Open Offer Criteria Is Skewed Against Retail Investors In A Rising Market | Open Interest

Open offers are designed to provide an exit opportunity for minority shareholders during significant changes in company ownership. However, under the current pricing framework, most open offers are failing—often quite dramatically.

Since the revision of open offer criteria last year, participation by minority shareholders has dropped significantly. This is primarily because, in many cases following a change in control or stake sale, the market price of the stock is well above the open offer price, making the offer unattractive to retail investors. It makes more sense to exit through open market sales than participating in the open offer.

The guidelines for calculating open offer prices have not only reduced the success rate of these offers but also increased volatility in stock prices. Investors often find it more profitable to sell their shares in the open market rather than participate in the open offer process. This trend is especially pronounced in a bull market, where rising prices make open offer prices seem undervalued and a process inconsequential.

According to SEBI regulations, an open offer is triggered when an acquirer gains 25% or more of voting rights in a company, or acquires 5% or more in a financial year while already holding 25% or more. The open offer price is determined as the highest among the negotiated acquisition price, the 52-week volume-weighted average price (VWAP), the 26-week VWAP, or the 60-day VWAP preceding the public announcement. VWAP is calculated based on the last 30 minutes of trading on the relevant day.

Recent open offers, as seen in the table above, indicate that retail investors are unlikely to participate when the offer price is significantly below the current market price. In such cases, selling in the open market yields better returns. In a falling market, however, the VWAP-based pricing may result in offer prices above current market prices, leaving retail investors with limited exit options.

The current pricing method also fails to account for short-term volatility. Previously, open offer prices were based on the average of weekly high and low closing prices over 26 weeks or the average of daily high and low prices over the two weeks before the announcement. Now, price-sensitive information and volatility just before the announcement are not fully captured due to the longer averaging periods.

This raises concerns about fairness. The system appears skewed in favor of acquirers, who benefit from lower acquisition costs due to reduced retail participation. Meanwhile, retail investors lose a fair exit opportunity, especially in a rising market. Ultimately, the current open offer pricing mechanism does not adequately reflect the intrinsic value of companies in a bull market, and a revision may be necessary to ensure fairness and better participation from retail investors.