The Securities and Exchange Board of India, in a recent consultation paper, suggested some leeway on the pricing formula used to determine the open offer price in the case of public sector undertaking (PSU) disinvestments.

SEBI has put up a discussion paper to review this issue.

Delays impact PSUs

According to SEBI, strategic disinvestment of 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 is highly susceptible to such developments, SEBI said.

Offer price formula

Current norms stipulate that the open offer price must the highest of: negotiated price per share under the share purchase agreement that triggers the offer; volume weighted average price of shares acquired during 52 weeks preceding the public announcement; the highest price paid for any acquisition by the acquirer during 26 weeks immediately preceding the PA; and volume weighted average market price for 60 trading days preceding the PA.

‘“Given that in case of PSU disinvestment, the acquirer shall be identified only after the shortlisting of bidders, which may be month(s) or year(s) late since the date when the information was first in public domain, 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 thereafter. And thus its liability for open offer obligations may constantly increase till the execution of agreement of the PSU with the acquirer,” it added.

PSUs must be professional

SEBI now moots that the 60-day volume weighted average market price can be dispensed with in case of PSUs. But there are strong arguments in favour of the regulator sticking with the current rule which is applicable to one and all. The volume-weighted average price formula is simple and can easily be followed by everyone.

Case-to-case basis

Besides, a concession may make PSU divestment process more lethargic and investors should not be punished for unnecessary bureaucratic delays. A strict timeline will make PSU managements and bureaucrats more professional and accountable, benefitting all stakeholders, especially buyers.

SEBI can also ask a PSU company to seek relaxation in open offer price if the process was not done on a time due to “unforeseen circumstances” or “genuine reasons”. Regulator can weigh the merits on a case-to-case basis and offer concession for the genuine delays.

Above all, SEBI should maintain the image that it is scrupulously fair to all.

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