The Takeover code and disinvestment

The Takeover code and disinvestment

Subject: Economy

Why in the news?

SEBI has amended its Takeover Code through amendments to the SEBI (substantial acquisition of shares and takeover) Regulations.

Details:

• The earlier requirement of calculating 60 days volume weighted average market price (VWAMP) for determination of open offer price in case of disinvestment of PSU Companies has been dispensed with.
• Following the announcement of the acquisition, the price of a stock usually goes up–increased cost of acquisition for the acquirer and makes disinvestment less attractive.

Sebi (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 or the Takeover Code

• In case of takeover—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, 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–the share price of such a PSU rises beyond its true value.
• Other three methods for calculating the open offer price in relation to disinvestments in listed PSUs
  • the highest price per share negotiated with the appropriate government under the agreement that triggered the open offer obligations;
  • the volume-weighted average price of shares acquired by the acquirer, if any, 52 weeks prior to the public announcement
  • 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.
    • All these methods do 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.

Concept:

• Disinvestment means sale or liquidation of assets by the government, usually Central and state public sector enterprises, projects, or other fixed assets.
  • The government undertakes disinvestment to reduce the fiscal burden on the exchequer, or to raise money for meeting specific needs, such as to bridge the revenue shortfall from other regular sources.
• Strategic disinvestment is the transfer of the ownership and control of a public sector entity to some other entity (mostly to a private sector entity or other PSU).
  • The disinvestment commission defines strategic sale as the sale of a substantial portion of the Government shareholding of a central public sector enterprises (CPSE) of upto 50%, or such higher percentage as the competent authority may determine, along with transfer of management control.

DIFFERENT APPROACHES TO DISINVESTMENT

• Minority Disinvestment: A minority disinvestment is one such that, at the end of it, the government retains a majority stake in the company, typically greater than 51%, thus ensuring management control.
• Majority Disinvestment: A majority disinvestment is one in which the government, post disinvestment, retains a minority stake in the company i.e. it sells off a majority stake.
• Complete Privatisation: Complete privatisation is a form of majority disinvestment wherein 100% control of the company is passed on to a buyer.