Should you take the open offer route to stock selling?
With two open offers already announced, and a few of others in the offing, we weigh the options of selling directly vis-a-vis the open offer route.
Several open offers are lined up, where the promoters of publicly-listed companies are offering to purchase the shares at a premium.
For example, GlaxoSmithKline Pharma announced an open offer for 24.33% share capital on February 13, 2014. The stock price is presently trading close to its 1-year high of Rs3,049. The share was trading at Rs2,983 just before the open offer announcement. You can tender your shares till March 5, 2014 at a price of Rs3,100 per share.
A little less than three weeks ago, Onmobile Systems announced that it will buy up to 11.9 million shares of OnMobile Global at Rs40 per share, which then was 31.4% higher than the close of the day at Rs30.45. One can tender the shares between April 3 and April 21, 2014. While writing this article (February 28, 2014), the shares were trading at 31.75 on NSE, which isn’t in comparison with the offer price. It touched a peak of 33.75 on Feb 12, 2013, when the details of the offer were announced.
Sterling Holidays Resorts’ offer would open between April 7 and April 23, this year, where a price of Rs98 per share has been offered to acquire 26% of the share capital.
Before giving in to these offers one should consider the following:
1. The price differential between the current stock price and the offer price
2. If the company is looking to delist
3. Future prospects
4. The chances of tendered shares being accepted. You should go for a higher ratio of: the stake in an open offer divided by the stake held by external investors
5. Any expected policy change lined up (for instance in the case of GSK Pharma, the new drug pricing policy caps sale price of drugs)
In case of HUL – which had an open offer in Jun 2013, where the company offered a price of Rs600 per share – those who benefitted were people who didn’t tendered their shares. The company’s stock price increased to Rs700 a month later.
If you argue that HUL is a one-off incident, the tax implications would be able to guide you better.
Shares sold under open offers would be counted as off-market transactions, where a long-term capital gains tax is applicable, if the shares have originally been bought a year ago. You will have to pay a tax equivalent to 10% (non-indexed) or 20% (indexed) on the sale. If you held the shares for less than a year, then the income earned would be added to your income.
Interestingly, there is no long-term capital gains tax if you sell shares directly through the stock market instead of through an open offer. Only Securities Transaction Tax of 0.1% would be applicable. Shares sold directly within a year of buying would attract a 10% tax.
If you have held shares for over a year, selling through the market makes more sense than going for the open offer, in terms of taxes.