Skip to main content

Stock Open Offer and Share Buyback

Stock Open Offer

When an entity makes an offer to shareholders of a listed company for purchasing their shares at a particular price and within a specified timeframe, it is known as open offer. The offer could be either voluntary or mandatory. An investor crossing the thresholds of 15%, 55% or 75% holding in a listed company has to come out with an open offer for at least 20% more equity, according to Sebi's 'Substantial Acquisitions and Takeover Code'.

Share Buyback

A stock buyback, also known as a 'share repurchase', is a company buying back its shares from its shareholders. The repurchased shares are cancelled, thereby bringing down the number of outstanding shares. As a result, value of each remaining share goes up, thanks to higher per share earnings. Shareholders not participating in buyback also see their stake in the company's ownership rising post buyback. A company buying back its shares is generally viewed as a positive thing.

Typically, buybacks are carried out in one of two ways:

(A) Tender offer
The company will send an offer to its shareholders to sell all or a portion of their shares within a stipulated time frame and the offer price. The company could be out to buy only a part or all of its outstanding shares and delist itself. In the case the company is planning to delist its shares under the reverse book-building method, only the floor


(B) Open market
price is given. The company can also buyback its shares from the open market, just like any other investor. It has to announce its intent of the buyback, the duration, maximum price and the total amount that it will utilise for this purpose. Such offers can remain open for a long period of time or until the amount earmarked by the company's is fully utilized.

 

Why is this done?

 

   To support the share price: An overall weak market outlook can bring down the stock price substantially. In such a scenario, a management may decide to support the share price with a buyback to boost investor confidence. For example, after its three buyback programmes during FY09 and FY10


To fight the impact of equity dilution: A share buyback reduces the number of shares in circulation and hence is a great measure to fight equity dilution caused by events such as employee stock ownership plans (ESOPs) or bond conversion.


Increase promoters' stake: A buyback offer could be unveiled with a view to enable the promoter group to increase their stake in the company. Since the shares bought back are extinguished, those who are not participating in the offer will see their stake in the company's overall equity going up.

The Price Detector

When it comes to open offers, the Sebi has issued guidelines to determine the minimum price at which the open offer can be made. However, there is no upper limit. According to the Sebi rules, the highest between the average prices of the past 26 weeks and the past two weeks should be considered as the minimum price for an open offer.


   Buybacks are generally voluntary on the part of the company and, hence, there is no mandate on its minimum or maximum price. However, only when the company plans to delist its shares, a 'floor price' has to be discovered in line with the Sebi's guidelines.


   A reverse book-building process follows where retail shareholders can tender shares at any price higher than the floor price. The price at which maximum number of equity shares are tendered becomes the 'Discovered Price'.


   However, when it comes to how high an open offer or buyback price should go, it is the acquirer's need and financial ability that play a key role.



The Action Plan

An open offer or a buyback can be an exciting but temporary opportunity to make profit for investors. However, investors need to take an informed decision based on the intentions of the acquirer, the offer price and the company's future prospects.


   At the same time, keep in mind the fact that once the window of opportunity closes, the share price is likely to go back to its pre-offer levels.


   It is, therefore, important for investors to carry out a fundamental research on the company to identify its current fair value and expected fair value a year down the line. If the fair value in near future is likely to cross the offer price, one should hold onto his investments. It shouldn't, therefore, come as a surprise that in four out of six open offers, which are currently on.


   Another alternative for investors is to sell in the open market when the stock prices surge on news. An avid investor can actually fare much better by selling out in the market before the offer closes and covering back once the prices fall after the offer closes.

A Pitfall To Avoid

Investors must resist temptation to play the arbitrage game by buying in the open market after an open offer announcement and selling in the offer. This is risky since investors may get stuck up with a portion of their holdings, which will be worth much less in the market post-offer.


Even after an open offer is announced, the market price of the scrip tends to remain somewhat below the offer price, which one may regard as arbitrage opportunity. However, since the offer is for a limited number of shares, after the offer closes investors are likely to find themselves with a portion of their holding not accepted by the acquirer. If the market price crashes post-offer, the gains made in the offer are likely to get diluted or even negated.


Conclusion

The special opportunities offered by the 'open offers' and 'buybacks' are too attractive to miss. Investors need to do their homework, resist the temptation to trade and try to estimate how things will pan out a year later to take the best call. Often, holding onto his investment, rather than taking a quick exit, could turn out to be the best strategy for an investor.

   
BUYBACK


• DONE BY
the company itself

• GENERALLY,
the number of shares reduce after a buyback

• BUYBACK
can be through open market operations or through the tender route

• BUYBACKS,
are voluntary on the part of the company

• THERE
is a maximum limit or ceiling up to which a company can raise its equity through buybacks during a year
   

OPEN OFFER


• DONE BY
promoters or any other third party other than the company

• OPEN OFFERS,
don't result in change in the number of outstanding shares

• OPEN OFFERS
are typically through the tender route only

• IN MOST
instances, open offers are mandatory rather than voluntary

• THERE
is a minimum limit of 20% with no maximum limit in case of open offers
 

Happy Investing!!

We can help. Call 0 94 8300 8300 (India)

Leave your comment with mail ID and we will answer them

OR

You can write back to us at PrajnaCapital [at] Gmail [dot] Com

 

---------------------------------------------

Invest Mutual Funds Online

Transact Mutual Fund Online

Download Mutual Fund Application Forms from all AMCs

Download Mutual Fund Application Forms

Best Performing Mutual Funds

    1. Largecap Funds Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Birla Sun Life Front Line Equity Fund
    2. Large and Midcap Funds Invest Online
      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
    1. Mid and SmallCap Funds Invest Online
      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
    1. Small and MicroCap Funds Invest Online
      1. DSP BlackRock MicroCap Fund
    1. Sector Funds Invest Online
      1. Reliance Banking Fund
      2. Reliance Banking Fund
    1. Tax Saver Mutual  Funds  Invest Online
      1. ICICI Prudential Tax Plan
      2. HDFC Taxsaver
      3. DSP BlackRock Tax Saver Fund
      4. Reliance Tax Saver (ELSS) Fund
    2. Gold Mutual Funds Invest Online
      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund

 

Popular posts from this blog

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...

Section 80CCD

Top SIP Funds Online   Income tax deduction under section 80CCD Under Income Tax, TaxPayers have the benefit of claiming several deductions. Out of the deduction avenues, Section 80CCD provides t axpayer deductions against investments made in specific sector s. Under Section 80CCD, an assessee is eligible to claim deductions against the contributions made to the National Pension Scheme or Atal Pension Yojana. Contributions made by an employer to National Pension Scheme are also eligible for deductions under the provisions of Section 80 CCD. In this article, we will take a look at the primary features of this section, the terms and conditions for claiming deductions, the eligibility to claim such deductions, and some of the commonly asked questions in this regard. There are two parts of Section 80CCD. Subsection 1 of this section refers to tax deductions for all assesses who are central government or state government employees, or self-employed or employed by any other employers. In...

ULIP Review: ProGrowth Super II

  If you are interested in a death cover that's just big enough, HDFC SL ProGrowth Super II is something worth a try. The beauty is it has something for everybody — you name the risk profile, the category is right up there. But do a SWOT analysis of the basket, and the gloss fades     HDFC SL ProGrowth Super II is a type-II unit-linked insurance plan ( ULIP ). Launched in September 2010, this is a small ticket-size scheme with multiple rider options and adequate death cover. It offers five investment options (funds) — one in each category of large-cap equity, mid-cap equity, balanced, debt and money market fund. COST STRUCTURE: ProGrowth Super II is reasonably priced, with the premium allocation charge lower than most others in the category. However, the scheme's mortality charge is almost 60% that of LIC mortality table for those investing early in life. This charge reduces with age. BENEFITS: Investors can choose a sum assured between 10-40 times the annualised premium...

EPFO can pay 8.5% interest in 2009-10

THE Employees’ Provident Fund Organisation can comfortably offer 8.5% interest rate to its 4.41 crore depositors during 2009-10 and still record a surplus contrary to Rs 139-crore losses suffered by it for giving the same benefit during the current fiscal. The issue of return to the depositors would be discussed at a meeting of the ‘finance and investment committee’ (FIC) on Thursday, agenda for which lists that maintaining an 8.5% interest could still give the fund a surplus of Rs 6.4 crore on the investment made by the fund. If EPFO maintains the interest rate of 8.5% on PF deposits, there will be a surplus of Rs 6.4 crore at an estimated income of Rs 12,994 crore in 2009-10. In case the interest is raised to 8.75%, the fund would suffer a loss of Rs 366.77 crore and the deficit would be still higher at Rs 739.94 crore if the rate of interest is fixed at 9%. FIC gives recommendations on financial matters to the apex EPFO body Central Board of Trustees (CBT), which takes the final ...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now