Open offer: What is it and how does it provides an exit option for the shareholders

An open offer is a secondary market offering that enables current owners in a firm to buy new shares in the company on a pre-emptive basis at a price lower than the prevailing market value.

Okay wait, but what is pre-emptive basis?

Pre-emption is a concept that is often implemented by ensuring each current shareholder's minimum entitlement, which is based on their existing investment in the company prior to the offer.

If any promoters of a company choose to expand their stake, if non-promoters wish to increase their stake to 15%, or if the company wishes to delist from the stock exchange, an open offer may be made.

Let us understand it with an example.

Imagine, you are a shareholder of company X and own 100 shares. Now, the company announces an open offer and for every five shares you already own, you can purchase an additional one. So that equals 20 shares.

Let's say the company decides to sell the shares for Rs. 10 each rather than the prevailing market price of Rs. 20. As a result, you can acquire 20 shares for Rs. 200 in total, saving you Rs. 200 compared to the market price.

In India, an open offer is often activated when a company buys up to 15% of the shares of another listed company. In such circumstances, an open offer to buy an additional 20% of the company's shares will be made to the current shareholders.

In the event that current shareholders of the acquired company anticipate potential hazards as a result of changes in the management and business, they are also granted the benefit of an exit option.

Now that you are clear on what is an open offer, another important question is how is it done.

How is an open offer made?

An acquirer must make a public announcement before making an open offer. This announcement must include the offer price, the number of shares that will be purchased from the public, the reason for the acquisition, the identity of the acquirer, future plans, information about the target company, the process for accepting the shares, and the timeframe for this.

Within 15 days of the offer's closure, the purchaser must pay the consideration to the shareholders. The acquirer is liable to pay interest on the amount for any delays.

Having learned the fundamentals of an open offer, can you remember where you most recently heard about it?

Yes, the ongoing saga of acquisition of NDTV shares by the Adani Group Company. As required by regulations, Adani Group announced an open offer to purchase an additional 26% from the company's public shareholders for Rs. 294 per share after acquiring 29.18% of broadcaster NDTV.