Strategic support

Sebi's proposal will help disinvestment

The Securities and Exchange Board of India (Sebi) has released a consultation paper (“Review of Determination of Offer Price in case of Disinvestment of PSU Companies”) proposing to change open offer pricing norms for public sector undertakings (PSUs). While the changes could make PSU takeovers more attractive for strategic investors, these might reduce the potential returns for minority shareholders. The logic of the proposal is pragmatic, considering the processes involved in PSU divestment. 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: The negotiated price per share for the acquisition; the volume-weighted average price paid by the acquirer (if any) during the 52 weeks preceding the public announcement; the highest price paid or payable by the acquirer in the 26 weeks preceding the public announcement; the volume-weighted average market price on the stock exchanges for 60 trading days preceding the public announcement. A similar pricing formula applies if the direct acquisition implies indirect control of another listed entity. There is a floor to the open offer price. It cannot be lower than that provided to the existing substantial shareholder. The 26-week/52-week criterion takes care of situations of creeping acquisitions where the acquirer has built a stake through market purchases.

The regulator is proposing to remove the 60-day criterion specifically for PSUs. The point is, unlike in a private takeover, there is flow of public information for an extended period prior to the official announcement of a divestment or strategic sale. In the takeover of a private company, the public announcement occurs only when there is a binding agreement and, hence, there is relatively little share price impact in the preceding period. 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”.

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. If the PSU in question has cross-holdings, offering indirect control of other listed entities, the 60-day criterion will be similarly dispensed with, in the calculation formula. 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. The government needs to push the disinvestment programme more aggressively to support economic revival.