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Sebi's decision to tweak open offer rules for PSU divestment sweetens the deal for acquirers: Analysts

Currently, any acquirer that triggers an open offer after buying a stake in the company has to calculate the open offer price using the volume-weighted average market price of shares for a period of 60 trading days immediately preceding the date of the public announcement.

NOIDA / September 30, 2022 / 10:13 PM IST
Representative image (Source: ShutterStock)

Representative image (Source: ShutterStock)

In order to sweeten the deal for acquirers of public sector undertakings (PSUs), the Securities and Exchange Board of India (Sebi) on September 30 tweaked regulations that govern open offers following a takeover of a company.

The market regulator in its board meeting amended SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, doing away with rules that mandate acquirers of PSUs to calculate open offer price using the last 60 days' prices.

“The Board, therefore, approved the proposal to dispense with the requirement of calculating 60 days’ VWAMP for determination of open offer price in case of disinvestment of PSU Companies (target company), wherein it results in its change in control, either by way of direct acquisition or indirect acquisition,” Sebi said in a release.

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Market analysts believe this has likely been done after the government made a representation to Sebi. They believe, though this is not a big change, it sweetens the pot for strategic investors in PSUs.

“It is a good step,” said Deepak Shenoy, Founder of Capital Mind. “The step sweetens the deal for acquirers. After this even if prices go up following the acquisition, the acquirer can say that you sell me shares at the same price during the open offer.”

Currently, any acquirer that triggers an open offer after buying a stake in the company has to calculate the open offer price using the volume-weighted average market price (VWAMP) of shares for a period of 60 trading days immediately preceding the date of the public announcement.

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Usually, just after a deal is announced, share prices make big movements. In the case of private transactions, details are made public only upon execution of binding agreements, whereas in the case of PSUs, the government is required to make public announcements at different stages before the actual deal happens. This makes stock prices react even before the deal happens.

“Considering the unique nature of transaction and process involved in a PSU disinvestment spanning over a long period, such a requirement of determination of open offer price under the takeover regulations many a time acts as an impediment in fructifying such strategic disinvestment of PSUs,” Sebi reasoned.

Makarand Joshi, founding partner, MMJC and Associates – a corporate compliance firm, said he sees the merit in the Sebi’s decision.

“Following the announcement of the acquisition, the price of a stock usually goes up. From an acquirer's point of view, this makes buying out PSUs unviable. He may have agreed to a negotiated price with the government but he would suffer heavily if he has to give another price during open offer which will usually be much higher according to the 60-day price discovery method.”

Sebi also changed another rule pertaining to the same regulation. The market regulator approved the proposal to permit the acquirer to provide an unconditional and irrevocable bank guarantee for the entire consideration payable under the open offer which will be an alternative to the existing requirement of depositing cash, subject to the approval of RBI.

Also read: Sebi okays proposals for greater disclosure by companies; approves redemption and dividend payout reforms

Sebi said such a guarantee needs to be issued by a scheduled commercial bank having a ‘AAA’ rating on any of its long-term debt given by a SEBI-registered credit rating agency.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Shubham Raj is a journalist with over five years of experience covering capital markets. His last stint was with The Economic Times where he wrote on daily happenings in stock markets and led IPO reportage. He also wrote on mutual funds and cryptocurrencies.
first published: Sep 30, 2022 10:02 pm