Experts Laud SEBI’s New Guidelines For Fair Pricing In M&A Transactions

SEBI's new guidelines for managing stock price impact arising from market rumours will ensure that the share price used in the merger and acquisition (M&A), buyback, and other transactions are not artificially influenced by speculative market activities, experts said on Wednesday.

Market rumours pertaining to a company's business can create significant volatility in stock prices, often leading to transactions that don't reflect a company's true value. This market rumours could be related to anything, including exiting of top management, cancellation of an order and financial health.

'SEBI's framework addresses this issue by establishing a mechanism to determine the unaffected price -- the price of a stock before the rumour surfaced.

'This price would be used for transactions unless the rumour itself caused price fluctuations in subsequent trading days,' Trivesh, Chief Operating Officer of Tradejini, said.

In its circular on Tuesday, SEBI outlined the framework for calculating the adjusted Volume Weighted Average Price (VWAP) for considering unaffected prices in transactions.

The guidelines also mandates that the adjusted VWAP be calculated by excluding the price variations attributable to the rumour, thereby reflecting the stock's value before the market reaction to the rumour. The aim is to exclude price disruption caused by rumours while determining the price for acquisition.

Generally, unaffected price refers to the share price of a company in case there is no market rumour. Since sharp price movements could impact the overall value of a transaction, the regulator has suggested to consider a scrip's unaffected price.

Under the Listing Obligations and Disclosure Requirements (LODR) Regulations, unaffected prices shall be considered for transactions on which pricing norms specified by it or stock exchanges are applicable. This requirement is also subject to the rumour pertaining to such a transaction being confirmed by the company within 24 hours from the trigger of material price movement.

This prompt confirmation helps in curbing prolonged speculation and provides clarity to investors, Deputy CEO of Anand Rathi Wealth Feroze Azeez said.

The requirement to verify market rumours will be applicable to the top 100 listed companies from June 1 and top 250 listed entities from Dec. 1.

Azeez further said the core objective of this framework is to ensure that stock prices used in transactions are not artificially influenced by speculative market activity. SEBI aims to establish a more accurate and fair pricing mechanism, by identifying and excluding the WAP variation caused by rumours.

This approach helps in mitigating the risks associated with price manipulation and ensures that the transactions are based on their true value.

The unaffected price will be applicable for a period of 60 days or 180 days based on the stage of a transaction, from the date of confirmation of the market rumour till the 'relevant date' under the existing regulations.

Tradejini's Trivesh said the new guidelines offer several benefits such as reduced market manipulation, fair valuations and increased investor confidence.