Strengthening the Takeover Code -- A possible agenda

Krishnan Thiagarajan

THE Justice P. N. Bhagwati Committee, appointed by SEBI to review the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers), 1997, also called the Takeover Code, needs to adopt a different agenda involving the nitty gritties of the Code.

It needs to strengthen the Takeover Code by changing certain provisions where loopholes were detected, and introducing new ones.

Business Line identified some key areas that require the Committee's attention:

Acting in concert -- definition: The niggling issue of ``acting in concert'' is cropping up again. Had SEBI defined ``acting in concert'' in the Raasi Cement-Sri Vishnu Cement case, it could have served as a precedent for future cases. It may even have served as a deterrent to Arun Bajoria's claim that, apart from the 14 per cent held by him personally in Bombay Dyeing, an additional 2 per cent is held by friends and relatives. In the absence of a clear definition, the Takeover Code cannot be enforced unless investigation is completed.

Preferential allotment: The Takeover Committee has to examine whether preferential allotment should attract the open offer requirement or not. Whenever a preferential allotment leads to a change in control, it should attract an open offer. Leaving the preferential allotment approval entirely to the shareholders may not be desirable.

Object of acquisition: The ``object and purpose of acquisition,'' generally disclosed in most open offers, is usually sketchy. It may be in the larger interest of minority shareholders for the Takeover Committee to stipulate that the acquirer render with greater clarity the object and purpose of acquisition, particularly future plans, if any, both in the public announcement and the letter of offer.

For instance, the letter of offer by Renaissance Estates (part of AH Dalmia group) merely states that ``the reason for the offer is to effect substantial acquisition of shares/voting rights in GESCO. Renaissance believes that the recent stock price of GESCO did not reflect its true intrinsic value.

A substantial acquisition of shares in GESCO accompanied by a change in control would unlock the intrinsic value of the shares for all shareholders.'' Had it not been for the unlocking of value, the takeover bid itself would not have been made at all.

Financing plans: As the Sterlite-Indal drama showed, the acquirer's financing plan has to be spelt out clearly. In a competitive hostile takeover environment, the escrow mechanism may itself not be a deterrent for the acquirer to overreact and lay down a weak financing plan for the takeover. In such cases, the Takeover Committee has to decide the circumstances under which SEBI may have the power to intervene in the battle.

Statutory approvals: The acquirer is required to disclose all the statutory approvals required to be obtained to effect the takeover offer and state them clearly both in the public announcement and in the letter of offer. As refusal of statutory approval is one of the grounds on which the acquirer can withdraw the offer, the requirement of making all the disclosures upfront has to be specifically spelt out.

The whimsical manner in which SEBI quelled Sterlite's hopes in the Indal takeover battle clearly highlights the need for greater transparency on this score. That it also suited Sterlite in the instant case is a different issue altogether.

Disposal/sale of assets: The Takeover Code provides that an acquirer is required to make a disclosure both in the public announcement and the letter of offer that he has no intention of disposing of or otherwise encumbering the assets of the target company in the two succeeding years, except in the ordinary course of business. The Code further adds that if the acquirer fails to make this disclosure either in the public announcement or the letter of offer, he shall be debarred from disposing of or otherwise encumbering the assets of the target company.

But this provision, made to protect shareholders' interests, has hardly served any purpose and is unlikely to do so in future. For instance, the disclosure of Renaissance Estates in the GESCO Corporation case.

The letter of offer says: ``On obtaining control over GESCO, REL (Renaissance Estates Limited) would have access to material information, based on which it would explore the possibilities of further increasing shareholder value through various means, which may include selling or encumbering the assets of GESCO, in the ordinary course or otherwise, in the succeeding two years from the date of offer disclosure.'' This disclosure, as it stands today, has no value at all for the GESCO shareholders to reach an informed decision on whether to tender or not.

Mandatory disclosure by board: The Takeover Committee must consider whether, in the larger interest of the minority shareholders, it must it make it mandatory for the target company's board to provide an unbiased evaluation of the offer and their recommendation to the shareholders.