Open Offer Pricing Methodology
Under Regulation 8 of the SEBI (SAST) Regulations 2011, the open offer price must be the highest of several benchmarks including the volume-weighted average market price for 60 trading days prior to the public announcement, negotiated price, and highest price paid by the acquirer during the 52 weeks before the announcement.
The open offer price determination framework under Regulation 8 of the SAST Regulations is designed to ensure that the price offered to public shareholders in a mandatory or voluntary open offer is fair and reflects recent market reality as well as the premium being paid in the negotiated transaction.
The price must be the highest of the following: the volume-weighted average price (VWAP) of the target company's shares traded on the stock exchange with the highest trading volume during the 60 trading days preceding the public announcement date; the highest price paid or agreed to be paid by the acquirer or any person acting in concert during the 26 weeks prior to the announcement; the price paid for any acquisition by the acquirer under a primary market offering during the 26 weeks prior; or the VWAP during the two weeks preceding the announcement date.
The VWAP over 60 trading days (approximately three months) is intended to capture the share's market value over a reasonable averaging period, smoothing out temporary price spikes or troughs. The 60-day VWAP is the most commonly cited benchmark as it typically represents the highest benchmark in a scenario where the announcement is accompanied by a significant price jump.
For open offers in cash, the price is straightforward. For share exchange offers, which are permissible under the SAST Regulations, the fairness opinion from an independent merchant banker is required to assess the exchange ratio.
The open offer must remain open for a minimum of 10 working days, with the tendering period following the public announcement and detailed public statement (DPS). The manager to the open offer (a registered merchant banker) must verify the adequacy of the escrow account deposited by the acquirer before the public announcement.
In competitive bid scenarios, a competing acquirer may make a higher open offer during the tendering period, triggering an upward revision mechanism.