Under the Rights issue, the company issues new shares to existing shareholders to raise funds. Usually these shares are given at a discount (lower than the current price). New shares are issued to shareholders in proportion to the shares they already hold. As such, if a company announces the granting of a rights issue in 2:5 the shareholder will have the right to buy 2 shares for every 5 shares of that company. After the shares issued in the rights issue are listed, they can be bought and sold in the same way as common shares.
Share partition
Under this process, a share is divided into several shares, due to which the market price of the shares reduces in proportion to the division. Besides, its face value also reduces in the same proportion. For example, if a company announces division of a share with a face value of Rs 10 in 5:1 and its market price is running at Rs 2,000, then after the split. Generally, companies resort to share division only to increase the turnover of their shares.
Repurchase of shares
Promoters adopt two methods to increase their stake in the company – either they gradually buy their company’s shares from the open market or they ask existing shareholders to sell their shares to the promoter at a specific price. The second process is called buyback. In buyback, the promoter proposes to sell his shares to the shareholders by a specific date. Due to this, on one hand, the promoter has stake in the company increases and on the other hand the share of general public decreases. This puts positive pressure on the share price. Buybacks are generally considered good enough for the company, as it shows that its promoters have full confidence in their plans and the future of the company.
Open offer
Like a rights issue, it is a means of raising funds for a company, in which the company proposes to its shareholders to purchase shares at less than the current market price. It is different from a rights issue in the sense that shareholders can immediately sell the shares received in the rights in the market, but the shares received in the open offer cannot be sold immediately.
If any promoter of the company wants to increase his stake in the company or any non-promoter increases his stake in the company to 15 percent or in case of delisting in the company from the stock exchange, an open offer is brought.
(i) What is the open offer?
If any promoter of the company wants to increase his stake in the company or any non-promoter increases his stake in the company to 15 per cent or in case of delisting from the stock exchange of the company, an open offer is brought.
Through open offer, shareholders get the option to liquidate their stake in the company by selling the shares. The company has to make a public announcement for an open offer. When the acquiring company increases its stake in another company to 5 per cent or 10 per cent or 14 per cent, it has to inform that company and the stock exchange every time.
Once the acquiring company’s stake in another company becomes 15 per cent, it has to announce an open offer. According to the rules, the acquiring company has to bring an open offer for at least an additional 20 per cent of the shares. For an open offer, the price of each share of the company should not be lower than its average for the last 26 weeks.
What are the conditions for the announcement of an open offer?
The company offering the open offer has to publicly announce it. The company has to provide information about the offer price of the shares, number of shares to be purchased from shareholders, purpose of acquisition, identity of the acquiring company, future plans and duration of the open offer. Within 15 days of the closure of the offer, the company has to pay the share prices to the shareholders. In case of payment delay, the company has to pay interest on the amount paid to the shareholders.
What is the difference between open offer and rights issue?
The purpose of a rights issue is to raise funds, whereas in an open offer the company or promoter has to spend money. Often the share price under a rights issue is lower than the share price running on the stock exchange. In an open offer, the share price is decided on the basis of its average price for the last six months. Here often the fixed price is higher than the prevailing price of the share in the stock exchange. Shareholders sell their shares due to high prices. Shares purchased through open offers other than rights issues are not traded on the stock exchange.
After an open offer, the share of common shareholders in the company decreases, while after a rights issue, the share of common investors in the company increases due to increase in the number of shares.
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