What is an open offer?
It is a process or methodology whereby a company tries to acquire additional stake in any listed company by buying its shares from existing shareholders—both individual and institutional.
According to the new takeover norm announced by the capital market regulator, Securities and Exchange Board of India (Sebi), if an entity (say, X) acquires 25% stake in a listed company (say, Y), X company has to mandatorily launch an open offer for acquiring an additional 26% stake in company Y.
A company may also provide an open offer to its own shareholders if the promoters wish to increase their stake in the company or to delist their company.
How does it work?
After acquiring 25% stake in a listed entity, the acquiring company comes out with an open offer for 26%. Based on Sebi guidelines, the company fixes the price of the open offer in terms of each share. In general, companies fix the open offer prices at a premium to the market price to make it attractive. After fixing the price, the company announces a cut-off date before which existing shareholders can tender their shares to the company. This is where existing investors can benefit. The larger the price difference between the open offer and prevailing market prices, the better it is for the shareholders and the higher would be their gains.
Remember that the gains will also depend on the response the open offer receives. If the open offer is priced very attractively to the prevailing market price, chances are that investors would make a beeline to tender their shares. If the offer is oversubscribed, the company will accept only limited applications.
How can MF investors benefit?
Both individual as well as institutional investors can tender their shares in any open offer. This means that a mutual fund scheme that holds shares of the listed company for which the open offer is made can tender its holdings and thereby make gains.
What are the limitations for mf investors?
As an MF investor, you don’t have much say on how the shares are bought and sold and it depends on the discretion of the fund manager. For all you know, your scheme may not have invested in the company concerned or invested only a fraction.