Sebi’s open offer price change is expected to boost acquisitions in India

On the one hand, India’s top 100 listed entities will have to confirm, deny or clarify market rumors in case of significant changes in their share prices. From December 2024, this requirement will be extended to another 150 companies. On the other hand, the party wishing to take over the company will have an easier path.

Under Sebi rules, if one-fourth of the target company’s capital is acquired (by granting a veto on special resolutions), the acquirer must make an open offer to shareholders for additional shares that would give it majority control.

A 26% stake purchased in this way may prove expensive. Currently, to equalize the situation for both buyer and seller, the offer price is set based on the average share price over the 60 days prior to the announcement, weighted by trading volume.

When market participants hear about a control play, we often see them flock to a stock, pushing its price above a level considered reasonable by the buyer. However, once Sebi’s revised rule comes into effect, “material” increases due to leaks will be eliminated. This is basically fair to retail investors too, as profits are not performance-based.

A level playing field for mergers and acquisitions would serve us well because it can make our economy more efficient. In an ideal scenario, control of companies would fall to entities best placed to maximize the value they generate for all stakeholders. If this is not the case, market self-correcting mechanisms are expected to kick in. Typically, publicly traded companies that perform poorly will see their share value decline.

Broadly structured companies without a single majority owner are therefore vulnerable to takeovers by parties that may integrate them with other operations or appoint their own managers to better manage them. This not only keeps incumbent market leaders on their toes, but also increases overall value generation by placing assets in more capable hands. Ownership changes can even give dying companies new life.

Minority shareholders, however, may not accept changes in control and direction, which explains Sebi’s mandate of an exit path fixed for them through an open tender for their shares. The price must, of course, be fair, which is why the weighted average formula was created. However, minority shareholder protections should not deter takeovers, which is what happens when prices skyrocket on the hype companies see. Lowering the bar could add some momentum to the Indian M&A arena.

However, complexity can prevent the idea from being implemented. To capture “significant stock price movement,” we need to clearly define it. Indian stock exchanges are expected to develop a framework for it, but market confidence will depend on how convincingly isolated leak movements are.

Determining the exact beginning of a rumor is not easy; Would it be necessary to conduct subjective telephone interviews? The impact of the verification rule on the target company’s share price will also be examined. This part may take some time to sort out. That said, how efficiently our markets operate under the new Sebi rules will determine the difference they make. The regulator’s efforts to balance open offer prices are commendable. Now let’s see some action.