Staving off takeover bids

D. Sampathkumar

THERE is more in common between the tribals of Narmada valley and the descendants of India's corporate captains than meets the eye.

Both seek legal recognition for what they consider to be a property right that cannot be alienated either by the State or a third party, under any circumstances.

The tribals of Narmada valley, who are threatened with dislocation from their homelands, demand that they be allowed to carry on with their lives as they, and generations before them, have done for years. They see no reason why they should be uprooted from the lands they have occupied for centuries, merely because some kulak farmer in Gujarat's Bharuch district wants water from the Narmada to grow sugarcane on his land. They may not express themselves quite so explicitly. But there is no mistaking the underlying message that big dams are, per se, bad.

In a somewhat similar vein, Indian promoters, too, have placed a demand before the State. While the tribals feel their ties to ancient lands are inalienable, the promoters say they have an inalienable right to manage the companies their fathers and grandfathers helped set up. Never mind that there is a greater common good for all shareholders in superior corporate performance under a new management. If a predator comes along and bids for shares of the company, the promoters contend that the playing field is not level between them and the former, and want the state (read SEBI) to come to their rescue.

In the past, hostile takeover bids were few and far in between, for various reasons. One, the incumbent management could deny the acquirer the fruits of ownership of shares in the target company by the simple expedient of dragging the matter to a court of law. The legal process for getting one's ownership rights restored were so daunting as to dissuade most prospective bidders to give up the game even before it began. The result was a placid market for corporate control.

Two, for decades, India enjoyed a sheltered economy. The spectre of shortage loomed large in all segments. This killed the spirit of competition among entrepreneurs so necessary for takeover battles. Worse, they realised that they stood to gain more from keeping things as they were, which meant that newcomers had to be kept at bay for the common good of all. This resulted in the tacit understanding among them not to encroach upon the other's territory. But liberalisation upset this delicate arrangement.

Even had they been driven by the takeover spirit, they were stymied by the lack of resources. With the underdeveloped capital market, financial institutions were the monopoly source of all capital. Consequently, the country's premier financial public sector institutions ended up owning big chunks of share capital in practically the entire corporate sector.

The financial institutions were simply not interested in any aggressive play in the takeover market, as they were only too aware of the strong nexus between politicians and businessmen. A businessman under siege in a takeover battle can always be expected to run to the local politician or civil servant to smooth things out with the financial institutions.

But things have changed since then. The policy of liberalisation wiped out the monopoly profits that enterprises enjoyed for long, in an economy driven by shortages. With that went the belief in the virtue of not rocking the corporate boat. Even before liberalisation unleashed the forces of competition, the legal framework for recognition of ownership rights in shares was tightened to the point that it has now become extremely difficult to use filibustering tactics to forestall takeover attempts.

If anything, things have become a lot easier, thanks to the concept of dematerialisation of shares and the book-keeping of ownership of shares assigned to depository institutions. Long before the management even gets wind of any attempt at cornering shares, the depository institutions have already transferred the shares in favour of the acquirer with hostile intentions.

None of this would have mattered in the least but for the current sluggish state of the stock market. But what has really given a fillip to takeover attempts is that companies are valued by the market at prices that do not even cover the liquid cash held by them. There existed a huge arbitrage opportunity in asset valuation between the real market and the capital market for the same assets. In other words, the takeover game has been simply been waiting to happen.

The managements of target companies now find themselves with limited options when faced with a takeover threat. Evidence of their near bankruptcy of tactics can be gauged by the fact that they are reduced to claiming that the acquirer has violated the SEBI takeover regulations. Their argument is that the acquirer did not inform the company as soon as he acquired five per cent of the total share capital in the company _ the threshold limit for the purpose.

Invariably, the acquirer contests this claim. He is able to produce a certificate of posting purported to contain the critical intimation. Needless to say, letters can be conveniently held back at the originating post-office, by `taking care' of the personnel manning it. In any case, even without special efforts or inducements, a letter posted from some remote corner of Bihar or West Bengal is certain to take a long time in finding its way to the recipient.

Ironically, in matters of postal delay, companies are being paid back in the same coin. They have not themselves been averse to using such tactics in shareholder communications. Word of a meeting convened to approve a controversial proposal invariably reached the shareholders too late for it to be of any use. Again, with the exception of the most profitable companies, dividend cheques from others had an uncanny habit of reaching the shareholders days before the validity expired on these instruments.

That being so, to insist that shares should not be registered on this count alone is akin to disqualifying a politician from contesting the election for a mere traffic violation. It is unlikely to work. The truth is that companies have now to reconcile themselves to the fact that an era of hostile takeovers is upon them. Their best defence lies in shoring up their performance. That way they can count on shareholders and institutional investors' support. There is also just a fair chance that even in a sluggish market, the share prices may reflect such superior performance and make it just that much more expensive, if not difficult, to mount a takeover.