Sucheta Dalal :Sebi Needs To Refocus For Improvement (6 May 2002)
Sucheta Dalal

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Sebi Needs To Refocus For Improvement (6 May 2002)  

The media gleefully lapped up the fantastic copy that former finance minister, P Chidambaram provided at the Confederation of Indian Industry’s annual meet when he blasted the stock market regulator. He said among other things that—“Sebi, over a period of seven years, became so complacent, self-praising, smug and non-transparent.” This writer fully supports his view. But when industrialists join in the Sebi-bashing one needs to examine their charges more carefully. Mr Chidambaram told chairman G N Bajpai that he needs to undo and to correct a lot that is wrong with the Securities and Exchange Board of India; but let us not forget that it is industrialists who have been the biggest beneficiaries of a weak Sebi. They have used their considerable influence to hobble and weaken the regulator to the point where the out-going Sebi chairman himself complained about the growing clout of corporates and how they jumped on you at the first hint of disciplinary action. It is another matter that he was willing to be influenced.

Industrialists worked at several levels; they manipulated discussions and packed Sebi’s innumerable committees with their lawyers, chartered accountants, financial advisors and investment bankers in order to change and dilute rules in their favour. That Sebi has too many committees which overlap each other was an advantage, because the sum total of various recommendations gave them bigger benefits. Another advantage was that Sebi invited interested parties on to its committees. For instance, the Takeover Committee set up under Justice P N Bhagwati’s chairmanship, emanated from a couple of controversial takeovers in 1996. Investment bankers involved in the deals were immediately incorporated into the committee. It is no wonder then that the takeover committee, despite repeated amendments tends to leave in several large loopholes; or that 84 per cent of all takeovers ended up getting exempted from making an open offer to retail investors.

Companies hate open offers and work hard to avoid them even when the price offered if reasonable. Experience shows that investors do not participate in open-offers when the acquirer is a reputed company. The CMC acquisition by the Tatas is proof. Although the Tatas were forced to make the offer at a substantially higher rate than the control-price that they paid for CMC, the open-offer received a tepid response. Investors not only welcomed the Tata management, but immediately benefited from the acquisition. Yet, how many companies realise that a failed open-offer is the best possible accolade from investors?

Instead, you have former blue chips such as ACC and Larsen & Toubro passively supporting the most brazen back-door acquisitions by colluding with the equally reputed acquirers. Worse still, the investment banker who helped engineer such anti-investor deals is a vocal member of the takeover committee. Nor surprisingly, Sebi has yet to act upon the flood of investor complaints, litigation and protests that followed the Gujarat Ambuja’s acquisition of the 14.5 per cent Tata stake in ACC and Grasim’s acquisition of under 15 per cent of L&T’s equity. On the contrary, NA Soonawala of the Tatas was incorporated on the takeover committee.

It also continues to drag its feet over investigations into the price manipulation by Reliance just before the L&T deal. Having returned Reliance’s restitution cheque of Rs five lakh, Sebi seems in danger of letting the company go scot-free. The Bhagwati committee’s latest decision to leave preferential allotments outside the Takeover Code smacks of exactly such a pro-industry bias. Takeover rules are not the only ones that benefit industrialists. A combination of preferential allotments, creeping acquisition (of as much as 15 per cent of the equity) and share buyback rules help build fortresses. Ironically, share buybacks rules were eased through an ordinance, ostensibly to improve market sentiment but have only allowed promoters to shore up their stakes.

The combination of relaxations has ensured that even the worst managed companies are protected against hostile takeovers. They cannot be wound up either. A series of archaic statutes such as the BIFR, Sica and statutes such as the Bombay Relief Undertakings Act (which exists only in Gujarat and has helped Arvind Mills and Essar Steel) are there to protect bad management. A worse distortion of rules pertains to the public shareholding of listed companies. In the 1980s, stock exchange listing rules mandated that 25 per cent of a listed company’s shareholding should be in public hands.

During the dotcom mania, investment bankers lobbied successfully to ensure that Information Technology companies were allowed to list with a 10 per cent public offer. Investors’ protests were ignored, even though it was obvious that a larger offering would lower share premia and dampen the hysteria over IT stocks. Instead, the new rules ensured quick riches for new-economy entrepreneurs, many of who were a part of the Ketan Parekh bandwagon. They ultimately left investors a lot poorer and further damaged the IPO market. Gradually, the 10 per cent norm was extended to infrastructure companies and later to all companies above a specified size. The takeover rules also confirmed the lower public holding. They specified that a company would be compulsorily delisted through a buyback from retail investors, only when public holding drops below 10 per cent. We now have the irony of Rahul Bajaj suggesting a 24 per cent public holding for MNCs!

To his credit, the Sebi chairman seems to have identified the core problem. He spoke about the triangle of regulation, which included self-regulation, regulation through market discipline and by the regulatory authority. He spoke about their structure and competence and said that regulatory bodies need to improve on a continuous basis given the blurring of boundaries between different players and increasing complexity of the markets.

In order to effect such continuous improvement, Sebi needs to focus on two issues. First, it should scrap all its committees and reconstitute them. It could first list its existing committees, study their deliberations, and identify those where many of the issues discussed seem to overlap. These could then be merged and re-constituted based on attendance and public interest. Finally, Mr Bajpai would do well to pay attention to Mr Chidambaram’s view that we have to shed the notion that retired judges and retired bureaucrats are best suited to man regulatory bodies or head various committees. There are plenty of examples where these eminent personalities have been shockingly partisan, biased in favour of industry/brokers or plain out-of-depth. Their decisions have embarrassed the regulatory process and Sebi.

-- Sucheta Dalal