out of free reserves and share premium existing in the books of account as at the end of the financial year preceding the financial year in which the DRHP is filed with SEBI; and (ii) not being issued by utilisation of revaluation reserves or unrealized profits of the Issuer [5].
8. Can equity shares resulting from fully paid-up compulsorily convertible securities held by the selling shareholders be offered for sale through an OFS in an IPO?
Yes, compulsorily convertible securities may be offered for sale, subject to specific conditions prescribed under the SEBI ICDR Regulations. Regulation 8 of SEBI ICDR Regulations stipulates that only fully paid-up equity shares may be offered for sale to the public, and such equity shares must have been held by the sellers for at least one year prior to the filing of the DRHP.
However, where the equity shares being offered arise from the conversion or exchange of fully paid-up compulsorily convertible securities (including depository receipts), the combined holding period of both the convertible securities and the resultant equity shares is considered for calculating the one-year holding requirement. This means that the conversion need not have taken place a full year before filing; rather, the total holding period across both instruments must cumulatively satisfy the one-year threshold.
Further, the conversion or exchange of the compulsorily convertible securities or the depository receipts must be completed prior to the filing of the RHP with the RoC and the DRHP must contain full disclosures of the terms governing such conversion or exchange.
Accordingly, compulsorily convertible securities may be offered for sale, provided that the resultant equity shares are fully paid-up, the combined holding period condition is met, and conversion is completed before filing of the RHP with the RoC in line with Regulation 8 of SEBI ICDR Regulations.
9. How is the offer size determined in an OFS?
In an IPO comprising an OFS, the offer size is determined by the Issuer and the selling shareholders in consultation with the book running lead managers (“BRLMs”) appointed for the IPO, subject to compliance with the minimum offer and allotment requirements prescribed under Regulation 8A of the SEBI ICDR Regulations [6] read with Rule 19(2)(b) of the Securities Contracts (Regulation) Rules, 1957 (“SCRR”) [7].
Rule 19(2)(b) of the SCRR requires that the aggregate public offer, whether through a fresh issue, an OFS, or a combination thereof, meets the prescribed minimum thresholds based on the post-issue share capital of the Issuer. Where the IPO is undertaken wholly or partly through an OFS, the aggregate number of equity shares offered by the selling shareholders must be sufficient to satisfy these thresholds.
10. Is there a threshold with respect to the securities that a selling shareholder must offer in an OFS?
For an IPO under Regulation 6(1) of the SEBI ICDR Regulations [8], the size of the OFS is decided in consultation with the Issuer and the BRLMs, subject to minimum offer and allotment thresholds as prescribed under Rule 19(2)(b) of the SCRA Rules being met by the Issuer.
For an IPO under Regulation 6(2) of the SEBI ICDR Regulations [9], the equity shares offered for sale by selling shareholders holding individually or with persons acting in concert, more than 20% of pre-issue shareholding cannot exceed more than 50% of the pre-issue shareholding of such selling shareholder. Similarly, selling shareholders holding individually or otherwise, less than 20% of the pre-issue shareholding cannot offer for sale more than 10% of the pre-issue shareholding of the Issuer.
11. Whether the size of the OFS can be varied post filing of the DRHP with SEBI? Are there any consultation or intimation requirements to be met by the selling shareholders for change in the number of equity shares offered in the OFS?
Prior to the filing of the DRHP with SEBI, the number of equity shares being offered in the OFS (“Offered Shares”) can be increased or decreased without any requirement of consultation and/or consent from the Issuer and/or the BRLMs.
Subsequent to filing of the DRHP until filing of the RHP with the RoC, an increase or decrease in the number of Offered Shares is allowed under the SEBI ICDR Regulations. However, such increase or decrease should not result in changing more than 50% of the overall OFS size (being offered by all the selling shareholders) determined at the DRHP stage. A change of more than 50% in the overall size triggers refiling of the DRHP with the SEBI [10]. Accordingly, to avoid refiling of the DRHP, any change in the OFS size generally requires a consultation and intimation and/ or consultation and consent of the Issuer and the BRLMs. This construct is also subject to the Offer Agreement entered into by the Issuer, BRLMs and selling shareholders prior to the filing of the DRHP.
Post-filing of the RHP with the RoC, no increase or decrease in number of the Offered Shares is typically permitted contractually by the Issuer and the BRLMs.
12. Whether the equity shares not being offered in the OFS are freely transferable by the selling shareholders?
The equity shares not being offered in the OFS by the selling shareholders (“Non-Offered Shares”) are freely transferable at all times, however, any transaction in such Non-Offered Shares by the selling shareholders is required to be intimated to the Issuer and the BRLMs and in certain scenarios depending on the timing of the transaction, the selling shareholders are also required to undertake a prior consultation and/or consent from the Issuer and the BRLMs for undertaking the transaction in their Non-Offered Shares.
Subsequent to filing of the DRHP until filing of the RHP with RoC, any transfer or secondary sale of Non-Offered Shares is subject to consultation and/ or consent or consultation and/ or intimation requirements with the Issuer and/or the BRLMs, as may be agreed to in the Offer Agreement. Further, the relevant disclosures are required to be made to the stock exchanges through a public announcement depending on the stage of the secondary sale, if undertaken. Typically, all secondary sales of Non-Offered Shares by selling shareholders are required to be completed prior to filing of the updated DRHP (“uDRHP”) with SEBI which is generally undertaken a week or 10 days before the filing of the RHP with the RoC.
Post-filing of the RHP with the RoC, there are no statutory restrictions on the transferability of the Non-Offered Shares. However, as is customary in such transactions, the transfer/ secondary sale of the Non-Offered Shares is subject to prior consultation with and/or consent of the Issuer and/or the BRLMs, as may be agreed to in the Offer Agreement, as any sale of equity shares of the Issuer during the IPO conditions the market and influences the price of the shares. Further, the relevant disclosures are required to be made to the stock exchanges through a public announcement depending on the stage of the secondary sale, if undertaken.
13. What are the corporate approvals required for an IPO which includes an OFS?
An IPO of equity shares requires the authorisation of the board of directors of the Issuer [11]. Further, the Issuer is required to obtain the approval of the shareholders of the Issuer by way of a special resolution if the IPO includes a fresh issue of equity shares by the Issuer [12].
In case of an OFS, the board of directors of the Issuer is required to taken on record the offer for sale by the selling shareholders and the number of shares being offered by each selling shareholder along with their consent letters agreeing to participate in the OFS.
Further, in case of a selling shareholder which is a body corporate, corporate authorizations approving the sale of shares in the IPO, specifying the quantum of the offer for sale (in number of shares or amount, as applicable) and to delegate powers to identified persons in respect of execution of agreements and actions and decisions to be taken on behalf of the selling shareholder in respect of the IPO are required. This is in addition to any other approvals that the selling shareholders may require under the relevant laws and regulations applicable to such selling shareholders.
However, in case the Issuer and/or the selling shareholder is a regulated entity, then an approval from the relevant regulator (such as RBI/ IRDAI) may also be required by the selling shareholders to offer its shares in the IPO.
14. What is the treatment of the special rights available to the selling shareholders by way of a shareholders’ agreement?
In terms of Regulation 4(c) of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended (“SEBI Listing Regulations”), a listed entity shall ensure equitable treatment of all its shareholders. The fundamental principle behind this is that once a company becomes a publicly listed company, it ceases to be the ‘founder’s company’ and accordingly, no special rights can be granted to a particular class of shareholders. Further, Regulation 31B of the SEBI Listing Regulations provides that any special rights granted to the shareholders of a listed entity shall be subject to the approval by the shareholders in a general meeting by way of a special resolution once in every five years starting from the date of grant of such special right.
In order to give effect to the aforesaid provisions, the existing shareholders’ agreement (“SHA”) of the Issuer is amended prior to filing of the DRHP with SEBI, to set out the relevant special rights of the shareholders which are required to be dropped off, the timelines for such drop-off, and waivers and consents for certain terms of the SHA to enable the IPO by the Issuer. While the SHA in its entirety terminates automatically from the date of listing of the shares on the stock exchanges pursuant to the IPO, certain rights of the investors have been permitted by SEBI to be retained until the equity shares of the Issuer are listed on the stock exchanges. Such rights are also stipulated under Part B of the articles of association of the Issuer which also falls away upon listing and Part A of the articles becomes operative.
However, in the event that the listing is not completed up to a certain date or if the DRHP is withdrawn due to any commercial or other considerations, the waivers and amendments entered into by way of the amendment to the SHA cease to exist from such date or date of withdrawal of DRHP, whichever is earlier and the SHA is typically reinstated to its original form as it existed prior to the execution of the amendment agreement to the SHA.
15. What are the timelines for dropping-off or waiver of the special rights available to the selling shareholders?
As per the customary practice and directives issued by the SEBI through its observations on draft offer documents, the timelines for dropping-off or waiver of the special rights available to the selling shareholders or any existing shareholders of the Issuer are as follows:
a. Right to appoint a director on the board of directors of the Issuer: The right of the existing shareholders to appoint a director on the board of the Issuer shall be waived off from the date of filing of the RHP with the RoC and shall fall away upon listing of the shares of the Issuer on the stock exchanges pursuant to the IPO.
b. Right to appoint an observer on the board of directors of the Issuer: The disclosure of unpublished price sensitive information to certain shareholders of the Issuer may result in the violation of the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“SEBI Insider Trading Regulations”) which will be applicable to the Issuer from the date of filing of the RHP with the RoC. Accordingly, any observers appointed by the existing shareholders/ investors on the board of directors of the Company are required to step down from the date of filing of the RHP with the RoC and the right itself is also required to be waived off from the date of filing of the RHP with the RoC and falls away completely upon listing of the shares of the Issuer on the stock changes pursuant to the IPO.
c. ROFO, ROFR, Tag Along and Drag Along Rights: The selling shareholders in the IPO will transfer a portion of their shares to the successful bidders pursuant to the IPO. Accordingly, the right of first offer (“ROFO”), the right of first refusal (“ROFR”), tag along and drag along rights are required to be amended or waived to enable such selling shareholders to undertake the transfer (i.e., undertake the ‘offer for sale’ of the shares owned by them if they meet the eligibility requirements to participate in the IPO).
d. Right to information: The disclosure of unpublished price sensitive information to certain shareholders of the Issuer may result in the violation of the SEBI Insider Trading Regulations. Accordingly, such information rights fall away at the time of filing of the RHP with the RoC.
e. Certain matters reserved for approval of the investors: In order to enable the Issuer to undertake certain actions for the IPO, a waiver is required to be provided by the investors for the specific reserved matters which impact the IPO.
f. Confidentiality of SHA: The terms of the SHA are required to be disclosed in the offer documents filed with SEBI, RoC and the stock exchanges. Accordingly, consent is typically obtained under the confidentiality clause of the SHA for disclosure of such terms in the offer documents.
16. How is the offer price determined in an OFS?
The offer price in an IPO, including an IPO comprising an offer for sale, is determined by the Issuer in consultation with the BRLMs, in accordance with the pricing mechanisms prescribed under the SEBI ICDR Regulations, including the book-building process, as applicable [13].
While selling shareholders are the persons offering the securities in an OFS, they are not permitted to participate in or influence the pricing decisions of the IPO. This follows from the SEBI ICDR framework, which vests the pricing function exclusively with the Issuer and the BRLMs, and from SEBI’s conflict-of-interest principles governing public issues. Accordingly, selling shareholders may determine the quantum of shares to be offered for sale, but do not have any role in the determination of the price or price band of the IPO.
17. Who bears the expenses of the OFS?
Section 28(3) of the Companies Act requires that all expenses in relation to the OFS be borne by the selling shareholders. The selling shareholders are required to collectively authorise the Issuer to take all actions in respect of the OFS and reimburse all expenses incurred by the Issuer in relation to the OFS.
In the event that an IPO is a combination of Fresh Issue and OFS, the expenses are required to be shared between the Issuer and the selling shareholders in the proportion of the equity shares being issued by the Issuer by way of the Fresh Issue and offered by the selling shareholders in the OFS.
In the event where an IPO is undertaken entirely through an OFS, all OFS related expenses are borne by the selling shareholders, and the Issuer only bears the listing fees payable to the stock exchanges, being expenses incurred in its capacity as a listed company.
18. Is the Issuer entitled to receive any proceeds from an OFS?
No, the respective portion of the proceeds from the OFS are received by the selling shareholder, after deducting their portion of the IPO related expenses and relevant taxes thereon. The Issuer does not receive any proceeds from the OFS.
19. Does the minimum subscription requirement under Regulation 45 of the SEBI ICDR Regulations apply to an OFS?
No, the minimum subscription requirement prescribed under Regulation 45 [14] of the SEBI ICDR Regulations does not apply to an offer for sale of specified securities.
Regulation 45(1) requires that the minimum subscription to be received in an IPO shall be at least 90% of the offer through the offer document. However, Regulation 45(1) expressly excludes an offer for sale of specified securities from this requirement.
20. Are proceeds from an OFS required to be monitored by a monitoring agency?
The proceeds from an OFS are not required to be monitored by a monitoring agency under the SEBI ICDR Regulations.
Regulation 41(1) [15] of the SEBI ICDR Regulations requires the appointment of a monitoring agency where the IPO size (excluding the OFS component) exceeds ₹1,000 crore. The monitoring requirement applies only to the utilisation of proceeds of the IPO received by the Issuer pursuant to Fresh Issue. In an OFS, the sale proceeds are received by the selling shareholders, and not by the Issuer. Accordingly, OFS proceeds do not constitute “issue proceeds” of the Issuer for the purposes of Regulation 41; and the statutory requirement to appoint a monitoring agency does not apply to the OFS component of an IPO.
In an IPO comprising a combination of Fresh Issue and OFS, the monitoring agency requirement under Regulation 41 applies only to the Fresh Issue portion, if the prescribed monetary threshold is met.
21. What are the lock-in requirements for the equity shares held by the selling shareholders?
In terms of Regulation 17 of the SEBI ICDR Regulations, any pre-issue capital held by the selling shareholders (including the equity shares not offered in the OFS and any unsold Offered shares post-listing) is required to be locked-in for a period of six months from the date of allotment of the securities in the IPO.
In the event the selling shareholder is a venture capital fund or alternative investment fund of category I or category II or a foreign venture capital investor, the shares held by such entities are required to be locked-in for a period of six months from the date of purchase of securities by such selling shareholder.
However, in the event that the IPO is undertaken under regulation 6(2) of the SEBI ICDR Regulations and if the selling shareholders hold, individually or with persons acting in concert, more than 20% of the pre-issue shareholding of the Issuer on a fully diluted basis, the aforementioned relaxation shall not be applicable. Consequently, the pre-issue capital of the selling shareholders will be locked-in for a period of six months from the date of allotment of the securities in the IPO.
22. Whether the securities which are locked-in can be transferred by the selling shareholders?
The securities held by the selling shareholders may be transferred to any other person holding the securities which are locked-in. The lock-in on such securities shall continue for the remaining period with the transferee and such transferee shall not be eligible to transfer them till the lock-in period stipulated in the SEBI ICDR Regulations has expired [16].
23. What undertakings are required to be provided by the selling shareholders in the offer documents?
The selling shareholders typically provide undertakings and confirmations through (i) selling shareholder certificates/consents; and (ii) representations and undertakings in the Offer Agreement, for inclusion in the DRHP/RHP/ Prospectus. These generally cover: (a) title to and eligibility of the Offered Shares (including compliance with the SEBI ICDR Regulations requirements and dematerialisation); (b) absence of encumbrances and ability to transfer the Offered Shares; (c) due authorisation and corporate approvals; (d) truthfulness and completeness of disclosures attributable to the selling shareholder, together with an obligation to update material changes; (e) regulatory status confirmations (e.g., not being debarred/restrained from accessing the capital markets); (f) OFS expense-bearing and reimbursement undertakings under the Companies Act; and (g) indemnities for breaches and misstatements attributable to the selling shareholder.
24. What are the various transaction documents required to be executed by a selling shareholder in relation to the OFS?
The following transaction documents are required to be executed by the selling shareholder in relation to an OFS:
a. Selling shareholders’ certificates and consents (containing details of an undertaking from each of the selling shareholder in relation to the OFS);
b. Declaration pages of the DRHP, RHP, and Prospectus;
c. Engagement letter for appointment of the BRLMs entered into among the Issuer, the selling shareholders and the BRLMs;
d. Waiver-cum-amendments to the subsisting shareholder agreements for termination of special rights of the existing shareholders;
e. Offer agreement entered into among the Issuer, the selling shareholders and the BRLMs including the customary representations and warranties in relation to the offered shares by the selling shareholders in the IPO;
f. Registrar agreement entered into among the Issuer, the selling shareholders and the registrar to the Offer including details in relation to the appointment and obligations of the registrar;
g. Share escrow agreement entered into among the Issuer, the selling shareholders and the share escrow agent, for deposit of the Offered Shares from the selling shareholders’ respective dematerialized accounts to a special escrow account opened by the Issuer;
h. Cash escrow and sponsor bank agreement entered into among the Issuer, the selling shareholders, the BRLMs, syndicate members, the registrar to the IPO, the bankers to the IPO and sponsor banks to the IPO;
i. Syndicate agreement entered into among the Issuer, the selling shareholders, the BRLMs and the syndicate members; and
j. Underwriting agreement entered into inter alia among the Issuer, the selling shareholders, the BRLMs and the syndicate members.
A tax opinion by an accounting firm/ practicing peer-reviewed chartered accountant confirming if any capital gains tax or withholding tax is applicable (in accordance with the Income-Tax Act, 1961, as amended) on all or a part of the sale proceeds of the offered shares as well as stamp duty payable on transfer of shares is also required to be obtained.
The aforesaid requirements are subject to any additional undertakings or documentations as may be required by the BRLMs based on commercial considerations.
25. What is the liability of the selling shareholders participating through an OFS in an IPO?
Pursuant to the SEBI ICDR Regulations, a selling shareholder is responsible for the disclosures included in the offer documents which are attributable to it. The selling shareholders are liable to the extent of the (i) information specifically pertaining to the selling shareholders and their respective portion of the Offered Shares; and (ii) statements made by them in the offer documents.
Under the provisions of the SEBI ICDR Regulations and the SEBI Act, 1992, the selling shareholders are liable for making untrue and/ or misleading statements in the offer documents. Under the Companies Act, where the offer documents include any statement which is found to be untrue or misleading, or where the inclusion or omission of any matter is likely to mislead, the selling shareholders are liable to be imprisoned for a term extendable from six months to 10 years, and a fine which may be as much as three times the amount of proceeds received or to be received by the selling shareholders from the sale of the Offered Shares in the IPO [17].
Further, contractual obligations also exist under the Offer Agreement to indemnify the BRLMs for any losses suffered by the BRLMs on account of misstatements or incorrect information pertaining to the Offered Shares and the selling shareholders in the offer documents and/or on account of information supplied by the selling shareholders containing incorrect information and any obligation towards payment of taxes pursuant to the Offer for Sale including securities transaction tax. However, such liability is typically limited to the extent of proceeds received by the selling shareholders from the sale of the Offered Shares in the IPO.
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