After five long years, the committee on Substantial Acquisition of Shares and takeovers has submitted its report and hopefully that will be the end of its tenure. Within months after the takeover regulations were notified in 1997, the committee headed by Justice P N Bhagwati was reassigned the task of plugging gaping loopholes in its code. Those loopholes have been a goldmine for the corporate sector — advised by the members of the same committee.
The takeover rules were expected to create a fair and regulated environment to govern change in management, but in fact have only helped set up hurdles in the path of hostile takeovers. They were also expected to protect retail investors interest by ensuring that an acquirer offers to buy at least 20 per cent of retail holdings at his acquisition price. Even that did not work; 84 per cent of takeovers escaped using the many exemptions conveniently provided by the code. The question then is: has the Takeover Committee now levelled the playing field for retail investors and potential acquirers? No. It has fixed a few problems and enhanced Security and Exchange Board of India’s role, but the changes remain against investors’ interest. Let us look at a few key issues.
Last year, the government (with full support from Sebi) hurriedly introduced an ordinance making it easier for companies to buy back their own shares, and enhanced the creeping acquisition limit from five to 10 per cent for a six-month period. This was ostensibly done to improve market sentiment. Although it did nothing of that sort, government quietly extended the concessions by another six months.
Strangely enough, the Takeover Committee goes beyond its own brief and what government has proposed by recommending that the enhanced creeping acquisition limit of 10 per cent should be extended until March 2004. This pro-industry recommendation was made despite a strong dissent by Prof Manubhai Shah, the sole investor representative on the committee.
The same attitude is apparent with regard to preferential allotments. Such allotments are the subject of several litigations filed by investor groups over the years, and they continue to be misused by promoters even today. In fact, leading market intermediaries admit that preferential allotments are an anachronism in a modern capital market and ought to be scrapped forthwith. Yet, the experts on the takeover committee have in fact endorsed preferential allotments, by keeping them outside the purview of the takeover code.
A third curious decision is to permit open offers to promoters who already hold a 75 per cent stake (para 3.4). Clearly, consolidation of holdings beyond 75 per cent smacks of an intent to delist. Yet the committee permits an open offer of 20 per cent beyond this level, although it would violate listing rules by leaving just five per cent equity in public hands. One issue that remained untouched despite investors’ pleas was the automatic exemption route for making open-offers to investors. The Investor Grievances Forum points out that automatic exemptions are the subject of maximum investor complaints. Prof Manubhai Shah in a dissenting view has stated that such exemptions are “overwhelmingly anti-investor and defeat the very purpose of the regulations”. But the committee simply ignored him and expanded the list of exemptions to make them more comprehensive.
The surprise is that the committee has failed to address the shenanigans that occurred in strategic sales in Larsen & Toubro and ACC. In these cases (including BSES Ltd) the incumbent “professional management” seemed unduly eager to accommodate the new acquirers of a block of shares in their company. Board changes were effected with alacrity with no explanation to investors about their advantage. Institutional investors and mutual funds also remained mute although the acquisitions were deliberately structured to leave retail and institutional investors in the lurch. Gujarat Ambuja, which acquired 14.5 per cent Tata stake in ACC, in two-stages beat the guidelines by 0.5 per cent but violated the spirit of the takeover rules. The acquisition was sanctified with a legal opinion from Soli Sorabjee. The L&T acquisition by Grasim was preceded by large-scale and brazen price manipulation by Reliance (disciplinary action by Sebi on the issue is still awaited). In both cases, the block sale of shares were sold at rates above the market price. The Committee felt no need to question why these companies would pay a huge premium without management control. Instead it seems to ratify a control premium of upto 25 per cent that ordinary investors cannot get.
Isn’t it curious that a caste system is being created even within a capitalist construct? Equity holders are considered equal owners of companies when it comes to taking a loss on their investments, but promoters want to walk away with a ‘control premium’ for themselves when they exit! Did the committee fail to grasp the injustice of this or did it deliberately ignore the issue? Another oddity is regarding the concept of postal ballots (para 4.2). The committee has said that when there was change in control without acquisition of shares, it should be passed by special resolution with a postal ballot to ensure investor participation. But postal ballots are meaningless when incumbent management, which is an interested party, is allowed to participate. Again, the committee ignored a suggestion to this effect, and tilted the balance in favour of management. The Sebi board now needs to address such aspects of the takeover code that were overlooked by the Committee. Sweetheart deals between industrialists ought to be banned and managements should be made more accountable to shareholders and asked to explain how major shareholding changes would benefit the company. Professional managers should also be strictly held to their fiduciary responsibilities if new strategic partnerships end up in backdoor acquisitions.
But more important than a mere change in the rules, is the need for better accountability on the part of the regulators themselves. We cannot have a situation where the battle between a powerful Kishore Chhabria and Vijay Mallya remains unresolved for seven years because Sebi is reluctant to use its powers. Or a Colour Chem Ltd, which got away by flouting Sebi orders rejecting its claim for an exemption from making an open offer because Sebi failed to monitor the issue.
Finally, there is the issue of Committee members providing legal advice and investment banking services to the most notoriously anti-investor takeovers in recent times. Although this committee has completed its tenure, it is important that Sebi introduces some rules and constraints on the members in future. -- Sucheta Dalal