While doing away with several speed breakers in deal making the proposed takeover code also ensures that the retail investors and small stake holders in the acquired company get a fair deal as far as pricing of the offer is considered. Treading the fine line between the ideal and the possible it is with reservations that the committee ?recommends a new pricing mechanism for shares. The new mechanism will function till an alternative method can be put in place.
While the committee maintains that an eventual transition should be made to an environment where offer price has no linkage with the market price parameter in the interim, it recommends the volume weighted average pricing mechanism (VWAP). Eliminating the outlier effects of high and low prices, this will ensure that the resultant price is more representative.
?It has been a demand for a long time that you should be taking into account the volume weights while going for pricing of an offer. Although in an ideal scenario offer price should have no linkage with the market prices I would say that we are making strides in the right direction,? said Prithvi Haldea of Prime Data Base, a portal that tracks capital market activities.
Analysis shows that the 26 week average is considerable below the prevailing market price while in a bear market it could be way above it. ?There were periods in 2008-09 bear market when the 26 week average price was over 60% above the spot price for the SENSEX. The committee had observed that this is a market dampener as it distorts the value of shares.
A longer look back period suggested by the committee will make it more expensive to defer the intended public announcement by the acquirer. Under the current norms acquirers can postpone the public announcement at a marginal carrying cost just to overcome paying the public shareholder the price he has actually paid in the proximate past.