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Open offer clause to stay, Sebi tells divestment ministry

Janaki Krishnan

The Securities and Exchange Board of India has turned down the divestment ministry's suggestion that the capital markets watchdog amend the open offer clause after the government sells a public sector company.

Under Sebi regulations, when an acquirer picks up 15 per cent or more of the equity of a listed company, the open offer clause is triggered off.

The markets regulator has argued that an open offer is a must in the interests of small investors who would otherwise be deprived of an exit opportunity.

The ministry has taken the view that the open offer provision distorts the pricing mechanism and the government ends up being the loser.

Sebi has instead suggested to the ministry that the government take the reserve price or the market price-whichever is higher-as the base price for bidding for listed public sector companies. This will help the Centre to get a higher price through the divestment route.

Sebi's suggestion has as its backdrop the ministry's pitching for an amendment to the open offer clause in the light of the CMC divestment experience.

The successful bidder, Tata Consultancy Services, offered a price of Rs 197 per share of CMC against the reserve price of around Rs 140 per share. However, the average market price at the time of making the bid was much higher than the offer price-Rs 280 per share.

In other words, while making an open offer TCS will have to cough up a higher price than the price at which it will pick up 51 per cent government stake in CMC, making the government a loser -- even if notionally -- in the process.

According to top Sebi officials, if the "reserve price or market price, whichever is higher" provision is accepted by the ministry, the government will not lose out even if the reserve price is lower than the market price.

Even though it is not mandatory for the government to accept the Sebi suggestion on its divestment, it is likely to follow this as the government will benefit from it.

This will ensure the sale of PSU stocks at market rates and dampen the process of prices being artificially jacked up in the run up to the open offer in order to arbitrage between the market price and the open offer price.

According to the ministry, when operators and investors smell an open offer, they start ramping up the share price of the company being sold.

Companies that bid for the stake, however, discount the market price and quote a price based on the reserve price which is lower than the market price.

While market players make a killing by resorting to massive buying and selling in the run-up to the open offer (since the offer price has to be the average price of the scrip for the last six months), the government stands to lose.

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