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It has been nearly two years since the government decided to divest the public sector oil marketing company, BPCL. On account of various complexities, the divestment was delayed and has now reached stage 2, as per the government. Similar delays were seen in the divestment of Air India. In such a scenario, the valuations at which bidders are interested in acquiring the company no longer hold.
On the flip side, it is not fair that the government divests its stake at pricing based on fundamentals prevailing two years ago. For example, when BPCL divestment was planned, oil prices were hovering around $60 a barrel, while it has crossed the $100 mark now.
Delays in strategic divestment in big companies like BPCL are partly because of their complex structure. BPCL, with its stake in oil production in Africa and a joint venture with Oman Oil, was creating problems as some buyers were not keen on these investments. These were taken care of in subsequent years.
To address the issue of pricing, the Securities and Exchange Board of India (SEBI) has proposed to ease the pricing formula used to determine the open offer price in the case of public sector undertaking (PSU) divestments. SEBI has put up a discussion paper to review the determination of offer price in the case of divestment of PSU companies.
SEBI is right in saying strategic disinvestment in PSUs is at variance with privately executed agreements. In the case of private transactions, the announcement is made upon execution of binding agreements and thus, there is not much impact on the traded price of such target companies.
However, in the case of PSU strategic disinvestment, information comes into the public domain at the time of Cabinet approval and subsequent announcements are also made at different stages -- thus the market price of the PSU concerned gets highly susceptible to such developments.
Even after the announcements are made, the acquirer is identified after a tedious process of scanning to shortlist the bidders, which takes months or years to complete.
Strategic acquisitions from the promoters result in an open offer to the public, the pricing of which is decided by a number of market regulator-imposed conditions. These include higher of the actual price paid by the acquirer to existing promoters or the volume-weighted average price for the previous 52 weeks, 26 weeks, or 60 days before the decision to buy the interest is made public or when the acquisition is actually signed, whichever comes first.
In the case of PSUs, especially those which take a long time, this formula will be of no use.
SEBI is contemplating dispensing with the requirement of 60 days’ volume-weighted average market price based parameter for calculation of offer price.
The question in such a case is the pricing at which an open offer should be issued. The best possible solution will be the average of the current market price. After all, there is no reason why shareholders should be punished for the delays, which are more bureaucratic in nature.
If one believes in the efficient market hypothesis, the market is always right and will adjust to the new pricing. The acquiring company will only buy at the pricing at which it feels right and the market will adjust to the new reality.
SEBI should allow the market to decide the open offer pricing and allow a volume-weighted average price for about 60 days around the time the deal is struck. Keeping it simple is always the best policy.
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Shishir Asthana
Moneycontrol Pro
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