EVERY once in a while, in the life of a company, there comes an event which makes investors wonder — should I review my holdings? We take a look at some such events and suggest how you should react as a retail investor to come out a winner.
Mergers And Acquisitions
Generally, when a company is going to be acquired, its stock price rises. This is because the acquirer typically pays a premium over the market price for acquiring the company. Price of the company being acquired goes up, while that of the acquiring company goes down. The premium paid over the market value sweetens the deal and attracts traders with short-term profit motives. Take the recent case of ICICI Bank (ICICI) taking over Bank of Rajasthan (BoR). When ICICI announced it is going to acquire BoR, share price of BoR moved up more than 50% over just three sessions. The stock that benefits the least in the short term is the company doing the acquisition. In most cases, the stock price of the acquiring company falls as it is exposed to greater risk. If there are rumours of a company in your portfolio being up for acquisition, you should be happy and hold on to the stock since there are chances that the buyer would pay a premium.
Strategic Investor
Often, companies raise funds by issuing shares to private equity investors or mutual funds. Such strategic investors, at times, buy a 5-10% stake in a company. A recent example of such a placement is Shiv Vani Oil placing shares with Templeton Strategic Emerging Markets. Similar placement was done by Everest Kanto Cylinders with Reliance Mutual Fund. Most investors think that the price at which these placements are made is a floor price and the stock price cannot go below this. However this could not necessarily be true. Different investors have different perspectives and time frames. These may not match with that of small investors' perspective. Hence, retail investors should buy into stocks after doing their own homework and looking into their own time frame. There are umpteen instances where share prices have fallen below levels at which equity has been allotted to strategic investors. Some of the real estate sector companies have earned dubious fame in placement business.
Bonus And Stock Split
Bonus shares are issued to the existing shareholders by converting free reserves or reserves from the company's share premium account to equity capital without taking any consideration from investors. Generally, a company would issue bonus shares if its business is doing well to reward its shareholders for being with it. Hence, it makes sense to hold on to shares of companies that have good fundamentals and have declared a bonus. Though the price adjusts immediately on the ex-bonus date, the bonus shares take time to arrive in the demat account of the shareholders. If you do not receive such bonus shares in the due course, better to approach the investor relations department of the company. At times, companies split the stock into a lower face value of maybe Rs 5, Rs 2 or even Re 1. This helps create higher liquidity in the stocks, so that a higher number of investors can participate in the same. Long term investors should merely ignore such actions, as such an announcement makes no change in the fundamentals of the company's performance. Like bonus shares, split shares take time to appear in demat account. If you do not receive them, contact the investor relations department of the company.
Special Dividend
Piramal Healthcare is now seen to reward the shareholders with distribution of the cash they will receive towards the consideration for the generics business sale. A special dividend cannot be ruled out. Asset sale leads to such special dividend. Recently, blue chip companies like Hero Honda and Engineers India were in limelight for such a one-time dividend. Post the ex-dividend date, the stock price falls to the extent of the dividend payable. Hence investors must have a good understanding of the business and the fair value of the company. If you are not really upbeat about the company's future, it makes sense to sell in the secondary market, as the cum-dividend price also factors in special dividend.
Rights Issues
Rights shares are those sold by a company to existing shareholders often at a discount to market price. It is very important that the investors keep track of the ex-right date. If you do not intend to participate in the rights issue, better sell the stock before the record date. As the stock goes ex-right, the price adjusts and the investors are mailed the rights form along with the prospects. If you do not receive the rights form, you should get in touch with the manager for forms. Timely submission of the form, along with the consideration, makes you eligible for receipt of the shares.
Delisting Offers And Buyback By Tender
Changing listing norms that demand for at least 25% of public ownership has made many consider delisting. Bright prospects of Indian economy have also accelerated the process. So, no wonder the number of delisting offers goes up. Recent examples here are HSBC Investsmart, broking arm of financial behemoth HSBC. If you get delisting offer, do keep a track of price discovery process. If the share is available in derivatives, you may choose to hedge your position once the price move up in sync with price discovery process. But, if there is no futures market available, be doubly careful. If the delisting attempt is not successful and the company rejects the discovered price, the stock price may simply dive down.
From taxation point of view too it makes sense to sell shares in secondary market than tendering them to the company. For buyback by tender, it makes sense to estimate the possible acceptance ratio by taking into account institutional holding and active investors willing to tender shares. If the secondary market price closes in into the tender price, better sell in the secondary market.
