Tender offer
The depository-system mechanism, used for takeovers, buybacks and delisting, that blocks a shareholder's securities in favour of the Clearing Corporation once a tender-offer delivery instruction is submitted.
In plain language
A takeover, buyback or delisting offer works differently from an ordinary market sale. The acquirer is not simply buying shares off the exchange. It is asking existing shareholders to tender their holding through a special mechanism.
The depository system built a dedicated route for this. It is called the tender offer mechanism. A shareholder who wants to join in submits a delivery instruction naming the offer. The depository then blocks the shares in the shareholder's own account. It does not move them out immediately.
How it works
From Chapter 10, section 10.4.3: a SEBI circular dated 13 April 2015 introduced the mechanism for acquiring shares through the stock exchange under tender offers for takeovers, buybacks and delisting. The client's DIS or electronic instruction must carry: Execution Date, Tender Offer Type (i.e. Market Type), Event Number (i.e. Settlement Number), CM BP ID, ISIN and Quantity.
On submission, if sufficient balance exists, the requisite quantity is blocked in the client's demat account in favour of the Clearing Corporation — not transferred out — tracked by the market type and settlement number of the tender offer. Clearing Members need not submit a separate instruction for Irreversible Delivery Out under this newer process. The tender offer instruction is irreversible once executed: a Participant cannot cancel one already "Instruction Ready for Settlement," but can cancel one still "Overdue" or "Future Dated."
A worked example
An acquirer launches a tender offer to buy back shares of Meridian Ltd at Rs 850 each. Mrs Kohli wants to tender 600 of her shares.
She submits a DIS naming the execution date, the tender offer type as market type, the event/settlement number of the offer, her broker's CM BP ID, the ISIN and the quantity — 600. Because she has sufficient free balance, the depository system blocks 600 shares in her own demat account in favour of the Clearing Corporation, rather than transferring them out immediately.
Once her instruction reaches "Instruction Ready for Settlement," she can no longer cancel it — had she instead wanted to withdraw while it was still "Future Dated," cancellation would still have been possible.
Why NISM asks about it
Chapter 10, section 10.4.3, sets out the tender offer mechanism. Expect the six mandatory DIS fields, the fact that shares are blocked (not transferred) at submission, and which instruction statuses can and cannot be cancelled.
Common exam traps
- Tender offer securities are blocked in the shareholder's own account in favour of the CC, not transferred out, at the point of submission.
- "Instruction Ready for Settlement" cannot be cancelled by the Participant; "Overdue" or "Future Dated" can.
- Clearing Members no longer submit a separate Irreversible Delivery Out instruction for tender offers under this newer eDPM-based process.
Check yourself
1.A tender offer instruction in the depository system can be cancelled by the Participant when its status is:
- a)"Instruction Ready for Settlement"
- b)"Overdue" or "Future Dated"
- c)Any status, up to the settlement date
- d)No tender offer instruction can ever be cancelled
Show the answer
Answer: (b) "Overdue" or "Future Dated"
Participant will not be able to cancel the tender offer instructions executed in the depository system and that are in the status "Instruction Ready for Settlement". However, tender offer instruction which is in the status "Overdue" or "Future Dated" can be cancelled by the Participant.
And the general rule: the aforesaid tender offer instruction executed from demat account of the client will be the irreversible nature instructions.
What a tender offer covers: mechanism for acquisition of shares through stock exchange mechanism pursuant to tender-offers for the purpose of takeovers, buy back and delisting of securities.
The six details a client must give on the delivery instruction slip or electronic instruction: Execution Date · Tender Offer Type (i.e. Market Type) · Event Number (i.e., Settlement Number) · CM BP ID · ISIN · Quantity.
What then happens: upon submission of the delivery instruction in respect of tender offer in eDPM system, if sufficient balance is available in the demat account of the client, requisite quantity will be blocked in the demat account of the client in favour of respective Clearing Corporation based on the market type and settlement number of tender offer.
The shares are blocked in the client's own account, not transferred.
Except on an inter-depository instruction: upon receipt of inter-depository instruction in respect of tender offer where the target account in NSDL system is a Clearing Member Pool Account, the shares will be automatically transferred to the Clearing Corporation.
And the clearing member's burden is reduced: Clearing Members will not be required to submit any instructions i.e. neither physical DIS or electronic instructions to the Participants for executing Irreversible Delivery Out (i.e. early Pay-in) instructions in favour of Clearing Corporation, as was done previously.
2.A beneficial owner wishes to tender shares in a company's buy-back offer. How must the securities be transferred out of his BO account?
- a)By an ordinary off-market transfer to the broker's pool account
- b)Only to the respective CM's early pay-in account through the early pay-in mechanism
- c)By normal pay-in from the BO account directly to the Clearing Corporation
- d)By an inter-settlement transfer within the BO account
Show the answer
Answer: (b) Only to the respective CM's early pay-in account through the early pay-in mechanism
The rule is stated as an exclusive one: in case of Buyback and Tender Offer transactions, transfers from the BO account are permitted only to the respective CM's early pay-in account through the early pay-in mechanism.
This follows from what early pay-in is for — availing margin exemptions and other applicable benefits including Buy-back and Tender Offer transfers.
Option A fails because the route is prescribed. Option C describes a facility that exists for ordinary sales but not for buy-backs. Option D is a category error — inter-settlement transfers apply within a clearing member account, moving securities between market-type/settlement-number buckets, and have nothing to do with a BO account.
Where this is taught
Free preparation for NISM Series VIRelated terms
- Block mechanismBlocking of shares in a selling client's own demat account in favour of the clearing corporation, instead of moving them out, to give early pay-in benefit; mandatory for early pay-in since 14 November 2022.
- Clearing member accountThe special demat account a broker or custodian opens to settle exchange trades, through which clients' sold shares go to the clearing corporation and bought shares arrive; also called the pool account.
- Irreversible Delivery-outA manual delivery-out instruction for margin payment or exemption purposes that NSDL's Auto Delivery-out never generates automatically, requiring careful sequencing against any Auto DO for the same securities.
- Market typeThe code identifying which market segment or settlement type a trade belongs to — normal, auction, and so on — that must be recorded on the DIS alongside the stock exchange name and settlement number.