How should Investors Take the Right Call on open offers and buybacks

Open offers and buybacks give a lot of scope for investors to make healthy profits if they are alert and aware of the pitfalls. But investors need to carry out their own research on the company before taking the right call. ET's Ramkrishna Kashelkar tells you how to go about it.

It will be impossible to find an investor on Dalal Street who hasn't heard of the terms 'open offer' and 'buyback'. For many, these corporate actions mean a surge in share prices and quick profits. In fact, stocks do tend to go up in most cases when an 'open offer' or 'buyback' programme is announced offering a lucrative exit opportunity to the shareholders. However, when deciding on how best to respond to them, many investors are often confused. Companies, in need of funds, raise money through qualified institutional placements (QIPs), rights issues and preferential allotments. On the other hand, cash-rich companies, utilise excess cash to consolidate their holding through open offers, buyback and delisting. These special situations offer a lot of scope for making healthy profits if an investor is alert and aware of the pitfalls.

OPEN OFFER:Open offers have always been a preferred option for promoters and corporate acquirers and raiders to increase their stake in their firms. The Securities and Exchange Board of India's (Sebi) 'Substantial Acquisitions and Takeover Code' also mandates a stakeholder to launch an open offer in certain cases. (See box: Codes Decoded)

BUYBACK : Like dividends, buybacks are also regarded as an important mechanism through which a company rewards its shareholders. Unlike open offers, which are most often triggered by the Sebi's guidelines, buybacks are voluntary decision by the company. Hence, it becomes necessary to check out the trigger for the company to go for a buyback.

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