Simply Put: Acceptance Ratio

Two friends meet over a cup of tea and start talking about their investments and get into the following discussion:

Akshay: Hey! Recently I have been hearing a lot about something called “Acceptance ratio” along with Buyback, you got any idea?

Chandra: Oh yeah! It is the percentage of shares that are accepted or bought back by the company out of total number of shares tendered for buyback to the company. It is not very likely that the company will buy back all the shares tendered to it for buyback and therefore acceptance ratio becomes very critical. For any shareholder, assumptions of this ratio hold significance, because you can guess how many of the shares you tendered are actually going to be bought back.

Akshay: What do you mean by accepting shares tendered for buyback? In a buyback, the company wants to repurchase its shares and we sell it to them in the market, isn’t it?

Chandra: You are referring to open market buyback, where the company’s brokers buy the shares of the company from markets directly and in such cases acceptance ratio is not relevant, as there is no legal obligation on the company’s part to complete the buyback. It may choose to not go through the process any time it wishes.

Akshay: Then when does acceptance ratio come into play?

Chandra: Acceptance ratio comes into the picture when the buyback is being done through “tender offer”.

Akshay: What is a tender offer now?

Chandra: Tender offer means an offer by a company to buy back its own shares or other specified securities through a letter of offer to the holders of the shares or other specified securities of the company. The company determines a specific price, and the shareholders can tender their shares by placing order with their brokers.

Akshay: So, what has acceptance ratio got to do with this?

Chandra: Acceptance ratio is a very important aspect in case of tender offer where shares are bought back based on the size of the buyback and the number of shares tendered. If the number of shares tendered are higher than the size of the buyback, then it is done on a prorated basis. Therefore, this ratio becomes important as all the shares tendered by shareholders will not be bought back. Just as all the shares that one has subscribed to in an IPO will not be allotted if there is over-subscription.

SEBI regulates that 15 per cent of a tender offer should be reserved for small shareholders (holding shares of value less than ₹2 lakh). Thus, if you are a small shareholder, then your acceptance ratio may be higher than that for others.

Akshay: Why is that?

Chandra: If the number of small shareholders in a company is lower than 15 per cent of total shareholders, which is the case in many companies, reserving 15 per cent of buyback for them will result in better acceptance ratio for them. For example, if a company is buying back 10 per cent of its shares, then buyback of 1.5 per cent (15%*10) of outstanding shares is reserved for small shareholders.

Let’s assume, in this case, the small shareholders account for 5 per cent of total shareholders. If all the shareholders across categories tender, then the acceptance ratio for small shareholders will be 1.5/5 = 30 per cent, versus for the rest it will be 8.5/95 = 8.9 per cent.

Akshay: So, you mean shareholders use acceptance ratio in order to make their decisions of tendering or not?

Chandra: Yes, the premium in the buyback price over current share price and likely acceptance ratio are factors that influence this.

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