It is a part of the takeover code as defined by the Securities and Exchange Board of India (Sebi). When a company acquires up to 15 per cent stake in another listed entity, an open offer gets triggered. This means the acquiring company must make an offer to existing shareholders to buy an additional 20 per cent stake in the company. And, it is typically kept open for about a month, from the date of announcement. It is aimed at providing the shareholders an exit option, as there may be a management change post-acquisition and investors may perceive potential risks in the business.
What is the acceptance ratio?
The ratio between total shares tendered (offered for sale to the acquirer by the existing shareholders) and those accepted by the acquirer is termed as the acceptance ratio. Simply put, the share acceptance by the acquirer is done on a proportionate basis. The lack of a guarantee of 100 per cent acceptance is a hitch. As in case of partial acceptance, prices may fall post offer and one may have to sell the residual stocks at a lower rate.
How is the price of the shares fixed?
The acquirer, in concert with the merchant banker, considers the following parameters while determining the offer price: negotiated price under the agreement that triggered the open offer; price paid by the acquirer for allotment in a public or rights or preferential issue during the 26-week period prior to the relevant date or the date when the open offer was triggered; and the average of the weekly high and low of the closing prices of the shares during the six months. Or, the average of the daily high and low prices of the shares during the two weeks preceding the relevant date. The highest price of these is considered. And, it has to be mentioned in the letter of offer, along with a justification.
How are the shareholders intimated?
The acquirer has to publish a public announcement in newspapers. It can be also viewed on the Sebi website, along with the letter of offer and form of acceptance. The letter of offer is a document addressed to shareholders of the target company. It contains disclosures of the acquirer, details about the offer price, number of shares to be acquired, purpose of acquisition and future plans of the acquirer. It also specifies the procedure for accepting the shares tendered by the shareholders.The public announcement will also specify the procedure for tendering your shares, in case you do not receive the letter of offer.
What are the tax implications?
The income is added to the taxpayer’s ‘other income’ and taxed, according to the slab applicable. Comparatively, if you sell over the exchange, there will be zero capital gains tax, if the stock is held for more than a year. If held for less than a year, it will attract a short-term capital gains tax of 15 per cent.
