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Thursday, December 15, 2011

Things You Should Know About Open Offers


When a company acquires shares in another listed company (generally called as the target company) and it’s holding (total stake including previously held shares of the target company) is equal to 15% or more than that, company mandatorily should go for an open offer.

Acquiring company, the company which buys the stake in the target company, makes an offer to existing share holders of the target company  to buy 20% additional shares.

This open offer provides the exit route to the shareholders who may not be willing to own the target company’s shares any longer, for the reasons like possible change in the management in future etc.

But all shares which have been tendered to the acquiring company by shareholders of the target company are not bought by the acquiring company.

Acceptance ration is the ratio of total shares bought by the acquiring company in an open offer to the total shares offered for sale by the shareholder’s of the target company.

Acceptance Ratio= Total Share Bought by the Acquiring Company/ Total Shares Tendered by the Share Holders of the Target Company

Generally company buys shares on the proportionate basis i.e. it shall buy a fixed per cent of shares from each shareholders despite of their shareholding.

If Mr. A and Mr. B are  having 100 shares and 1,00,000 shares of the target company respectively then acquiring company shall buy 40 shares from Mr. A and 40,000 shares from Mr.B in case of the 40% of the acceptance ratio.
Lower is the acceptance ratio more are the chances of falling the share price after the open offer.

The acquiring company fixes the price for the open offer on the basis of following points-
·         price at which acquiring company bought 15% or more shares of the target company
·         average price of the share during last 6 months


The acquiring company sends the ‘Letter of Offer’ to the shareholders of the target company and releases advertisements in the leading dailies about the open offer. Open offer information is also present on the SEBI website.
Investors can transfer their shares electronically (by transferring shares into the designated demat account ) or simply tender paper share certificates.

Tax Treatment

The income received by a shareholder by tendering shares in the open offer falls under the head ‘Income From Other Sources’ and is taxed according to the slab he falls in.

On the other hand, if a shareholder sell s these shares in the open market-
(1)    15 % STCG (Short Term Capital Gain) tax is applicable if the shares are held for a period less than a year.
(2)    If shares are held for a period greater than a year, it becomes the LTCG (Long Term Capital Gain) and as the LTCG is exempt no tax is payable.
When shareholders sell on the exchanges, STT and other exchange charges are applicable.

Should investor tender shares in the open offer or sell on the exchanges?

It solely depends on the open offer price and the present market price of the share along with the cost of the share at the hands of the investor.

Let’s understand this with a lucid example-
Mr. Sharma owns 100 shares of a company which he bought at the rate of 200 Rs. per share.
Market price of the share is 300 Rs. and company fixes the open offer price at 350 rupees.

Suppose Mr. Sharma falls in the 20% tax slab.
1.       If he tenders his shares in the open offer, he shall gain 150 Rs. (350-200) Per share and after paying tax @ 20% , he shall get a profit of 120 Rs. per share.
2.       If he shares are bought before 1 year, LTCG is exempt. Mrs. Sharma shall get a profit of Rs. 100 per share.
3.       If shares are sold within one year of the purchase 15% STCG is applicable. In this case, after the deduction of 15% tax, there shall be a net income of Rs. 85 (100-15) per share.
So in aforesaid case, it is best for Mr. Sharma to tender his shares in the open offer.

Let’s discuss another example-

Mr Singh owns 100 shares of a company which he bought at the rate of 200 Rs. per share.
Market price of the share is 300 Rs. and company fixes the open offer price at 310 rupees.
Suppose Mr. Singh falls in the 30% tax slab.

1.       If he tenders his shares in the open offer, he shall gain 110 Rs. per share and after paying tax @ 30%, he shall get a profit of 77 Rs. per share.
2.       If the shares are bought before 1 year, LTCG is exempt. Mrs. Sharma shall get a profit of Rs. 100 (300-200) per share.
3.       If shares are sold within one year of the purchase 15% STCG is applicable. In this case, after the deduction of 15% tax, there shall be net income of Rs. 85 per share.
So in aforesaid case, it is best for Mr. Singh to sell his shares in the open market instead of tendering in the open offer. 

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