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S. Vaidya Nathan

Mr Justice P. N. Bhagwati, head of SEBI's Takeover Committee, and Mr L. N. Bajpai, Chairman, SEBI... The Takeover Code revamp must address critical issues such as open offers triggered by `change in control'.

THE Takeover Code of the Securities and Exchange Board of India (SEBI) is set to see one more round of change, evident from the indications given by Mr Justice P. N. Bhagwati, head of SEBI's Takeover Committee. SEBI's committee proposals do not go to the desired extent, especially in such crucial areas as change in control, persons acting in concert and foreign ownership.

Preferential offers: In the last five years, preferential offer has become the favourite route to acquire stake and escape the open-offer obligation. This flexibility has been misused and it is only right that this is now sought to be plugged. If the acquisition of stake of over 15 per cent is done through this route, an open offer requirement would be triggered. In many cases, the preferential allotment has led to an effective change in control.These cases should entail an open offer.

Promoter groups: There is a proposal to give an exemption from open offer if transfer of shares has happened among group companies but only if the group companies are defined transparently and identified to the public. If the group companies are well-defined, share transfers above the creeping acquisition limit can be done without attracting an open offer. Many a time, transfers among these firms now come as a surprise to investors who are not even aware they are part of the group.

Premium by promoters: So far, transfer of shares among promoters has been exempt from the open offer requirement on the ground that no hidden value is uncovered in the process. Now, an open offer is proposed if the transfer is done at a 25 per cent premium to the market price. This is a desirable move since a willingness to pay a sizeable premium may be driven either by a better value being attached to control and/or hidden value seen by one set of promoters.

Annulment: In a rather radical move, a change proposed is to annul the transactions if the equity stake is hiked beyond 15 per cent without complying with the open offer requirements. This appears to be driven by the experience of just one or two cases. Such changes are best avoided as these could only make the Takeover Code unwieldy. Such exceptions can always be tackled by reference to the takeover panel.

Graded disclosures: If there is one proposal that is of considerable detriment to the development of a vibrant market for corporate control, it is the plan to require acquirers to make disclosures of their holdings at three stages — 5 per cent, 10 per cent and 14 per cent as against at 5 per cent now. This is bound to make the task of acquirers more difficult by making acquisitions difficult and expensive. This would also give incumbent owners/management time to build their defences and stall the prospect at an early stage. A series of moves in the last two years, suo motu by SEBI has loaded the dice against acquirers. The graded disclosures will add to that and so it must not be pursued at all.

Change in control: In a few high profile and some not-so-high profile cases, acquirers, without getting more than 15 per cent of equity, have secured effective control. In the Gujarat Ambuja-ACC case, SEBI filed an affidavit stating that an open offer was not required as the acquisition of a 14.4 per cent stake in ACC did not lead to change in control. In quite a few such cases, the ground reality presents a different picture. This has rendered the "change in control'' trigger ineffective in the context of cases involving Indian companies. The "change in control'' concept must be defined properly and also applied with flexibility by taking note of ground realities. Persons in concert: One other key area where no action has been proposed is the concept of "persons acting in concert'' with the primary acquirer. This has to be well-defined to avoid abuse.

Cut creeping acquisition levels: The creeping acquisition limit is now at 10 per cent till September 30, 2002. This enhanced level should not be continued. The SEBI committee must press for a rollback to the earlier level of 5 per cent (and, probably, cut even to 2 per cent) in the interest of a vibrant market for corporate control.

Foreign ownership: There is a high degree of ad hocism and confusion on how ownership stake changes at the global level affect the application of the Takeover Code. Some obvious cases of changes in control such as Bausch and Lomb have gone through without an open offer. This is one area where SEBI can define clearly the circumstances of global development that would lead to open offers and those that would not.

Transparent changes: With the imminent round of changes, any future alterations should be only after the proposals are dealt with by the committee and put up for public comment.

This is essential to remove the ad hocism and susceptibility to lobbying pressures that have been evident in the moves by SEBI to hike the open offer threshold, the creeping acquisition limit and enhancement of the period for it. Due process is vital to the framing of regulations.

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