SPECIAL EVENTS: Series I: Open Offer

An open offer is an offer by an existing shareholder or a new shareholder of a publicly listed company, to acquire a certain number of shares from other shareholders of the target company. An open offer can either be voluntary or mandatory.

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Voluntary or Mandatory?

At any time, any entity can come out with a voluntary open offer to acquire as much number of shares of that company from other shareholders at any price which that entity is willing to offer.Whereas, if the open offer gets triggered as per the SEBI SAST guidelines (such as acquiring 15% or more stake in a company), then it is mandatory for the entity to come out with an open offer to acquire an additional minimum of 20% shares of the target company via the Open Offer route.In either of the case, the eligible shareholders, as per their discretion, may or may not tender their shares in the open offer.

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Minimum Pricing

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The price at which the mandatory open offer is to be provided cannot be below the higher of the following:

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1. Average of the weekly high and low of the closing prices of the shares of the company during the past 26 weeks.

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2. Average of the daily high and low prices of the shares of the company for the past 2 weeks.

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3. The price at which the entity coming out with an open offer acquired the shares which triggered the open offer.

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4. Price paid by the acquirer for acquisition of shares of the company, if any, by way of allotment in a public or rights or preferential issue during the past 26 weeks.

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Minimum Acceptance Ratio

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This ratio is the critical criteria in deciding the benefit that may likely accrue to the investors who tender their shares in the open offer. As the name itself suggests,minimum acceptance ratio gives us the minimum number of shares that shall be accepted in an open offer. For example, a minimum acceptance ratio of 10% means that for every 100 shares tendered by a shareholder in the open offer, a minimum of 10 shares shall be accepted in the open offer at the open offer price and rest of the90 shares shall be returned back to the shareholder after the closure of the open offer.

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The minimum acceptance ratio is calculated as follows:

It should be noted that the above figure is arrived at by assuming that all the eligible shareholders actually tender all of their shares in the open offer.

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Example: To understand the whole concept better, let us take an example.

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On September 9, 2010, Accelya Holding World S.L. (“Accelya”) agreed to buy the promoter stake of 38.60% or 56,69,478 equity shares of Kale Consultants Limited(“KCL”) at a price of `172 per equity share. This triggers the mandatory open offer as Accelya was acquiring a stake of more than 15% (i.e. 38.60%) in KCL.The mandatory open offer is for acquiring a minimum of 20% additional shares of KCL by Accelya from the shareholders of the company KCL, except the existingpromoters. This is because the shares have been acquired from the promoters itself and that event itself triggered the open offer in the first place.The open offer has to happen at a minimum price of `172, (as per SEBI pricing guidelines explained above).

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The open offer shall be for 20% additional shares of KCL that works out to 29,37,832 shares. The shares that can participate in the open offer are those which are heldby all the shareholders except the existing promoters, i.e. 61.40% ( 100% – 38.60%) of the total outstanding shares of the company. This works out to 90,19,684 shares.

 

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Hence, for every 100 shares that an investor tenders in the open offer, a minimum of 32 shares will be accepted in the open offer and rest of the 68 shares will bereturned back to the investor.

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Breakeven Price

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In the example we’ve discussed, the minimum acceptance ratio is 32.57% and the open offer price is 172. As on 8th Oct’10, the closing price of shares of KCL is151.25 on NSE. So if an investor had purchased 100 shares at that price his total outgo would be 15,125. On tendering these 100 shares, 32 shares shall be acceptedin the offer at 172, giving him an inflow of 5,504 ( 32 shares x 172). The remaining investment of the investor is 9,621 ( 15,125 – 5,504). This remaining amountneeds to recovered from the remaining 68 shares ( 100 – 32) that the investor will get back once the open offer closes. Thus, the investor will need to sell the remaining68 shares at a price of 141.49 ( 9,621 ÷ 68) to recover his original investment of 15,125. This, 141.49, is the breakeven price in this case. The investor stands to gainonly if he is able to sell his remaining 68 shares above this price, post the open offer.

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What if some shareholders do not tender their shares in the open offer?

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In our example of KCL shares, assume a certain shareholder, say Ratnabali Capital Markets Ltd (“Ratnabali“) which holds 3.48% (5,10,538) shares of the company as ofJune 30th, 2010, does not tender its shares in the open offer. This shall then improve the acceptance ratio from 32.57% to 34.53% for the other shareholders whotender their shares in the offer.

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Therefore, the number of shares accepted in the open offer shall increase to 34 (from the earlier figure of 32 in the example discussed) and accordingly, the newbreakeven price shall stand reduced from erstwhile 141.49 to 140.56.Hence, if any shareholder decides not to tender his shares in the open offer, then it becomes beneficial for the other shareholders who are indeed tendering theirshares in the open offer.

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Note:1. For the sake of simplicity, transaction costs have been ignored in the example discussed in this article.2. Prices and shareholding data sourced from National Stock Exchange.

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