 "Why open offers aren't attractive for many investors")
Arun Kejriwal, Director, Kris Research, is clear that investors should sell the Mangalore Chemical and Fertilizers (MCF) stock in the secondary market, not in the rival open offers to either Deepak Fertiliser or the promoters.
With the date for revising the offer ending on September 25, the final offers look like this: Saroj Poddar of Zuari Agro, acting in concert with Vijay Mallya, made a revised offer of Rs 68.55 to Rs 81.60, while the offer from Deepak Fertilisers was revised from Rs 63 to Rs 93.60. Kejriwal argues that with Mangalore Chemicals quoting at Rs 94.55, higher than the open offer price, it makes little sense to tender it this way. The stock in the past week had hit Rs 104 before slipping, after investors realised there could not be any more price revision.
Whether this open offer succeeds or not, it is a fact that such offers have seldom sailed through in India. Since 2013, 133 open offers have been announced. And, only a handful of companies managed to get the proposed percentage of shares through this. These include United Spirits and Mahindra CIE. Even marquee names Hindustan Unilever, Glaxo SmithKline Pharma and CRISIL failed to garner the proposed holding through this route. Unilever was able to raise only 14.78 per cent instead of the proposed 22.52 per cent; CRISIL raised 15.07 per cent, not the proposed 22.23.
One big reason is taxation. According to the present regulation, open offers are classified as off-market deals, entered into between private individuals. Since there is no securities transaction tax (STT) of 0.1 per cent on the share sale, the taxation is different from open market transactions.
For shares tendered in the open offer, the tax treatment is completely different. Short-term capital gains (less than a year) are taxed at 10 to 30 per cent (without considering education cess), depending on the individual's tax slab. In case the stock has been held for over a year, the long-term capital gains are taxed at 20 per cent without or 10 per cent with an indexation benefit. In contrast, for transactions in the secondary market, the short-term capital gains tax on sale of shares or mutual funds is 15 per cent and the long-term capital gains tax is zero, if STT has been paid. So, how should an investor see open offers?
Short-term investors: For investors who've stayed invested for less than a year, the tax matrix looks like this. Investors in the top two income tax (I-T) brackets (20 and 30 per cent, respectively) stand to lose out if they give the shares in the open offer because of the higher rate of taxation on their income. So, it makes more sense for them to sell it in the secondary market and pay a 15 per cent tax on gains. Investors in the lowest I-T bracket would stand to benefit if they participate in an open offer, as short-term capital gains tax is less for them.
Only arbitrageurs benefit from open offers: It is a game that retail investors should not play because it is very high risk. Explains Ambareesh Baliga, independent market analyst: "Many arbitrageurs benefit from open offers by making bets on the acceptance ratio." For example, in case a share is trading at Rs 2,800 and the acceptance ratio is expected to be 70 per cent, arbitrageurs would buy 100 shares and give it in open offer. To be on the safe side, they would short 30 shares. So, they are completely hedged. But if the calculation goes wrong, the arbitrage can go completely wrong. "In the case of United Spirits, the market expected a 70 per cent acceptance ratio, whereas it was 55 per cent. Many were stuck with the additional shares," adds Baliga.
There is a strong case for investors to sell in the secondary market during open offers. Usually a businessman or company is willing to pay much more for buying a companies vis-a-vis an investor. Therefore, he offers a premium. But as soon as the offer price is announced, the stock price goes up sharply, even above the offer price because traders feel by increasing the price, they will be able to get a better deal for the company.
"Investors can exit during such surges because if the open offer fails and the company does not make a fresh one, the stock price will fall quickly as well," says Baliga.
With the date for revising the offer ending on September 25, the final offers look like this: Saroj Poddar of Zuari Agro, acting in concert with Vijay Mallya, made a revised offer of Rs 68.55 to Rs 81.60, while the offer from Deepak Fertilisers was revised from Rs 63 to Rs 93.60. Kejriwal argues that with Mangalore Chemicals quoting at Rs 94.55, higher than the open offer price, it makes little sense to tender it this way. The stock in the past week had hit Rs 104 before slipping, after investors realised there could not be any more price revision.
Whether this open offer succeeds or not, it is a fact that such offers have seldom sailed through in India. Since 2013, 133 open offers have been announced. And, only a handful of companies managed to get the proposed percentage of shares through this. These include United Spirits and Mahindra CIE. Even marquee names Hindustan Unilever, Glaxo SmithKline Pharma and CRISIL failed to garner the proposed holding through this route. Unilever was able to raise only 14.78 per cent instead of the proposed 22.52 per cent; CRISIL raised 15.07 per cent, not the proposed 22.23.
One big reason is taxation. According to the present regulation, open offers are classified as off-market deals, entered into between private individuals. Since there is no securities transaction tax (STT) of 0.1 per cent on the share sale, the taxation is different from open market transactions.
For shares tendered in the open offer, the tax treatment is completely different. Short-term capital gains (less than a year) are taxed at 10 to 30 per cent (without considering education cess), depending on the individual's tax slab. In case the stock has been held for over a year, the long-term capital gains are taxed at 20 per cent without or 10 per cent with an indexation benefit. In contrast, for transactions in the secondary market, the short-term capital gains tax on sale of shares or mutual funds is 15 per cent and the long-term capital gains tax is zero, if STT has been paid. So, how should an investor see open offers?
Short-term investors: For investors who've stayed invested for less than a year, the tax matrix looks like this. Investors in the top two income tax (I-T) brackets (20 and 30 per cent, respectively) stand to lose out if they give the shares in the open offer because of the higher rate of taxation on their income. So, it makes more sense for them to sell it in the secondary market and pay a 15 per cent tax on gains. Investors in the lowest I-T bracket would stand to benefit if they participate in an open offer, as short-term capital gains tax is less for them.
Only arbitrageurs benefit from open offers: It is a game that retail investors should not play because it is very high risk. Explains Ambareesh Baliga, independent market analyst: "Many arbitrageurs benefit from open offers by making bets on the acceptance ratio." For example, in case a share is trading at Rs 2,800 and the acceptance ratio is expected to be 70 per cent, arbitrageurs would buy 100 shares and give it in open offer. To be on the safe side, they would short 30 shares. So, they are completely hedged. But if the calculation goes wrong, the arbitrage can go completely wrong. "In the case of United Spirits, the market expected a 70 per cent acceptance ratio, whereas it was 55 per cent. Many were stuck with the additional shares," adds Baliga.
There is a strong case for investors to sell in the secondary market during open offers. Usually a businessman or company is willing to pay much more for buying a companies vis-a-vis an investor. Therefore, he offers a premium. But as soon as the offer price is announced, the stock price goes up sharply, even above the offer price because traders feel by increasing the price, they will be able to get a better deal for the company.
"Investors can exit during such surges because if the open offer fails and the company does not make a fresh one, the stock price will fall quickly as well," says Baliga.