Sebi’s open offer pricing tweak should boost acquisitions in India

livemint.com:

The Securities and Exchange Board of India (Sebi) has changed its takeover regulations to shield acquirers from cost spikes in the event information of a merger and acquisition (M&A) plan gets leaked. From 1 June, when its new rumour verification framework comes into effect, the pricing formula for an open offer will be stripped of any spike that arises from the stock market getting whiff of a company’s control being in play. At one level, India’s top 100 listed entities will be mandated to confirm, deny or clarify market rumours in case of significant movements in their share price.

This requirement will be expanded to the next 150 companies from December 2024. At another level, a party seeking to acquire a company will have an easier path. Under Sebi rules, if a quarter of a target firm’s equity is acquired (granting a veto on special resolutions), the acquirer needs to make an open offer to shareholders for additional shares that would give it majority control.

A 26% stake bought this way can prove expensive. Currently, to even it out for both the buyer and sellers, this offer price goes by the stock’s average price over 60 days before the announcement, weighted by volumes traded. In case market participants hear of a control play, we often see them piling into the stock, raising its price beyond a level judged reasonable by the acquirer.

Once Sebi’s revised rule takes effect, however, ‘material’ leak-driven upshoots will be clipped out. This, in principle, is fair to retail investors as well, since such gains are not performance led. A level playing field for M&As would serve us well as it has the potential to make our economy more efficient.