IIAS raises queries on offer price after demerger

The issue is being raised in the backdrop of the proposed demerger of Crompton Greaves' consumer electrical business

The proxy advisory from IIAS on Thursday released a report highlighting that there is a need to have a method to arrive at the offer price for companies in the absence of trading history.

The issue is being raised at the backdrop of the proposed demerger of Crompton Greaves’ consumer electrical business. The demerger has left the industry baffled on what should be the appropriate offer price in such complex transactions.

The institutional advisory firm has suggested that Securities and Exchange Board of India (Sebi) should come out with guidance for the market in such complex transactions.

“Given the way this deal is structured there is no trading history for the consumer electronics business and the Sebi Takeover Code does not specifically state how the offer price should be determined in a situation where the trading history of the stock is less than 60 days,” said IIAS in the report.

The demerger was proposed in August this year to hive off the consumer electrical business in a separate entity. The company proposed to give one share of the electrical business to shareholders for every two shares held. This was post the deal of the promoter group, Avantha with Advent International and Temasek to acquire 34.37 per cent stake in the company. The open offer would be made by Advent and Temasek together.  

IiAS has raised a question on how one arrives at the right open offer price in such conditions. “Should the open offer price be at the negotiated price or should it be determined by market forces,” asks IIAS.

IIAS also factored in the fact that if Sebi asks the shares to be traded for 60 days and then sued to determine the offer price leaves room for manipulation. And using only the negotiated price based "fair market value" opens the risk that promoters and acquirers would be incentivised to not share full value with minority shareholders.

The report concludes that the market watchdog needs to provide a clear direction and consistent approach for such transactions.