Takeover code -- Proposed changes promote vested interests

S. Vaidya Nathan

SOME of the changes for the takeover code proposed by the takeover panel of the Securities and Exchange Board of India (SEBI) smack of capitulation to the vested interests in Corporate India -- incumbent managements/owners. Clothed in the garb of enhancing transparency, the moves are actually detrimental to the interests of shareholders and the development of a vibrant market for corporate control.

Acquirers of shares now (be it with an intent to takeover a company or strategic investors) have to disclose holdings to the stock exchanges and the company if their stake goes past five per cent of the equity. This is intended to provide information on an investor acquiring a sizeable stake in a company.

This could be a warning signal about the possible takeover of the company, especially if the acquirer is not intending his exposures as an investment or he has cut no deals with the incumbent management/owners.

Three-step disclosure: Now the SEBI takeover panel, headed by Justice P. N. Bhagwati, wants disclosures at three stages -- 5, 10 and 14 per cent of equity. This has been proposed on the grounds that it would enhance transparency. This seems nothing but a veil spun for the sake of Corporate India by the Bhagwati Committee and SEBI.

Notably, the third threshold limit fixed for disclosure is just a percentage-point away from the 15 per cent-limit which triggers an open offer under the SEBI takeover code (SEBI Substantial Acquisition of Shares & Takeovers Regulations). If implemented, this proposal would lead to a higher level of disclosure. But to whose benefit?

Sparse benefits: There may be isolated cases where the three-step disclosure may lead to higher prices. As soon as the 10 per cent and 14 per cent limits are crossed, speculation about an open offer may lift price levels sharply.

But it is also quite possible that in many such cases, the acquirer may be an investor or have no intent to make an open offer. The investor may well be content with a board position to have a say in the management. In such cases, the speculative pressure triggered by the three-step disclosure may quickly abate and prove detrimental to shareholders.

Stifling takeovers: But the more dangerous consequence is that the three-step disclosure may stifle takeover activity and hinder the development of a vibrant market for corporate control. It may raise the price at every disclosure on the back of speculative activity.

The incumbent managers/promoters may also ramp prices in connivance with selected operators to make a possible takeover bid expensive. These activities may serve to make the price of the open offer that much more prohibitive.

It could put off any would-be acquirer if he sees the price as prohibitive. And it may also at the outset deter would-be acquirers from launching a takeover bid by picking up the initial stake since they know that the prices may be bid up or ramped up (by existing owners) to put off the acquirer.

The aggregate effect may stifle activity in the takeover markets. Even in a corporate world, populated by a large number of well-run companies, this would be costly from a macro-perspective, though in the odd instance, it may lead to shareholders getting a better price on account of the three-step disclosure.

In a corporate world such as India, where companies that have treated shareholders poorly heavily populate the place, any measure that throttles the market for corporate control does not serve the interests of shareholders and in the aggregate, the public good as well.

Serving private good: Barring a few exceptions -- the list of investible stocks is narrow at about 150 in a market that has 9,000 listings -- companies have had inefficient managements, and even where there is some efficient management, they are subject to the whims and fancies of the promoters.

By perpetuating the ownership of Corporate India with such managements/owners, the larger public good is affected and the benefits of transparency, which were used to cloth the Bhagwati panel proposal, would be substantially less than the loss to shareholders of Corporate India and the public good.

Status quo is fine: The three-step warning would give incumbent managements/promoters three formal warnings of a possible acquisition and provide them an opportunity to nip any activity in the bud. The existing one-stage disclosure of stake at five per cent has worked well.

It has certainly not prevented shareholders from getting a good price in a takeover situation with the possible exception of BSES. In this case too, the absence of a promoter group and the almost deliberate and benign neglect by the domestic institutions enabled the Reliance Group to walk away with a prize catch at an extremely low price in a takeover situation.

With empirical evidence also pointing to shareholders getting good deals in a takeover situation, clearly, the SEBI panel proposal appears to driven by vested interests. So the backdrop to the proposal assumes importance.

Driven by vested interests: The acquisition of stakes by Mr Arun Bajoria in Bombay Dyeing and by the Renaissance Group in Gesco Corporation has sent shivers down Corporate India's spine. Following these deals, the chambers of commerce have been quick to come to the fore, oppose hostile takeovers and seek protective measures in the takeover code against hostile takeovers.

They have also sought the removal of the creeping acquisition limit for promoters of five per cent so that promoters can lift stakes without making an open offer. The IDBI top management has helpfully expressed views that oppose hostile takeovers. It is in such a environment that the SEBI panel proposed the move and the proximate reasons are not difficult to pinpoint.

In 1998-1999, SEBI raised the open offer trigger from 10 per cent to 15 per cent and the creeping acquisition limit from 2 to 5 per cent without going through the due process. Then, the SEBI panel chief expressed surprise and reservations over SEBI's actions.

But this time around that angle appears to have been taken care off with the three-step process and a possible enhancement of the open offer size to 51 per cent or 100 per cent (this too may be undesirable in the absence of takeover financing in the Indian context, though a 100 per cent offer is a good concept) coming through the committee.

Extraneous influences seem to be playing a major role, which is not desirable in the regulatory process. Instead, SEBI should ensure that the objective of serving the interests of shareholders and ensuring a vibrant market for takeovers guides its every move in this key area.