Strategic Support: SEBI’s proposal will help disinvestment

News: The Securities and Exchange Board of India (Sebi) has released a consultation paper proposing to change open offer pricing norms for public sector undertakings (PSUs).

What are the present Rules regarding open offer pricing norms?

Under the rules in the SEBI Substantial Acquisition of Shares and Takeovers Regulations, 2011, an acquirer has to make an open public offer for an additional 26 per cent if the threshold of 25 per cent ownership is crossed.

The price formula for the open offer is based on several parameters. For a listed company, it must be the highest price calculated under the following criteria:

1. The negotiated price per share for the acquisition;
2. The volume-weighted average price paid by the acquirer (if any) during the 52 weeks preceding the public announcement;
3. The highest price paid or payable by the acquirer in the 26 weeks preceding the public announcement;
4. The volume-weighted average market price on the stock exchanges for 60 trading days preceding the public announcement.

What is SEBI proposing?

The regulator is proposing to remove the 60-day criterion specifically for PSUs. In the case of PSU disinvestment, the intention to disinvest is often stated publicly at the time of the Budget, or in other official forums. The acquirer is identified only after the shortlisting of bidders, a process which may take months.

Hence, public news flow usually leads to a significant rise in market price before a formal public announcement of the deal. In this context, the regulator has rightly noted that “the prospective acquirer shall be chasing a moving open offer price as the market price tends to rise pursuant to announcement of the divestment and various stages”.

What will happen if the 60-day criterion is removed?

If the 60-day criterion is removed, the open offer price given to minority shareholders will probably be set at around the same levels or marginally higher than the price offered to the government.

Such a change to the open offer pricing formula may make such strategic deals more affordable and, hence, more attractive to acquirers. This would also reduce volatility in stock prices and allow the government to arrive at a fair valuation more easily.

Source: This post is created based on the article “Strategic Support: SEBI’s proposal will help disinvestment” published in Business Standard on 28^th March 2022.