Rahul Das, Parker Karia and I have a piece in today's Financial Express on the SEBI modification to the takeover code for public sector companies seeking divestment linked here. 

Disinvestment: Sebi’s much-needed tweak to open offer norms

While Sebi’s recently proposed amendment to the takeover Code will incentivise disinvestment, the cumbersome process itself has not been addressed

Sebi recently proposed an amendment to the mechanism for determining the open offer price in case of disinvestment of listed public sector undertakings or PSUs. In terms of Sebi (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 or the Takeover Code, in situations such as a change in the majority ownership or control over a listed company, the acquirer is required to make a public announcement, thereby providing the public and minority shareholders of the company an exit option by offering them an opportunity to sell their shares to the acquirer at a particular price (open offer price). The public announcement contains details about the offer such as the transaction that triggered the open offer obligations, acquirer, selling shareholders, offer price, etc. The Takeover Code provides various methods for calculating the open offer price, the highest of which is considered to be the open offer price. One such method entails calculating the volume-weighted average market price of the shares for 60 days before the aforementioned public announcement.

In the case of private transactions, the use of the above method for calculating the open offer price is favourable to the acquirer, owing to the degree of predictability enjoyed since information related to the acquisition reaches the public domain only after the execution of binding agreements. On the other hand, any news regarding the government’s disinvestment of their holdings in a PSU reaches the public domain right from when a proposal for disinvestment is considered by the government. This is followed by several other processes, the progress of which reaches the public domain almost immediately on account of various factors, including announcements made by the government itself. In fact, the public announcement under the Takeover Code is practically the final leg of the disinvestment process. During the entirity of the time that elapses from the moment news of the government’s plan to disinvest its holdings in a PSU is first made public till the public announcement, which could range anywhere from a few months to a few years, the share price of such a PSU can undergo significant upward rallies resulting in an inflation of the price per share, well beyond its true value. Given the trend of undue inflation in share prices, the acquirer’s final liability towards the offer price is always prone to a surge induced by the market frenzy post disinvestment announcements. In fact, in the past, the share price of some PSUs undergoing disinvestment has seen a rise in the share price anywhere ranging from 200% to upwards of 300% in a span of merely 6 months.

Thus, if the volume-weighted average market price of the shares for 60 days before the public announcement of the open offer is used as a methodology to calculate the open offer price, it leads to an extremely inflated price per share, resulting in the imposition of a heavy burden on the potential acquirer. More often than not, this results in an increased cost of acquisition for the acquirer, thus jeopardising the disinvestment process of the PSU itself. It also disincentivises potential acquirers from participating in the disinvestment process of listed PSUs, since the acquisition costs are often unpredictable and can be extremely high.

In view of the above difficulties faced by acquirers in the case of disinvestment of listed PSUs, Sebi has proposed that the parameter of 60 days volume-weighted average market price for calculating the open offer price be dispensed with. This relaxation is proposed to be extended to the indirect acquisition of any entity that the PSU has a stake in that may be triggered on account of government disinvestment from the concerned PSU. Further, the acquirer would have to disclose the negotiated price for the acquisition, be it direct or indirect.

If Sebi’s proposals are implemented and the Takeover Code is appropriately amended, there would exist three methods for calculating the open offer price in relation to disinvestments in listed PSUs—(i) the highest price per share negotiated with the appropriate government under the agreement that triggered the open offer obligations; (ii) the volume-weighted average price of shares acquired by the acquirer, if any, 52 weeks prior to the public announcement; and (iii) the highest price paid or payable by the acquirer for acquisition of the target company’s shares in the 26 weeks preceding the public announcement. Employing any of the above three remaining parameters for calculating the open offer price would not take into account the inflation in the PSU’s share price that may be caused on account of information related to the government’s plan of disinvesting its holdings in a listed PSU for a long time. Sebi’s proposal will further incentivise potential acquirers to participate in the disinvestment process, as they would have a clearer idea of the potential acquisition costs involved. Further, the reduced acquisition cost would result in acquirers being able to direct capital to other ventures as well, thus resulting in a freer and more efficient flow of capital in the economy. It would also go a long way to halt speculative trading in the stock market in respect of concerned listed PSUs.

While Sebi’s proposals are aimed at reducing the impediments surrounding the disinvestment of PSUs and to provide for a more rationalised and effective disinvestment process, it may be noted that the genuine upward movements in the share price of PSUs from the time the decision or proposal for disinvestment becomes public till the public announcement is made under the Takeover Code, would not be considered while determining the open offer price , which would be detrimental to the public and minority shareholders. It may also be noted that the existing mechanism under the Takeover Code allows for acquirers to seek an exemption from the obligation of making an open offer. However, Sebi’s proposals do not address the larger issue, which is the cumbersome process involved in the disinvestment of PSUs. Sebi’s measures to ensure that a fair and reasonable open offer price is offered to the public and minority shareholders do not result in the shortening of the timeline for disinvestment of PSUs, which can even be as long as a few years. The onus, therefore, falls on the relevant government, which must ensure that the processes followed prior to the triggering of the open offer obligations of the acquirer under the Takeover Code are carried out in a fair, swift, and time-bound manner.