Do Sebi's actions indicate fresh thinking on its part? (27 October 2002)
In what is probably the most pro-investor decision in decades, the Securities Appellate Tribunal (SAT) has tossed the Gujarat Ambuja-ACC deal back into the regulator’s lap and directed it to investigate whether Gujarat Ambuja Cement Ltd (GACL) has in fact gained control of ACC’s management after it acquired the 14.5 per cent Tata stake. The SAT order is in response to a petition filed by ACC shareholders who claimed that GACL’s acquisition triggered regulation 12 of the Takeover Code whereby, ‘no acquirer shall acquire control over a company without making an open offer to public shareholders of the target company’ (at the same price).
The decision is extraordinarily significant because of the eminent reputation of the two companies involved in this deal and the two others that emulated it. Let us look at some details. GACL acquired the Tata stake in ACC in three tranches at a price of Rs 370 per share, which was more than three times its ruling market price of around Rs 110. The first tranche of 7.2 per cent was acquired in December 1999 and was claimed as a ‘strategic investment’. The claim was obviously hogwash because nobody pays such a steep premium for a ‘strategic investment’ without management control, when plenty of shares were available in the open market at less than a third the acquisition price. None other than Attorney General Soli Sorabjee ratified this brazen claim. But Sorabjee also said that if there were a change in the facts and circumstances of the case, it would have to be revisited and examined afresh. The regulator ignored this crucial little detail when it went along with the GACL claim and exempted it from making an open offer.
GACL then acquired a second tranche of 4.2 per cent of the Tata equity at the same price in April-May 2000. It followed this up with a third acquisition of 3.05 per cent of the equity in September 2000. It now had a 14.5 per cent stake in ACC, which was a whisker below the 15 per cent limit, which would have triggered the open offer clause under the Takeover Code. GACL had acquired the third tranche of shares within days of Sebi granting an exemption from making the open offer. Since then GACL has two directorships on the ACC board and openly includes ACC’s cement capacity along with its own in various presentations that it makes to financial institutions. Even then the regulator did not bother to seek a second opinion from the Attorney General or to use its own judgement in the matter. Instead, it ratified the GACL claim forcing angry investors to file an appeal with SAT. If the ACC-GACL deal involved the most reputed business houses in the country, then Grasim’s acquisition of a similar stake in Larsen and Toubro (L&T) falls in the same category. In fact the Birlas did one better than GACL. Not only did they buy the Reliance holding in L&T at a substantial premium to market (leaving retail investors in the cold), but have had the temerity to hike their stake beyond the 15 per cent trigger and then announce an open offer at Rs 190 a share. This is substantially lower than the price of Rs 306 per share that they paid to Reliance.
The SAT order in the ACC case will not force Sebi to rethink such exploitative manoeuvres by India’s most blue chip business houses. Ruling on the ACC issue, the one-man SAT tribunal headed by C. Achuthan, said, “I think the object of the Sebi Act and the Takeover regulations would materially be frustrated if one resorts to a narrow interpretation of the concepts of control. He has directed Sebi to investigate the acquisition and to decide its future course of action based of the investigation. ‘It was incumbent on Sebi to make a detailed investigation and decide the issue instead of disposing of the complaint in an adjudication style’. It also says that no serious efforts seems to have been made to find out whether control had been exercised ‘in any other manner’ referred to in the Code. The SAT order says that the regulator had not looked at whether GACL was in a position to effectively exercise control over ACC. And that the regulator had only depended on submissions made by the parties involved—GACL, ACC and the Tatas. The order says, “It is also futile to expect the Ambujas or the Tata group or ACC to voluntarily furnish any material which would not support their contention.” Interestingly, although Sebi followed the same pattern in investigating Grasim’s purchase of the Reliance holding in L&T, with some inputs from the two stock exchanges, in that case the submissions themselves point to large-scale manipulation and insider trading (a copy of Sebi’s internal report is available with me for almost a year). With SAT having directed Sebi to reopen the ACC case, it will hopefully be forced to wind up its investigations and rule on the issue before Grasim’s offer opens for subscription.
Sebi’s takeover code is probably among the most discredited of its regulations. The code is meant to protect retail investors and to ensure them a fair deal in corporate takeovers, but has done nothing of the sort. In fact, 84 per cent of all corporate acquisitions and takeovers have escaped the open offer rule of the Sebi code. Ironically enough, Sebi has just begun to crack the whip on past violations. Just last week it ordered three companies to make open offers to retail investors and directed them to include a hefty interest component in the offer price. Among these is Clariant International’s acquisition of Colourchem Ltd where Sebi has ordered the acquirer to pay a 15 per cent interest over the acquisition price. It also rejected an exemption from the open offer requirement sought by Amtrex Hitachi appliances.
Do Sebi’s recent actions indicate fresh thinking on the part of the regulator? After all, a new chairman now heads Sebi and he has already demonstrated that he intends to do things differently. If it does, then the SAT order will be just the handle that the regulator needs to revise the earlier decisions and redeem Sebi’s credibility through some bold new orders. -- Sucheta Dalal