Open Offers: Tread Carefully In These Waters

Open offers are raining in a lacklustre and volatile market. Thanks to the recently introduced investor-friendly New Takeover Code, there has been a barrage of open offers launched in the market. Currently, there are about 20 open offers filed with the SEBI, which is primarily owing to a few prominent differences between the new and old take over codes. It is common knowledge that open offers have always presented investors with golden opportunities to make healthy profits, as the stock prices tend to shoot up temporarily, triggering speculative buying activity. For instance, INEOS ABS (INDIA) saw a 17 per cent jump in its stock price after the announcement of its strategic JV-driven open offer agreement in June 2011. However, investors have always been confused when it comes to deciding how best to respond to such offers.

One of the most important and tricky facts with respect to an open offer is that if an acquiring company receives more shares than it plans to buy, it rejects the excess applications, and investors who have bought shares hoping to sell them to the company at a higher price end up with losses. This happens because share prices generally tend to recede after the offer closes. In view of the problems faced by investors, we have decided to highlight a few points that investors must keep in mind before venturing into an open offer-driven investment opportunity.

The most important point to remember is the acceptance ratio of the shares tendered by investors to the company. In simple words, it tells you about the probability of your shares being accepted by the acquirer. This is calculated by dividing the existing floating capital (other than promoter holdings) with the number of shares to be acquired in the open offer. The higher the acceptance ratio, the greater is the probability of the shares being accepted. For instance, in case of Everonn Education, which is launching an open offer to acquire 20 per cent of its existing floating capital, the probability of acceptance stands at 40 shares for every 100 shares held by an investor. In other words, you may continue to hold 60 shares even if you have offered 100 shares to the company in the open offer.

Another important point is the tax implications. We would like to inform our readers that since an open offer is an off-market transaction, one may have to pay long-term or short-term capital gains tax on it, instead of the usual STT. The gains will be taxed either at 10 per cent without indexation or at 20 per cent with indexation, depending on your duration of holding. Hence, in case of companies like Jaihind Projects and Marg, the profit derived from the price differentials would be eaten away by the tax implications associated with them.

In conclusion, we believe that the current set of open offers launched in the market will not yield any multibagger opportunity for investors, as most of them are trading near or above their respective open offer prices, leading to investor apathy. Also, an important point to be noted is that a majority of these counters are listed on the BSE under the ‘T’ group, indicating some corporate governance issues. Hence, we advise our readers to remain alert and well aware of the various pitfalls while venturing into open offers.