Stock market regulator, Securities and Exchange Board of India’s (SEBI) proposal to alter the manner in which open offer price is determined during strategic sale in PSUs can prove to be quite helpful to the Centre’s disinvestment programme, even while arresting speculative activity in these stocks. The intent behind SEBI’s open offer provision in takeover regulations is to provide an exit to existing shareholders in a company at a fair valuation when the control of the company changes hands. The open offer price in a listed company is determined by taking into account the price at which the stake was sold to the acquirer and the volume-weighted average market price of the share over a period of 60 days prior to the date of public announcement. The higher of the two prices is fixed as the price offered to public shareholders. This method of determining the offer price is not suitable for public sector enterprises because news about the prospective stake sale is known to everyone as soon as the Union Cabinet makes a decision in this regard. The long gap between the Cabinet decision and the final PSU stake sale results in heightened speculative activity in these stocks, influencing prices. This has been evident in the sharp rallies in stocks such as BPCL, Shipping Corporation of India and CONCOR ever since they were identified for strategic disinvestment. 

Such speculative rallies deter the acquirer company as it will need to keep revising upwards its cost of acquisition. Given the heavy reliance of the Centre’s finances on disinvestment proceeds, it is best to iron out any wrinkles in the stake sale process. The proposal in the discussion paper to dispense with the requirement to consider 60 days’ volume weighted average market price for calculating offer price appears sound. If the existing shareholders are also offered exit at the same price at which the acquisition of stake was done, it will provide greater visibility and certainty to the acquirer on the cost of acquisition, increasing the possibility of closing the deal. With tax revenue generation in FY23 clouded in uncertainty due to the impact on businesses of the war in Ukraine, disinvestment receipts will acquire a critical dimension. While the Centre has been able to divest smaller stakes through public offers or through exchange traded funds, privatisation or sale of controlling stakes has been much more difficult; these revised rules can ease the process a bit.

Besides these smaller changes, the Centre needs to deliberate on the reason why the disinvestment program is showing such slow progress, once the pandemic abates. A revised road-map needs to be drawn up for the disinvestment policy unveiled in 2021 — which included manner in which the Centre needs to exit or close down PSUs in non-strategic sectors while retaining small stakes in PSUs in strategic sectors such as atomic energy, transport and communication and power. Besides, it is important that the SPV for monetising surplus land with various ministries and departments begins its operations soon.

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