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Market regulator Sebi offers shield against M&A stock price disruptions

New framework, part of rumour-verification norms, will be rolled out on June 1

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The norms were initially set to be implemented in February before the deferment

Khushboo Tiwari Mumbai

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The Securities and Exchange Board of India (Sebi) has made significant amendments to the takeover regulations that could potentially lower the cost of mergers and acquisitions (M&A) for India Inc. The market regulator has said the disruption in stock prices following news reports or leaks of sensitive information will be excluded while computing the open offer price. 

This amendment is part of Sebi’s new rumour verification framework that comes into effect on June 1. Industry players are still awaiting a relatively detailed framework in this regard. 

The volume-weighted average 60-day prior to the announcement is a crucial formula for determining the open offer price. However, news about potential M&A often leaks in the media before the formal announcement, leading to a surge in the target company’s stock price. This results in a higher open offer price, making it relatively expensive for the acquirer.

Legal experts believe that these changes will reassure companies that premature leaks will not affect stock prices and jeopardise the deal. 

“The price protection framework is a welcome development. One of industry’s key concerns was the statutory linkage of the pricing of listed company deals with the pre-deal announcement traded price and the impact of rumour verification on the pricing of deals. While we await details of the framework for the calculation of unaffected price, this is a step in the right direction,” said Anchal Dhir, partner, Cyril Amarchand Mangaldas. 

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From 1 June, the top 100 listed companies will have to confirm, deny, or clarify any media-reported information that leads to a significant price movement of the shares within 24 hours of the trigger. This requirement will be extended to the top 250 listed firms from December 1, 2024. 

The norms were initially set to be implemented in February before the deferment.

“This also encourages listed companies to confidently address market rumours, with the assurance that any resulting volatility in the stock price will not turn away interested bidders -- that is ultimately also a win for public shareholders as it will reduce informational asymmetries,” said Sanjam Arora, partner, Trilegal. 

An industry standards forum of members from industry associations had recommended changes to the earlier approved norms on rumour verification. Following the suggestions, Sebi approved changes in its board meeting held in March. 

However, detailed circulars on the same are awaited. These circulars will bring clarity on the framework to be adopted for taking the unaffected price. 
Under Sebi regulations, pricing for preferential issues, open offers, and several other transactions is based on the volume-weighted average price (VWAP), which is used to calculate a stock’s average price over a period, factoring in the volume traded. Sebi has proposed using the “unaffected price” for such calculations.

“This change seems to be acquirer- and market-friendly, since acquirers will not be required to consider market price movement due to leak of information and subsequent clarifications by the listed target company for deriving the open offer price,” said Supreme Waskar, a corporate lawyer. 

Prithiviraj Senthil Nathan, partner at King Stubb & Kasiva, Advocates and Attorneys, said: “Sebi seeks to provide an accurate reflection of a company’s value, thereby protecting investors from misleading price fluctuations. This transparency in rumour verification helps curb speculative trading based on false information and promotes a more stable and trustworthy market environment.”

On the exclusion of the reported information from generally available information, Natasha Treasurywala, partner, Desai & Diwanji said: “This amendment prevents mischief by an insider from trading based on unverified reports and then taking the defence that the unverified event or information reported in the media was generally available-information.”

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First Published: May 20 2024 | 9:29 PM IST

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