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SEBI asked to amend rules on takeover norms

Our Bureau

NEW DELHI, July 13

THE Department of Disinvestment (DoD) has requested SEBI to amend the takeover regulations to provide for change of management control, as soon as the Government transfers its shareholding to a strategic partner.

The DoD wants SEBI to permit the handing over of management to a strategic partner prior to the completion of the mandatory open offer.

The justification for this is that in the case of a Government company, the risks involved in completing the transaction within the mandatory period for the open offer without effective transfer of management is far greater. This would adversely impact t he valuation and, in turn, the realisation from the sale of shares, according to a senior DoD official.

The Government reckons that there is a fair chance of the sale process being stymied during the period of the open offer in the form of legal suits and the risk of reopening of agreements due to Parliamentary intervention.

Resorting to this move comes against the backdrop of the Balco disinvestment, which was almost derailed subsequent to the sale agreement having been signed. The sale was legally challenged in the Delhi and Chhattisgarh High Courts.

To bolster its case, the DoD has told SEBI that it would build a clause in the shareholders agreement, ensuring that the strategic partner deposits a significant sum towards the open offer in an escrow account at the time of the management change itself. If at the end of the open offer, the strategic partner is unable to complete the deal, the Government would trigger off the penalty clause, whereby the strategic partner's share is bought back at a 50 per cent discount to the sale price.

The DoD Secretary, Mr Pradip Baijal, and senior officials of the department made a presentation to a panel on takeovers constituted by SEBI and headed by Mr Justice Bhagwati.

The DoD has also sought a few other changes to the takeover guidelines, saying existing SEBI guidelines had not anticipated strategic sale of listed public sector enterprises.

One of the amendments to the takeover regulations, sought by the DoD, is to factor in cases of disinvestment to avoid a situation where a strategic partner does not end up making a open offer to the public twice. This theoretically can happen in cases of PSUs where the Government disinvests in tranches.

The argument advanced to support the exemption in this case is that the shareholders agreement itself provides for first offer of the remaining shareholding to the strategic partner. Therefore, there is no sense in making a second open offer, the DoD has reasoned.

It also sought an exemption from making a full 20 per cent open offer in select cases of PSU disinvestment. This has been sought to prevent the possibility of some of the PSUs being delisted. However, the takeover panel rejected this proposal.

The other proposals will now be considered at the next board meeting of SEBI. The proposals were deferred at the last board meeting on July 6.