Offer for Sale explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
The limits are expressed on two different bases — one as a fraction of the holding, the other as a fraction of the whole capital — which changes who can sell how much.
The two offer for sale limits
| Selling shareholder | Permissible offer |
|---|---|
| Holding 20% or more of the pre-issue share capital | Up to 50% of that pre-issue holding |
| Holding less than 20% | Up to 10% of the pre-issue share capital |
The first is a fraction of the shareholder's own holding; the second is a fraction of the company's capital. That difference produces results that are not intuitive.
A shareholder with 40 per cent may offer 20 per cent of the capital — half of its holding. A shareholder with 19 per cent may offer 10 per cent of the capital, which is more than half of what it holds. A shareholder with 5 per cent may offer all of it, since 5 per cent is within the 10 per cent cap.
The design makes sense once the purpose is clear. The 50 per cent cap on large holders ensures a substantial shareholder retains a meaningful stake after listing — it cannot use the IPO as a complete exit. The 10 per cent cap on smaller holders is an absolute ceiling on how much of the company any one non-substantial shareholder can offload into the issue.
For a company with several pre-IPO investors, the arithmetic has to be done holder by holder before the offer size can be fixed.
The pre-listing structure behind an offer for sale
Where an existing shareholder proposes to exit through an OFS, the session described a structure in which a holding company is first merged with the IPO-bound company to avoid a two-tier tax incidence. This is followed by a capital reduction of the holding company, with shares of the IPO-bound company issued as consideration, thereby enabling promoters to hold shares in the listed entity.
The two-tier problem it solves: without the merger, a sale by the holding company would be taxed at the holding company level, and the onward distribution to its shareholders taxed again.
The structure is not free: this structure may give rise to two distinct tax consequences, with the distribution being taxable as dividend to the extent of accumulated profits and the balance being subject to capital gains tax.
The tax mechanics of an offer for sale
- A one-year period of holding applies, including the holding period of any underlying convertible instrument, with exceptions applicable for bonus shares and shares received pursuant to court-approved schemes subject to prescribed conditions;
- Securities transacted through an OFS attract securities transaction tax and are accordingly taxed as long-term capital gains at 12.5% or short-term capital gains at 20% as applicable;
- Stamp duty of 0.015% and securities transaction tax of 0.2% on the consideration.
The holding period question on an offer for sale
The session flagged a continuing interpretative issue regarding whether the relevant holding period threshold should be one year or two years, given that the specific charging provision covering shares sold through an OFS was inserted as a distinct entry some years after the original listed-shares STT provision, which the session took as itself suggesting that an OFS was not regarded as automatically falling within the ordinary listed-shares treatment.
The argument turns on drafting history. If OFS shares were already covered by the listed-shares provision, a separate entry would have been unnecessary — its insertion implies they were not.
The expense deduction question
Also open is whether IPO-related expenses, to the extent wholly and exclusively incurred for the purpose of the transfer and pro-rata allocated to each selling shareholder, are deductible in computing the resulting capital gains — a position the session considered reasonably arguable under the general provision governing expenditure incurred wholly and exclusively in connection with a transfer, since SEBI itself prohibits the listed company from directly bearing OFS-related costs, requiring these to be cross-charged pro-rata to the selling shareholders.
SEBI's prohibition on the company bearing OFS costs produces an indirect tax consequence that is easy to miss.
The listed company is generally able to claim input tax credit on the underlying banker and professional fees while the individual selling shareholders receiving the cross-charge cannot, so that the GST charged on the cross-charge becomes an additional, non-recoverable cost of upwards of the applicable GST rate for the shareholders participating in the OFS.
Follow the flow. The bankers and lawyers invoice the company, which claims credit on the GST. The company then cross-charges those costs to the selling shareholders, adding GST to the cross-charge. The shareholders are individuals, not registered persons carrying on a business — so that GST is a dead cost.
The result is that the regulatory requirement to cross-charge, imposed to protect the company from bearing a selling shareholder's expense, converts a recoverable tax into an unrecoverable one.
Common mistakes
- Applying the 50 per cent offer for sale limit to a shareholder below the 20 per cent threshold.
- Ignoring the holding period of an underlying convertible instrument.
- Assuming ordinary listed-share treatment for the OFS holding period.
- Omitting the GST on the cross-charge from the selling shareholder's net proceeds.