Market regulator SEBI has tweaked the pricing formula for ‘preferential issues’ with the intent of using a more representative price in such share sales.
Henceforth, ‘volume weighted average price’ (VWAP) would be used as a parameter for pricing the preferential issues as against the current requirement of using the ‘closing price’, SEBI decided at a Board meeting here on Thursday.
This is also aimed at bringing consistency between various SEBI regulations, especially with the Takeover Code.
Adopting VWAP as a parameter for pricing was in line with the provisions of the SEBI Takeover Code 2011.
The SEBI Takeover code 2011 had utilised the VWAP as parameter for computing the offer price to be paid by an acquirer.
A better price
“Using VWAP is the best way to go about it. It is more scientific. This is already in use in the developed markets”, Avinash Gupta, Senior Director & Leader-Financial Advisory, Deloitte in India, told Business Line.
For preferential issues, SEBI is now of the view that VWAP is a better representative as it eliminates the outlier effects of high and low prices.
Such a price is a more accurate determinant of the prices at which shares are already transacted, according to SEBI.
The pricing formula in the existing SEBI regulations seeks to result in a representative price by smoothening the effect of day-to-day volatilities affecting the stock price.
In this context, the ‘closing price’ of shares may not be the best representative price at which shares have been transacted for it to be used as a benchmark in the pricing formula, according to SEBI.
Corporate actions
SEBI Board on Thursday also approved taking into account the effect of stock splits, bonus and other corporate actions in the pricing for preferential issues.
For preferential issues, the existing SEBI regulations do not specify any adjustments to be made to the pricing formula if there are events such as stock split and bonus issue.
However, this has been specifically provided for in the regulations concerning qualified institutional placements.
SEBI has now decided to extend the same treatment to preferential issues also.
Infrequently traded shares
The pricing methodology specified in the Takeover Code in respect of infrequently traded shares will be used in preferential issues also, SEBI has said.
Currently, for preferential issues, there are no specific provisions under SEBI regulations for pricing of infrequently traded shares.