Sebi-empanelled experts to provide take on open offer price

Sebi to empanel valuers; but questions remain on compensation, conflicts of interest

The Securities and Exchange Board of India (Sebi) wishes to empanel experts who can opine on valuation of shares during takeovers or other company schemes which may require an open offer to minority shareholders. This is the first time the regulator is looking to put in place an independent panel of those knowledgeable, to assist in arriving at a fair price, say market participants.

“In terms of regulation 8(16) of the Takeover Regulations, SEBI may require valuation of the shares by an independent merchant banker other than the manager to the open offer or an independent chartered accountant in practice having a minimum experience of 10 years, for the purpose of ascertaining the offer price,” said a tender notice on the regulator’s website.

ARRIVING AT FAIR-VALUE

• Sebi plans to create panel of valuation experts
• They would provide independent feedback on offer price in takeovers, mergers,etc
• Move is a welcome step, but experts say conflicts remain
• Compensation to be paid by company, not Sebi
• Also, there is a link between compensation and size of valuation

This would also apply to schemes of arrangement, which might involve a merger or spin-off of divisions within a company. In such cases too, Sebi might call for an independent opinion on how much the offer price should be.

“…it has been decided by Sebi to empanel CAs who may be entrusted with undertaking valuation work as described above, as and when a need is felt to obtain an independent feedback on the takeover or scheme related case at hand,” it said.

Interestingly, the company would pay the valuer and not the regulator, which experts feel, could create conflict of interest issues.

“The CA firms shall be compensated by the subject company and Sebi shall not make any payment to the empanelled CA firm which is assigned a case,” clarified the note.

Shriram Subramanian, managing director, InGovern Research Services, said no way had yet emerged to address such conflicts of interest. “That is always there…but this way, there is at least a greater degree of independence if the regulator is appointing it, as opposed to a situation where the valuer is appointed by the company itself,” he said.

The firms can charge fees from Rs 1 lakh to Rs 25 lakh, says Sebi. Some also provide for a certain percentage if the consideration amount is in excess of a certain figure. This ranges from 0.002 per cent to 0.0004 per cent of amounts exceeding Rs 100 crore and Rs 5,000 crore, respectively.

Zulfiqar Shivji, international liaison partner and head-transaction advisory services, BDO India, said a transaction fee approach based on bands as opposed to value based is a better means to ensure independence. “If such valuers are paid through a flat-fee structure or through use of a fixed formula, then it is likely to be more fair. Linking compensation to the outcome of valuation should be avoided,” he said.

Valuation itself remains an inexact science and a number of factors can impact whether or not a fair price is arrived at, according to Amit Tandon, founder and managing director of Institutional Investor Advisory Services India.

He said the quality of a valuer and complexity of the business would have an impact on accuracy of the valuation. Besides, the company needs to cooperate and provide information for valuation to be done correctly, all of which cannot be taken for granted.

The regulator’s criteria for empanelment includes a minimum experience of 10 years, and valuation experience of five years. Sebi has given two weeks for eligible entities to apply.