Weeks before the new Takeover Code came into effect, there was a flurry of open offers from companies to buy back their shares. The new Takeover Code is more shareholder-friendly because it has increased the trigger for compulsory open offers and raised the minimum offer size. The minimum size is about 26% now, compared with 20% under the previous Code. Hence, many companies rushed to file their open offer documents under the old Takeover Code norms so that they could restrict their open offer size to 20%.
Let's simplify this further. If you acquire a stake of 25% or more in a listed company, you are required to give an open offer to the remaining shareholders. This open offer means you are ready to buy 26% more shares of the company at the same price at which you acquired the original 25% stake. The open offer price is generally at a premium to the market price of the shares. This provides an opportunity to the remaining shareholders, especially external and minority shareholders, to tender their shares at the same acquisition price.
Speculative buying: Open offers often trigger speculative buying and cause the share prices to shoot up temporarily. However, such offers can be tricky if you enter at the wrong time. If a company receives more shares than it plans to buy, it rejects the excess applications. If you have bought the shares, hoping to sell them to the company at a higher price, you may end up with losses after the offer closes and the share price recedes. So, before you decide to participate in the open offer, keep the following points in mind:
Acceptance ratio: Its tells you how likely it is for your shares to be accepted by the company. This ratio is calculated as the percentage stake in the open offer divided by the percentage stake held by external shareholders. For instance, if the percentage stake in the open offer is 26% and the percentage stake held by external shareholders is 52%, then the acceptance ratio is 0.5. This means the company will accept one share for every two shares held by external shareholders. The higher the acceptance ratio, the more the chances of the shares being accepted in the open offer.
Tax implications: If you sell your shares back to the company, the transaction will not be routed through a stock exchange and, hence, no securities transaction tax will be paid on it. So, the investor will not be eligible for the exemption available to equity investors who buy shares through a stock exchange. The transaction will be treated as a private deal between two entities and any short-term capital gain will be added to the income of the investor, while the longterm capital gain will be taxed at a flat rate of 10% or 20% after indexation. The investor can opt for any one of these methods.
An open offer provides the existing shareholders an opportunity to exit at a premium to the market price. Non-shareholders can also gain by engaging in arbitrage buying of shares in the secondary market and tendering them in the open offer at a higher price. However, one must remember that this is a technical subject and any investment by retail investors should be done under the guidance of financial advisers. However, if played right, it can be a good chance for shareholders to make a neat profit in the season of open offers.
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