Takeover regulations need to work for investors (29 Sep 2003)
Consider this staccato narration of events sent to me by a savvy investor. Suez, a French MNC enters into an agreement to acquire Nalco USA on June 26, 1999. Suez acquires controlling interest in Ondeo Nalco India by virtue of the takeover. The regulator, whose website proclaims, ‘‘Sebi to be the most dynamic and respected regulator—globally’’, receives a complaint on September 14, 2001, that Suez ought to make an open offer for Nalco India. Sebi (Securities and Exchange Board of India) issues a show-cause notice to the company on July 8, 2002—about 10 months after receiving the complaint. There are hearings and submissions at Sebi on September 23, 2002, December 14, 2002 and December 30, 2002. On April 9, 2003, Sebi orders Suez to make an open offer at Rs 370 per share and pay interest at the rate of 15 per cent per annum from August 8, 1999, until the date of payment to all shareholders.
Typically, Suez appeals to the Securities Appellate Tribunal (SAT) in May 2003. SAT, which hears only Sebi-related cases, is yet to pronounce its judgment over three months later. The decision on whether interest should be paid to all tendering shareholders or not will be taken by the Supreme Court in the Colour Chem case, where the case is now pending for about three months now. The same will ultimately apply to Suez.
In the meanwhile, there is another major development. On September 4, Suez agrees to sell Nalco USA to a consortium of companies comprising Blackstone Group, Apollo Management LP and Goldman Sachs Capital Partners for $4.35 billion. Since it has indirectly acquired the Indian company Ondeo Nalco India, which is listed at Mumbai and Kolkata, will Suez still have to make an open offer and pay interest on a company it does not even own? Or will the new overseas acquirer of Nalco US now make the open offer and pay interest which is mounting at the rate of Rs 46 lakh per month?
Interestingly, Ondeo US already held 80 per cent of the equity in the Indian company. This means that they will either acquire 100 per cent of the company after an open offer from Suez, or make the offer themselves and delist the company. Either way, another MNC will exit from the bourses.
Under Sebi’s new takeover rules, such bizarre situations will occur with steady regularity and make India the laughing stock of the world business community unless we hasten the decision making process at our regulatory bodies. And unless regulators react with greater alacrity to changing situations.
In the developed world, business are bought and sold swiftly and the regulators work at helping companies complete all legal and procedural formalities in time. Equally, any compliance failure is also dealt with swift and exemplary punishment. For several reasons, the implementation of the takeover code in India has been especially fraught with delays, indecision and litigation. And the losers are invariably shareholders who are compelled to hang on to shares they would otherwise have sold in anticipation of some long delayed open offer and interest. What happened at Ondeo Nalco, a water treatment and chemical company is by no means unusual. Many Sebi decisions relating to takeovers are disputed and invariably delayed. Often they have even been overturned by SAT, leading to further confusion and uncertainly. For instance, the decision in the Damania Airways case this April happened after investors have given up hope, and it still does not help them. In this case, NEPC Ltd, which acquired Damania, in fact made an open offer in 1996, but simply did not bother to pay investors.
Sebi decided the case in June 2001, and SAT decided to debar NEPC’s promoters from accessing the capital markets for five years. This long delayed decision is hardly a punishment at all, because both NEPC and Damania, both private airlines, have since then closed operations. And given its tattered reputation, the renamed Skyline NEPC is hardly likely to tap the capital market in five years. Similarly, the Italian multinational Luxottica acquired Ray-Ban in 1999, but the Sebi decision on the need to make an open offer and pay interest happened in 2002. And it is still being contested before SAT. Even in the Swedish Match acquisition of Wimco, it was a three-year process before SAT upheld Sebi’s order regarding an open offer this February. In Colour Chem’s case, the battle will finally be decided by the Supreme Court. Why, even in a simple case like Birla Kennametal, investors who tendered their shares had to wait with endless patience to get their payment. In such cases too, investors end up being losers, despite the 15 per cent interest that is usually ordered to be paid by Sebi and SAT. For instance, investors who have had their shares/money locked up in takeover disputes during the raging bull run of the last few months, would certainly have lost a huge investment opportunity due to delayed decisions. The interest can never compensate them for this notional loss. Sebi under the current dispensation has been working hard to clear long delayed takeover cases, when frequent changes in the regulations added to the confusion. But good intentions alone are not enough. Sebi needs to set a time frame for hearing and clearing takeover disputes and this cannot be more than three months after the event. The other bottleneck was usually SAT. Although SAT decisions, have been usually in favour of investors, long delays have again been a problem. Also, it was an open secret that there was little love lost between Sebi officials and the SAT.
That phase too is set to end. According to media reports, the government has finally made up its mind to upgrade and re-constitute the SAT into a three-member body as envisaged under the amended Sebi Act.
But it has to be impressed on SAT too that in business and in the capital markets, more than anywhere else, justice delayed is clearly justice denied. -- Sucheta Dalal