BOMBAY, 11 June — The Indian Public Offerings (IPOs) market or the primary market has as good as dried up. And probably to make up for this, off late, there has been a slew of “Open Offers” at lucrative prices from various blue blooded companies. Open Offers refers to the practice wherein the company offers to buy back its own shares from the shareholders at a price which is normally higher than the listed price.
When Open Offers came in, it was like a gift and all were happy. But then all good things do come to an end. And it looks like this dream run is also nearing the end. At least that is what the data released by Prime, a data base on the primary capital market infers.
According to Prime, during the just concluded fiscal 2000-01, there were 77 open offers, which was up by 4 percent from 74 made in 1999-2000. Of these, foreign companies or FMCGs made only 7 open offers in 2000-01. In terms of value, the total offer size aggregated to Rs. 1,584 crore, up by 238 percent from Rs. 469 crore in the year before.
But despite the marginal increase in the number of open offers, it seems that the response from the shareholders has been extremely poor. Only 10 of the 77 offers managed to acquire the targeted shares, the balance — 67 offers or 87 percent — failed miserably. It was so bad that 13 companies could not elicit any response at all.
Why did the open offers flop? Well, there were two main reasons. Firstly, most of these open offers were technical issues and secondly, the offer prices were very unattractive. As many as 40 offers were made at a discount to the face value, 10 offers at face value and only 27 at a premium to face value.
It was mostly noticed that more than shoring out their stakes in the company, the open offers were made for various frivolous reasons. As per Prime, as many as 30 offers were made solely for the purpose of acquisition of a small listed company and then changing its object clause to undertake a new business activity. And of these 30 companies, the new business activity of as many as 28 companies was to get into ICE — information, communication and entertainment — sector.
Sixty-seven offers were for takeover, seven were in the nature of consolidation of holdings and one for substantial acquisition. In as many as 11 cases, the disclosed objective was de-listing from stock exchanges.
In fact it has now been seen that open offers have become the most preferred route to get the companies delisted. Between April 1998 and March 2001, as many as 41 companies have made open offers for delisting. And delisting was opted mainly by companies being taken over by their Indian promoters, or by good Indian companies being acquired by MNCs, or by domestic units of MNCs getting converted into subsidiaries.
The list of Indian companies, which have already been acquired by MNCs with the objective of delisting them from the local bourses, include Rossel Industries, Poritts & Spencer, Bundy, Kemwell International, Industrial Oxygen, GE Capital Transportation, Punjab Anand Lamp, Philips, International Bestfoods and Orient Cerlane.
Several Indian promoters have also used the open offer route for eventual delisting. Over the last three years, companies that have delisted are Bharti Telecom, Merind, Albright & Wilson, Superior Air Products, Tata Advanced Materials and Tata SSL.
Shareholders might have got disenchanted with the open offers but there seems to be no cooling down by the companies. In the current fiscal, within the first two months of 2001-02 itself, as many as 25 offers have already been announced and the main objective is de-listing.
Prominent among these are Carrier Aircon, Otis Elevator and Hitech Drilling. But what is pertinent is that in most of these new offers in the current fiscal, the offer prices are in excess of the market prices to make the offer attractive to the domestic shareholders. And by laying down this bait, it is expected that more and more shareholders will go for the offer. In fact it is better to exercise the option as this is probably the best option and, also would get stuck once the stock gets delisted.
One more phenomenon noticed with buybacks is that announcements of buybacks and open offers, lead to a lot of speculation in the stock and props up the stocks for a few sessions. But once the initial euphoria is over, the shares settle to lower levels or discount levels.
Take for example the case of Finolex Industries. The company had fixed a buyback price which was 60 percent more than the prevailing market price. However, the scrip is back to square one. Currently, the scrip is at a discount of 42 percent to its buyback price. GE Shipping and Siemens are also trading at a discount to their buyback prices.
Companies like Raymond, MICO, Carborundum Universal, Finolex Cable, Jayshree Tea, Sterlite and Bajaj Auto are reeling below not only the buyback price, but also below the price when the buy back was announced.
The good news, however, is that a few stocks are trading not only above what they were trading when the buy back was announced, in fact, they have managed to cross buyback price. These stars are Reliance, Ashok Leyland and Indian Rayon. One clear conclusion from the above is that while a buyback/open offer can stop the slide in price, it is not enough to ensure a sustained rise — other fundamentals are more important.
And if companies continue to use the open offers route to mainly get the companies delisted, then this is not a very healthy sign for Indian stock markets as it will get further shorn of several good, blue chip companies, making the markets more shallow.
