M&A experts welcome Sebi norms that protects buyouts from rumour-driven price surges

If there is a sudden surge in the target-company's price because of the rumour, it could make the acquisition more expensive and even unviable for the buying company.

The market regulator's decision to discount the impact of rumours on stock prices during transactions including mergers and acquisitions will help with more efficient price discovery and curb volatility, legal experts said.

The Securities and Exchange Board of India (Sebi) issued a circular on May 21 calling for the exclusion of price disruption caused by rumours while arriving at valuations for an acquisition. The regulations apply to the top 100 listed entities with effect from June 1, and to the next 150 entities starting December 2024.

Also read: Sebi issues guidelines to manage stock impact from market rumours

Market rumours can affect stock prices during an M&A and may increase the target company's share price. For M&A purposes, the value of the target company's shares is determined by taking the adjusted volume weighted average price (VWAP) over a period preceding the public announcement.

If there is a sudden surge in the target company's price because of a rumour, it could make the acquisition more expensive and even unviable for the buying company.

The new framework has a way to exclude such price variations. The framework states that the WAP variation during the period that an unverified rumour is alive - from the day of the material price movement till the end of the next trading day, after confirmation of the rumour - shall be kept out of calculations to determine the true value of the target company.

Leaky system

Dynamic stock pricing has always been a concern in public M&As, said Abhishek Dadoo, a partner at Khaitan & Co.

"It is (unfortunately) common in India for details of listed company deals to leak prior to its finalisation – resulting in substantial impact (typically, upwards) on the market price," said Dadoo.

Harish Kumar, a partner at Luthra & Luthra Law Offices India, pointed out how even after companies put in place robust information-control mechanisms, leaks are frequent and disruptive to the price-discovery mechanism.

"It is often noted that news about potential M&As (which at times are in only the discussion stage) often leak before the formal announcement, which leads to a surge in the price of the securities," said Harish Kumar.

The market is also sensitive to such information leaks, according to Jidesh Kumar, managing partner at King Stubb & Kasiva, a law firm.

"Market participants often react quickly to any news or speculation about potential mergers or acquisitions, which can lead to increased trading volumes and significant price fluctuations," said Jidesh Kumar.

Given these conditions, the new framework should protect market participants from surges in volatility.

Also read: Sebi alters rules to determine market capitalisation of listed firms, to use 6-month average

"Taking the unaffected price as a floor price or offer price for M&A deals as proposed would potentially help maintain price volatility (otherwise caused due to informational asymmetry), which may eventually lead to effective price discovery," said Harish Kumar.

Besides reduced volatility, the other benefits from the new framework include increased transparency on the price-discovery mechanism, ensuring fairer outcomes that are protected from speculative activity and regulatory confidence from knowing that deal prices were not open to manipulation, said Jidesh Kumar.

The new framework, along with the setting of standards on what constitutes mainstream media and what is information that "is not general in nature", will help listed entities in dealing with market rumours, added
Harish Kumar.