Introduction
An open offer takes place when the company wishes to raise capital efficiently. As a secondary market offering, the open offer allows stakeholders of a company to buy shares/stocks at a lower price when compared to the stock's prevailing market price.
Understanding Open Offer
Unlike the rights issue (offering), open offer restricts investors from selling the rights of their purchases to third-parties. In order to prevent dilution of the company's existing stakeholders, the company issues an open offer through which the stockholders will be allowed to buy stocks from the company.
In the same line, the rights issue allows investors to trade the rights associated with the shares of the company.
The period during which an open offer or rights issue is valid generally last from 16 to 30 days. Also, the rights issues are valued at a price below the prevailing market prices and these rights can be transferred to third-party investors.
How Does It Work In India
In India, an open offer is generally activated when a company acquires another listed company by up to 15% shares. In such cases, the existing stakeholders will be given an open offer to purchase an additional 20% of the company shares.
Existing shareholders of the acquired company are also given the benefit of an exit option, in case they expect potential risks due to change in the management and business.
Once the offer price is determined by the acquiring company, a public announcement is to be made in the newspaper. The announcement will also be available on the Securities and Exchange Board of India (SEBI) website as the takeover code is regulated by the SEBI.
The letter of offer, disclosing information of the offer price, purpose, and management of the acquiring company, will be sent to the stakeholders of the company being acquired. The addressed letter will also mention the procedures involved in accepting the stakeholders tendered shares.
