Open offers give harried investors a way out

Prices Of Most Stocks With Open Offer Are At
A Discount Providing Arbitrage Opportunity

Mar 27, 2007
Ashish Rukhaiyar
MUMBAI

IT IS a well-known fact that the equity market is trading with a downward bias, with most of the stock prices down by more than 20-25%. The prevailing uncertainty has infused an element of scepticism about the future, with investors selling at current levels. However, for a group of investors, open offers have come to the rescue, as the offer price is at a significant premium to the current market price.

There are nearly 35 open offers in the pipeline, with most of them providing a decent premium to the shareholders. Moreover, these offers also provide a good arbitrage opportunity where investors can buy shares from the secondary market and tender them in the open offer.

According to Prime Database, open offers of companies like Punjab Tractors, Adani Enterprises, Rane Holdings, Swaraj Engines, Dunlop India and Vinay Cements, among others are either ongoing or will be opening within a month’s time. In most of these cases, a premium in the range of 10% to 50% is available, if the open offer price and the current market price is compared.

Experts say that tendering shares in the open offer is a safe way to book reasonable profits, especially in a falling market. “Most of the times, open offers fail to get the intended number of shares as they are triggered primarily due to regulations. As such, acquirers fail to get the prescribed 20% or more shares in the open offer,” said a merchant banker.

But, this does not mean that the offer has failed, as the acquirer has to accept the shares that have been tendered. This gives investors an easy opportunity to book small but decent amount of profits, he added.

Take for instance Punjab Tractors, where Mahindra & Mahindra has made an open offer at Rs 360 per share. On Monday, the stock of Punjab Tractors closed at 302.40. Similarly, Adani Enterprises is currently trading at Rs 206. Adani Infrastructure Services Pvt Ltd has made an offer at Rs 233 per share. (The offer will open on April 5 and close on April 24.)

Incidentally, there are two types of open offers. One, where the acquirer intends to acquire a minimum 20% shares and second, where the offer is for more than 20% of the paid-up equity capital.

However, investors who tender their shares in the open offer have to factor in the tax component, too. “The tax component has to be factored in and so the offer price is at a premium to the spot,” said Vineet Suchanti, MD, Keynote Corporate Services. “An investor who holds shares for more than one year and then sells it in the secondary market has no tax liability. However, if the same shares are tendered in the open offer, then long-term capital gains tax is applicable.”

EXIT MODE
* Tendering shares in the open offer is a safe way to book reasonable profits, especially in a falling market
* There are close to 35 open offers on the anvil and most of them provide a 10-50% premium to the shareholders
* These offers also provide a good arbitrage opportunity for investors where investors buy shares from the secondary markets and tender them in open offer
* But investors will also have to factor in the tax component