Key Takeaways
- Existing shareholders buy new shares at a discount.
- Basic entitlement plus optional excess shares available.
- Simpler and less regulated than rights issues.
- No tradable rights; no cash if unused.
What is Open Offer?
An open offer is a capital-raising method where a company offers new shares to existing shareholders at a discounted price, allowing them to maintain their proportional ownership. This pre-emptive right helps shareholders participate in funding without going through the complexities of a full public offering.
Unlike rights issues, the entitlements in an open offer are not tradeable, meaning shareholders cannot sell their rights in the market.
Key Characteristics
Open offers have distinct features that differentiate them from other equity issuance methods:
- Discounted Share Price: Shares are offered below current market value to incentivize participation.
- Pre-Emptive Rights: Shareholders receive a basic entitlement proportional to their existing holdings.
- Excess Application Facility: Provides an option to apply for additional shares beyond entitlement, subject to availability and scaling.
- Simplified Process: Requires fewer regulatory steps compared to rights issues, reducing administrative costs.
- Non-Tradeable Entitlements: Shareholders cannot sell their rights, so non-participation results in no cash proceeds.
- Transparency: Companies must clearly communicate offer terms, including price, ratio, and offer period.
How It Works
When an open offer is announced, each shareholder receives an entitlement to purchase new shares in proportion to their existing stake, for example, 1 new share for every 5 held. This entitlement is priced at a discount to encourage uptake and protect shareholders from dilution.
Shareholders can also apply through the Excess Application Facility to buy additional shares beyond their entitlement. However, allocation of excess shares is not guaranteed and may be scaled back if demand exceeds supply. This process helps companies raise capital effectively while giving shareholders a chance to increase their paid-in capital in the company.
Examples and Use Cases
Open offers are commonly used by companies needing quick capital injections without extensive regulatory hurdles. Here are some typical examples:
- Airlines: Delta has used open offers to raise funds while allowing existing investors to maintain their ownership stakes.
- Growth Companies: Firms featured in best growth stocks guides often utilize open offers to finance expansion without diluting control.
Important Considerations
Participating in an open offer can be beneficial to maintain your ownership and avoid dilution, but it requires careful evaluation of the company's prospects and the value offered. Since entitlements are not tradeable, choosing not to participate results in a loss of potential investment rather than a cash benefit.
Additionally, understanding your rights, including any tag-along rights, and monitoring the offer terms closely will help you make informed decisions during such capital-raising events.
Final Words
An open offer lets you buy additional shares at a discount to protect your ownership from dilution. Review the offer terms carefully and calculate whether participating aligns with your investment goals before committing.
Frequently Asked Questions
An open offer is a secondary market offering where existing shareholders can buy new shares at a discounted price below the current market value. It allows companies to raise capital by offering additional shares on a pre-emptive basis to their current shareholders.
Each shareholder receives a basic entitlement, which is the right to purchase a proportional number of new shares based on their existing holdings. For example, a 1-for-5 offer means a shareholder with 100 shares can buy 20 new shares at the discounted price.
Yes, shareholders can apply for additional shares through the Excess Application Facility. However, these extra shares are not guaranteed and may be allocated on a pro-rata basis if demand exceeds supply.
If shareholders do nothing, they will not receive any cash or benefits, as open offer entitlements cannot be sold in the market. Their ownership may be diluted if they choose not to buy the discounted shares.
Unlike rights issues, open offer rights cannot be traded or sold, and shareholders receive no cash if they do not participate. Open offers are simpler with fewer regulatory hurdles and often include an Excess Application Facility for buying additional shares.
Companies use open offers to quickly raise funds for growth, debt repayment, or operational needs while allowing existing shareholders to maintain control. This method is less complex and helps build shareholder confidence through transparent communication.
Yes, in some jurisdictions like India, open offers are mandatory when an acquirer gains more than 25% of voting rights or crosses certain ownership thresholds to protect shareholder interests.
