Open Offer

What is Open Offer?

An open offer is an offer made by an acquirer to buy a fixed quantity of shares, when his stake in the target company crosses certain pre-defined limits. In case of takeovers, an open offer can be an exit opportunity for existing shareholders
as the offer price is usually at a premium to the prevailing market prices.

When would an open offer be triggered?

~ If an entity’s stake in a company crosses 15% of the total shares outstanding, then he needs to make an open offer for a further 20% of total shares outstanding.
~ If an acquirer has 15% or more but less than 75% of shares, to get more than 5% of the voting rights of the company in a year, the acquirer needs to make an open offer for further 20% of shares of target company.
~ An acquirer, who already has a stake of 75% or more in a company, can acquire further shares only through an open offer from the shareholders.

Regulatory View

● SEBI's (Substantial Acquisition of Shares and Takeovers) Regulations, 1997: Provides regulations and suggests measures to protect interest of the investors.
● If the shares received by the acquirer under the offer were more than the shares agreed to be acquired by him, the acceptance would be on a proportionate basis.
● After the public announcement of open offer, it should be opened on or before 55 days. The open offer is kept open to the public for a period of 21 days.

How does one determine the offer price?

SEBI does not decide or approve the offer price. The acquirer is required to ensure that all the relevant parameters are justified in the offer, which are
● The highest price at which the acquirer has acquired the shares of the target company as per the agreement.
● If the target company is frequently traded, then the average of weekly high and low prices of shares is taken for 26 weeks or during two weeks prior to the date of the Public Announcement, else the fundamentals of the company are
considered.
● In case of abnormal cases, amendments of regulations are expected from SEBI to deal with pricing issues. (Ex. Satyam Computers)

How can an investor benefit?

● Short-term players might enter for arbitrage when the market price of the stock is lower than offer price, and exit the stock before the close of open offer, as there is a possibility of share price moving towards the offer price.
● If the acquirer is accepting more number of shares, then there is a greater possibility that the shares tendered by the investor would be accepted under the open offer.

More Importantly - The Conclusion:

An investor can benefit under an open offer, as it is an opportunity for him to exit his position in a stock, at a price that is usually higher than the prevailing market price. Short-term traders can also benefit from the arbitrage opportunity in the
open offers as the stock price usually moves closer to the offer price, once the company announces an open offer.

However, if the number of shares tendered by the investors were more than those available under the open offer, the company would acquire the shares on a pro-rata basis. Also there is a risk of a steep fall in the share price once the open
offer concludes. As a result, the investor could end up having to sell the unaccepted stock at lower prices.

On the tax angle, both short-term investors and long-term investors are taxed with the applicable tax rates as open offers are treated as off-market transactions (hence the lower capital gain taxes that are applicable for normal investors in the market would not be applicable to the gains made by submitting the shares in an open offer).

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Should you Invest in IPOs - Investment in IPOs part 2

Welcome back to the ABCs of investing in IPOs. So how do investors protect themselves and take advantage of the IPO opportunities?

Dos:
● Do check the quality of the promoters before investing in the stocks. What is their track record? Are the promoters/management trustworthy? Did their other group companies that have earlier gone for IPO provide adequate returns to investors? At what price did the promoters and other investors invest in the company? What would be the promoter stake post the public issue? Whether they have any strategic/technical tie-ups or alliances with well-known companies etc.
● Do check the basic valuation metrics such as EPS, P/E, Book Value, Dividend yield etc. Has the company been able to increase its revenues and profitability over a period of time? What is the valuation of the company when compared to its industry peers?
● Do check, where would the company utilize the IPO proceeds and how would the company benefit by going for an IPO?
● Do check the future prospects of the company and whether the company can grow its revenues and profits, going forward.
● Do check the IPO grading: Before the issue, the issuing company needs to get itself graded by the credit rating agencies registered with SEBI. The grade represents a relative assessment of safety, return, risk of IPO vis-à-vis other listed equity shares. The higher the grade the better it is, though a higher grading would not guarantee any returns to investors, if the issue were expensive.

Donts:
● Do not invest in the IPO just because everyone else is doing it and you would not like to miss the opportunity. Remember that if more number of people applying (i.e. the demand is high) the price is usually not cheap and the possibility of making return post listing would also diminish.
● Do not invest in IPO with the hope of making instant return (especially if the IPO is expensive), because the ‘grey market (unofficial price)’ premium is high. This grey market premium is usually manipulated and it could (and most likely it will) change before the listing and the investors hoping to make a quick profit could end up making a loss.
● Do not invest because the current IPO is relatively cheaper than the listed stocks in the same space, if on absolute basis the stocks in the industry are expensive.
● Do not invest if there are significant risks in the horizon especially where there are execution risks, compliance risks, contingent or regulatory risks. As any developments on these fronts can risk the value of the investments in the company.
● Do not invest in IPOs if one is not ready to take the risks associated with investing in equity shares.
While the current regulations are tighter than in the past, and have resulted in the improvement in the quality of promoters that are accessing the capital markets to raise funds, investors need to be alert to the hype surrounding the IPO issues and focus more on the downside risks and potential returns based on the company’s valuation.

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Should you Invest in IPOs - Investment in IPOs part 1

Should investors invest in the primary market or the secondary market? Which would
provide investors better returns? What are the precautions that investors should take
while investing in the primary market IPOs?
Historically, the valuations have determined the kind of returns that investors would get
from a stock, irrespective of the fact whether the company is already listed or is a new
IPO. Investors have burnt their fingers while investing in stocks at the peak of bull
markets, whether they have invested in these stocks through IPO route or in the secondary
market. On the other hand, many investors who have invested in IPOs whenever the
stock is attractively valued have made good returns on their investments.
In the past, we have seen many investors investing in the IPOs, even though these IPOs
were expensive or the quality of promoters was suspect and thus losing money on their
investments.

Tomorrow, a peak at the Dos and Donts of investing in IPOs. If you think you need immediate advice on your portfolio management, don't hesitate to get in touch with us.