Offer For Sale (OFS) – Process Explained

by Shiv Kukreja on December 28, 2012

in IPO/NFO

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at skukreja@investitude.co.in

A few days ago when the CARE IPO was about to get opened, Rakesh got confused about the “Offer for Sale” process through which the share sale was to happen. He wanted to know whether the procedure to apply for CARE shares was to be same like normal IPO or something different.

To know more about it, TCB asked me to share the process details.

TCB
December 19, 2012 at 7:50 am
Dear Shiv,Can you please give details about the procedure for Offer For Sale (OFS) of Hindustan Copper, ONGC, NMDC etc. ? As you correctly said, this OFS is different from CARE Offer For Sale.I would like to know details like how to apply, how & when to pay, how & when is allotment done, what is the meaning of terminologies like indicative price, during the offer from where can we monitor the quantity and price of bids received etc.Thanks

Here is my attempt to let people understand the Offer for Sale process. Please leave your comments in case I miss something or you find any discrepancy in the post.

Poor economic growth causes poor investment sentiment which results in poor market conditions and thus forces corporates to cost cutting. In another attempt to save some unnecessary costs and to reduce the time taken to raise money, SEBI has introduced a new process called Offer for Sale (OFS).

Offer for Sale is getting really popular with the companies and as many as eight companies, like NMDC, Hindustan Copper, Eros International, Blue Dart, Honeywell Automation etc., have taken this route to either raise money from the markets or to increase non-promoter shareholding in order to comply with the minimum public shareholding guidelines.

What is “Offer for Sale” and can retail investors participate in the process?

Offer for Sale (OFS) is another form of share sale, very much similar to Follow-On Public Offer (FPO). OFS mechanism facilitates the promoters of an already listed company to sell or dilute their existing shareholdings through an exchange based bidding platform.

Except the promoters of the company, all market participants like individuals, mutual funds, foreign institutional investors (FIIs), insurance companies, corporates, other qualified institutional bidders (QIBs), HUFs etc. can bid/participate in the OFS process or buy the shares. The promoters of the company can only participate as the sellers in the process.

OFS Process

First of all, very basic, you need to compulsorily have a demat/trading account(s) and permanent account number (PAN) to participate in an Offer for Sale. The sellers are required to deposit the offered shares with the exchange before 11.00 a.m. on T–1 day, where ‘T’ is the day of OFS.

Once the OFS starts, you can participate in the process yourself using your online trading accounts like ICICI Direct, Kotak Securities etc. by placing your bids under the ‘OFS’ section of their respective broking websites.

Investors, who do not have online trading accounts, can place their bids by directing the dealer of their broking company to do it on their behalf. You can modify or cancel your bids during the offer timings except in the last 60 minutes i.e. till 2:30 p.m.

The exchange will announce the “Indicative Price” only during the last 60 minutes of the OFS. Indicative Price is the volume weighted average price of all the valid/confirmed bids. e.g. There are total 1000 shares in an offer for sale with Rs. 200 as the floor price. If the investors bid for 200 shares at Rs. 210 and 800 shares at Rs. 200, the indicative price for the offer would be [(200*210)+(800*200)]/1000 = Rs. 202.

No leverage is provided to the investors against the stock margin available in the trading accounts and thus, they are required to deposit 100% of the order value in cash to bid for it. Also, the funds allocated for OFS cannot be utilised for other investment purposes or against any other obligation of the trading member.

Once the bidding gets over, allotment price is fixed and allocation is done. The successful bidders will be allotted shares directly into their demat account on T+1 basis the very next day. In case of partial allotment or no allotment, the refunds will be made on the same day itself. This makes the OFS process really fast, just like buying shares of the company from the open market.

During the offer timings or once the offer gets completed, you can monitor the quantity and price of bids received etc. from this link of NSE, like it has the details of the OFS of Eros International Media Limited which got concluded on December 20th.

Allocation Methodology and Contract Notes

The companies can adopt one of the two methodologies for allocating the shares on offer i.e. either on a price-priority basis at multiple clearing prices or on a proportionate basis at a single clearing price.

Like you get the contract notes by the evening of the trading day on which you buy shares of a company, you’ll get a contract note in the same format when you buy shares in an OFS. Contract note will have the details of your bid price and the quantity allotted in the specified format.

What differentiates Offer for Sale (OFS) process from IPOs/FPOs?

Physical Application: Unlike IPOs/FPOs, no physical application forms are issued to apply for shares in the OFS process. OFS process is completely platform based.

Time Period: While IPOs/FPOs remain open for 3-4 days, OFS gets over in a single trading day as the markets gets closed for trading at 3:30 p.m.

Price Band: Under IPOs/FPOs, there is a price band in which the investors need to bid for the shares or simply give their consent to buy the shares at the “Cut-Off” price. With OFS, there is a “Floor Price”. As the name suggests, it is the minimum price at which you can bid for the shares under OFS. You will not be able to place an order below the floor price as it will not be accepted by the system.

Though it is not mandatory to disclose the floor price before the issue opens, the promoters usually disclose it prior to the share sale in almost all of the issues. Alternatively, the promoters can submit the floor price in a sealed envelope to the exchange which will be disclosed post closure of the offer. In case the floor price is not disclosed to the public, the investors can place their bids at any price they want.

Charges: Investors are not required to pay any kind of charges over and above the ‘Fixed Price’ in an IPO or FPO. But, the OFS process involve certain transaction charges including the brokerage, Securities Transaction Tax (STT) and other charges, which the investors normally pay when they buy shares of a company in the cash market.

On the OFS day, normal trading in the shares of the company will continue even when the bidding process is ‘ON’. The investors have the option to either buy the shares of the company in the normal market or place their bids for the shares on sale in the OFS. The investors can place only ‘Limit’ orders under the OFS facility as ‘Market’ orders are not allowed.

OFS process has the following advantages over FPOs/IPOs:

Cost effective: I think this is the biggest reason for the promoters to sell their stake through the OFS route. OFS route involves very less formalities. Unlike IPOs/FPOs, the promoters of the issue under OFS are not required to file Draft Red Herring Prospectus (DRHP). Also, there is no need to get the application forms printed. It also saves big advertisement expenses.

Saves Time: This route involves sale of shares in a single trading day and that too, during the normal trading hours i.e. between 9:15 a.m. and 3:30 p.m. The promoters can announce their intention of share sale even one trading day prior to the opening of the offer.

Transparency: Retail investors have suffered losses in the past due to manipulation in IPO/FPO allotment. OFS process is quite transparent as it is done on real-time basis with a system based bidding platform and involves least amount of paperwork.

Multiple Orders: Under OFS, there is no restriction on number of bids from a single buyer. This facility is not available in FPOs/IPOs.

The formats are changing rapidly. One-day cricket is fast losing its appeal to T-20 matches. Similarly, 3-4 days long FPOs are getting replaced by these single-trading day Offers for Sale. Very few people read the DRHP or printed details on application forms while investing. So, in a way, these OFS will reduce the issue costs to a large extent. But, will the investors be able to make wise investment decisions in these OFS? Just wait and watch.

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{ 60 comments… read them below or add one }

Anup December 28, 2012 at 2:29 am

Hi,
Is there a way to find out what are the near term OFS available? I couldnt find this on BSE/NSE sites.

-Anup

Reply

Shiv Kukreja December 28, 2012 at 2:38 am

Hi Anup,
It is there under “Offer for Sale >> Forthcoming Issues”.
http://www.nseindia.com/live_market/content/live_watch/offer_sale/ofs_sale.htm

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Karthik Reddy Chintaparthi December 28, 2012 at 11:57 am

I have heard that it is quite tough for small retail investors (who have an income of < 10Lakhs per annum) to participate in this process. Is this true ?

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Shiv Kukreja December 28, 2012 at 1:59 pm

That is not correct. There is no income cap for retail investors. They can easily participate in this process.

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santonu December 29, 2012 at 6:31 pm

SEBI has to make compulsory to integtrate OFS window tby all brokers. This facility is not available in many brokerage houses like karvy,religare, stock holding etc

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Shiv Kukreja December 29, 2012 at 7:00 pm

Yes I agree. Ideally the brokers themselves should take the initiative. I dont understand why the OFS window is not available with these brokers even in bigger OFS.

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Sachin January 2, 2013 at 12:21 pm

Hi,

Is anyone knows if OFS option available with Sharekhan?

- Sachin

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Jega May 22, 2013 at 2:24 pm

Yes Sachin, Sharkhan has got an option for OFS.

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Neel February 6, 2013 at 6:57 pm

Super article Shiv. Got answers for what I was looking for and more!

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Shiv Kukreja February 6, 2013 at 11:33 pm

Great… thanks Neel!

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Ajit February 7, 2013 at 8:59 pm

Heyyy Shiv excellent article ….Every leyman can understand the concept by your article….Thanks a ton!!

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Shiv Kukreja February 9, 2013 at 12:44 am

Thanks Ajit!

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darshan gattani February 8, 2013 at 3:35 pm

HI, I would like to know how much can i apply in a single OFS.. i mean is there a retail limit on investments of 2 lakhs like there is in IPO or FPO or can even a single individual can apply for lets say 10 lakhs.

Request you to please comment as i am unable to answer.

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Shiv Kukreja February 9, 2013 at 1:41 am

Hi Darshan… There is no such limit for the retail investors.

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vikram April 5, 2013 at 4:19 pm

Hi Shiv, nice article.

my question is can OFS be used for IPO???

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Shiv Kukreja April 5, 2013 at 7:57 pm

Thanks Vikram! No, OFS cannot be used for IPO.

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Naveen May 22, 2013 at 12:52 pm

I like this post and it is very helpful but I have 1 query on OFS.

Query: As you described in the example, if the investors bid for 800 shares @ Rs 200 but the indicative price is Rs. 202. Then those investors will get the shares or not as the bid price is lower than the indicative price……??

Thanks

Reply

Shiv Kukreja May 23, 2013 at 1:06 am

Thanks Naveen!
Answer: If the allotment price is Rs. 202, then people who have bid below this price will not get any shares allotted.

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Naveen June 3, 2013 at 10:52 am

Hi Shiv…
If the floor price is Rs. 200 and the bid is at Rs. 210 but the indicative price is Rs. 202. In that case, I will get the shares at Rs. 202 or Rs. 210…??

Thanks

Reply

Shiv Kukreja June 3, 2013 at 11:04 am

Hi Naveen… it would be Rs. 210.

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Arun June 10, 2013 at 11:59 am

hi Shiv, Naveen,

I think i am missing out a point here; requesting more clarity on it-

If the shares are to be allotted @ bidding rate only (say Rs.210 in this case), then waht is the whole idea of calculating ‘Indicative Price’?

Reply

Shiv Kukreja June 10, 2013 at 10:50 pm

Hi Arun… Indicative Price indicates the average price at which bidding investors have made their bids and thus it gives other interested bidders an idea of the price above which they should bid to increase their chances of getting allotment.

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Kishor Mehta May 28, 2013 at 5:18 pm

In the above case, Indicative price is Rs.202. Whether Bidder @ 200 will get allotment or Not

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Shiv Kukreja May 29, 2013 at 9:46 am

Hi Kishor… Indicative Price and Allotment Price might differ by a few rupee/paise. Bidder @ Rs. 200 will not get any allotment if the allotment price is Rs. 202.

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Kishor Mehta May 28, 2013 at 5:20 pm

whether allotment price is the same as indicative price always

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Shiv Kukreja May 29, 2013 at 9:47 am

Not necessarily, but it is very close to the indicative price.

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Garvit May 29, 2013 at 3:00 pm

Thanks a Lot ! …. Superb simple explaination ….. I searched lot of websites but they all give it in lot of Financial terms …..

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Shiv Kukreja May 30, 2013 at 9:15 am

Thanks Garvit!

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KLM May 30, 2013 at 11:32 am

suppose i bid for 200 shares at close to market price say 570 as against the offer price of say 500 and the indicative price is 520, at what rate will my offer be settled when the seller decides to opt muptile offer price

Reply

Shiv Kukreja May 31, 2013 at 10:59 pm

It would be Rs. 570 for your bid of 200 shares.

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rahul agarwal May 30, 2013 at 1:12 pm

Hi shiv,
Wat is ur comments on the arbitrage opportunity the OFS and SLB together provide. Short sell in market and buy in SLB procedure.correct me if I m wrong anywhere. Pls send me a mail on the mentioned id if possible.

Reply

Shiv Kukreja May 31, 2013 at 11:19 pm

Hi Rahul… Stock market is all about opportunities and risks. Yes, there is an opportunity in this combination but there is a risk of non-allotment of shares or getting lesser no. of shares than you apply in the OFS and suddenly the share price jumping up to some higher levels the next day.

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Sanjay May 30, 2013 at 4:37 pm

Hello Shiv,

I was checking the OFS issues on the NSE website today at:

http://www.nseindia.com/live_market/content/live_watch/offer_sale/ofs_sale.htm

Can you please explain what do the terms ‘Cumulative Qty (100% margin)’ and ‘Cumulative Qty (0% margin)’ mean? I did Google the terms but was unable to find an explanation.

Also, if an OFS does not mean 100%, does this mean there will be a succeeding OFS the company at a lower price?

Thank you.

Reply

Shiv Kukreja May 31, 2013 at 11:59 pm

Hello Sanjay,
Cumulative Qty (100% margin) – It is that quantity of shares for which retail investors or institutional investors make bids and deposit 100% money for their bids in advance. These bids can be cancelled as well as modified by the investors.

Cumulative Qty (0% margin) – It is that quantity of shares for which only the institutional investors can bid and need not deposit any money for their bids in advance. These bids cannot be cancelled, but can be modified (to increase the qty or price) by the investors.

If an OFS does not get fully subscribed, it is up to the management of the company to decide what they want to do. They can either cancel the whole issue or have another OFS at the same price or at a lower price or at a higher price. If it is not for meeting the Minimum Public Shareholding (MPS) deadline, then they may decide not to come up with one more OFS.

Reply

kumar ashok June 13, 2013 at 12:06 am

sir,
as you have described about allocation of ofs with example. with the same example if promoter offer 1000 share @ 200 and got application 200 @ 210 and 800@ 200 only.
as your calculation the average price is 202.
in this case the promoter can sell only 200 share @ 210 and 800 share aplication will be rejected. and the result is fail of OFS.
So there is need of clarity about it.

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Shiv Kukreja June 14, 2013 at 10:26 am

Hi Kumar,
In this case, Rs. 202 is the “Indicative Price” and not the “Allotment Price”. As the demand is for 1000 shares only against 1000 shares on offer, the company would allot 200 shares @ Rs. 210 and 800 shares to the bidder who has applied for it @ Rs. 200. The company is allowed to cancel the OFS if the bidding prices are not attractive enough for the company to complete the OFS.

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KLM June 13, 2013 at 5:54 am

Sir,
Do you have a writeup on delisting. What will be effect of shares not tendered even after delisting is complete and shares not traded in the market

Reply

Manshu June 14, 2013 at 2:37 am

There is no write up on delisting here and I didn’t know the answer to your question, but Economic Times had an article that addresses it. Here is the link:

http://articles.economictimes.indiatimes.com/2011-12-05/news/30477576_1_voluntary-delisting-delisting-offer-delisting-process/2

It says that if you still have the shares within a year of the delisting then you can offer it to promoters. But if it is more than a year then you are stuck with it and there are not many options. You can read the article for more details.

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aniruddh June 14, 2013 at 10:10 am

Can anyone tell me when will I be able to sell the shares allocated to me through OFS.
I had purchased shares through OFS of MMTC. Now I want to sell them. So when will I be able to do so?

Reply

Shiv Kukreja June 15, 2013 at 10:27 pm

Hi Aniruddh… You can sell your MMTC shares whenever you want and as soon as you find a buyer for these shares. Right now there is a huge difference between the OFS price, the market price and the intrinsic value of these shares. I think you’ll start seeing buyers for these shares when the market price is close to or below its intrinsic value.

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aniruddh June 18, 2013 at 8:49 am

Thanks shiv

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Shiv Kukreja June 18, 2013 at 11:46 am

You are welcome Aniruddh!

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Hiten jain June 14, 2013 at 12:25 pm

Just want to get it clearly OFS wil be considered as shares are purchase from Primary market or secondary market.

It is selling by promoters .it should be considered as primary market but where as charges and stt are applicable so it will fall under secondary market also.

what do we consider Primary market or secondary Market

Reply

Shiv Kukreja June 15, 2013 at 10:43 pm

Hi Hiten… OFS is a Primary Market activity. But you are right, many of its terms are similar to the secondary market transactions. So, for practical reasons, OFS is a mix of primary market and secondary market.

Primary Market – Investors purchase tradable securities directly from the issuers.
Secondary Market – Investors purchase traded securities from other market participants.

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mithun June 15, 2013 at 12:22 am

Sir,
How is the floor price calculated.
Is the indictive price always closer to the floor price.
Is there a rule that floor price should not be below the current book value.
Can the floor price be fixed way below the IPO price.

My queries are in relevance to the upcoming NHPC OFS.

Reply

Shiv Kukreja June 18, 2013 at 10:54 am

Hi Mithun,

Floor Price is fixed by the promoters of the company in consultation with the merchant bankers of the issue. It would say it is the “intrinsic value” that gets calculated by the merchant bankers and not the floor price.

It is not necessary for the indicative price to be always closer to the floor price. e.g. Floor Price in 3M india OFS was Rs. 3300 whereas the Indicative Price was Rs. 3654.33 per share.

Also, I’m not aware of any such rule which mandates the floor price to be above the book value of the share.

There is no such condition which regulates the promoters not to fix the floor price considerably below the IPO price. So, taking NHPC as the company in question, the govt can and will have to fix the floor price at Rs. 15 or so, irrespective of the fact that the IPO price was Rs. 36.

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kumar ashok June 15, 2013 at 11:18 pm

dear sir,
thanks for making me out of confusion about allotment of OFS. now i want to know, how the govt valued the MMTC share at very low price while it was marketed at about 200/per shere. and if the real price is about 6o, how a retail investor calculate the real price of a share.
i think there is big confusion about true price and CMP of the shere

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Shiv Kukreja June 16, 2013 at 12:21 am

Dear Kumar,
It is the job of the Merchant Bankers to calculate the fair value of the OFS shares and advise the govt (or other promoters) to fix the offer price close enough to get a reasonable price to the promoters and get the offer successfully concluded. For a retail investor, the process to calculate the fair price is the same as it is with other traded stocks, which I think is a quite difficult job for a layman. MMTC once used to trade at around Rs. 39000 per share (Rs. 1965 per share post-split 1:10 & post-bonus 1:1) and now the OFS has been fixed @ Rs. 60 per share. A very high unrealistic market price is due to a very low floating stock and who knows if it is still overvalued @ Rs. 60 and what is its actual fair value ??

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Sameer June 17, 2013 at 11:56 pm

Dear Shiv

This was a very informative article which clarifies the most of the doubts but I still have following queries.
A. Can a bidder put offer price below the floor price.
B. When indicative price is more than the floor price & the issue is subscribe for more than 1 times the offer. Can promoters cancel OFS?
C. If the issue is subscribed say X times then will the allotees gets the proportional shares or allotment process starts from higher price & gets full nos. of shares applied & then the next till no. of shares equals the offered shares.

Reply

Shiv Kukreja June 18, 2013 at 10:12 am

Thanks Sameer for your kind words!

Here are the answers to your queries:
A. A bid cannot be placed below the floor price.
B. No, it cannot happen. Why would the promoters do that?
C. If the promoters decide to adopt the “Multiple Price” option, then the allotment process starts from the higher price & goes on till the shares on offer get exhausted.

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Ramesh June 18, 2013 at 10:27 am

Shive, your responses are crisp and very clear. I have a doubt, I had bid for 100 shares at Rs 60/- and 500 shares at Rs 100/-. How am I allocated and at what rate?

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Shiv Kukreja June 18, 2013 at 11:05 am

Hi Ramesh,
Though I’m not the Registrar of the company and hence cannot be 100% sure about it, but I think you will get 500 shares allotted @ Rs. 100 and proportionate allotment @ Rs. 60. You can access the full details of your allotment from your contract note of the OFS.

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Shiv Kukreja June 18, 2013 at 11:11 am

Also, thanks for your kind words Ramesh!

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Ramesh June 18, 2013 at 10:27 am

My query is about MMTC recent OFS

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mithun June 19, 2013 at 12:53 am

Dear sir, thank you for the reply.

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Shiv Kukreja June 19, 2013 at 11:19 am

You are welcome Mithun!

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Somu G November 20, 2013 at 7:46 am

Well researched and knowledgeable article. Many thanks!

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Shiv Kukreja November 20, 2013 at 3:33 pm

Thanks a lot Somu !!

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Gaurav Jain July 25, 2014 at 2:30 am

Dear Shiv, Thanks for such a wonderful and detailed article. But, I have a query, Is the indicative price available during the OFS time limit also( i.e.between 09:15 to 3:30pm) or it is provided only after OFS closes.
Also, if it is provided during OFS time, at what time intervals it gets refreshed??

Reply

Shiv Kukreja July 28, 2014 at 11:23 pm

Hi Gaurav, thanks for your motivating words!
Earlier, in an OFS, the Indicative Price was disclosed only during the last 60 minutes of the trading session. But, now it gets disclosed throughout the trading session.
Also, I am not sure how frequently the indicative price gets refreshed, but I think it is 15 minutes or 30 minutes.

Reply

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