If the need to review the framework of change of control is compelling enough, what amendments are necessary to strengthen them in the Takeover Code? If SEBI aims to ensure equality of treatment and opportunity to all shareholders and protect their interest, the following checklist may help lay down the guidelines for amending Regulation 12 of the Code:

Identifiable promoter group: If an acquirer acquires either the full equity stake or part (with an agreement to buy out the remaining equity stake from the promoter at a later date) from a clearly identifiable promoter group, the change in control clause specified in Regulation 12 of the Takeover Code should be immediately attracted.

This provision may be made applicable to companies with dispersed ownership, in which a group has been identified as promoter (though its equity stake may be small — say, less than 15 per cent) or persons having control over a company in filings under Regulation 6 and 8 made with the stock exchanges.

Though the equity stake acquired from the promoter may be below the threshold level of 15 per cent warranting an open offer, the Code must make it mandatory for the acquirer to make an open offer based on the SEBI formula. In this case, the acquirer steps into the shoes of the promoter by virtue of transfer of equity stake.

Price is the key: If there is no clearly identifiable promoter group, the deal should be evaluated based on `negotiated price'. The pricing in a deal becomes significant because the premium paid over the market price represents several tangible or intangible benefits conferred by the deal on the acquirer.

For instance, in both the Gujarat Ambuja and Grasim deals, immediately after the sale by the Tata group and Reliance respectively, Gujarat Ambuja and Grasim were allowed to appoint two directors on the board of ACC and L&T respectively. To assume that this appointment has no role to play in pricing of the deal may be a superficial argument.

If the acquirer enters into a negotiated deal with any person in the target company at a price that is at a substantial premium to the current market price, an open offer must be made mandatory.

The recent amendment to the definition of `inter-se transfers' may provide some clue as to what may constitute substantial premium to the current market price.

According to this amendment, inter-se transfers (or transfer of equity between two promoter groups in India) will be exempt from the open offer requirement only if they are made at a price not exceeding 25 per cent of the current market price.

Extrapolating this to the change in control clause, it may be fair to state that any acquisition of equity stake priced at a premium of over 25 per cent over the market price ought to attract the open offer requirement.

It may be interesting to note that the Gujarat Ambuja's acquisition price of Rs 370 represented a 55 per cent premium to ACC's price a day before the announcement in December 1999. Similarly, Grasim's acquisition price of Rs 306 was also at a 47 per cent premium to L&T's price a trading day before the announcement in November 2001.

Change in control investigation: If a negotiated deal fails to fulfill these two criteria, it may then be appropriate for SEBI to undertake a full scale investigation into all the relevant facts of whether the acquirer is or will be in a position to effectively control the target company.

In order to protect the interest of the minority shareholders, an additional safeguard may have to be considered:

In the current SEBI formula for pricing an open offer, any negotiated deal put through within a six-month period has to be considered for pricing purposes. To protect the interest of the minority shareholders, it may be imperative to replace the six-month period with three years.

The period of three years is relevant as holding equity over a three-year period converts an acquirer into a promoter of the company. Beyond this period, any transfer of equity between promoters is exempt from the open offer requirement.

Once this change is made, market price-linked offers based on the SEBI formula will become applicable only after a three-year period.

For instance, Grasim is currently making an open offer for L&T at Rs 190, which is based entirely on the market-linked formula. It has made this offer after waiting for the six-month period applicable to the negotiated deal to expire.

Had a three-year negotiated deal criterion been applicable instead of six months, the price for the open offer by Grasim would have worked out to Rs 306 — the price at which it acquired shares from Reliance.

Chronology of key events

Gujarat Ambuja-ACC

December 22, 1999: The Tata group companies enter into a memorandum of understanding to sell 7.2 per cent of the equity of ACC to Ambuja Cement India, subsidiary of Gujarat Ambuja Cement at a price of Rs 370 per equity share.

December 27, 1999: Mr Narottam Sekhsaria, Managing Director of Gujarat Ambuja and Mr A. L. Kapur appointed as additional directors of ACC.

In January 2000, Mr Sekhsaria made the Deputy Chairman.

April & Sept, 2000: In two instalments, the Tata group sold 4.2 per cent and 3.05 per cent equity to Gujarat Ambuja group at Rs 370, taking the total holding of Gujarat Ambuja to 14.45 per cent.

July 17, 2001: Alleging violations of the takeover regulations, Mr Ashwin Doshi, and others filed a writ petition in the Bombay High Court. This was referred by the High Court to SEBI in 2001.

Based on submissions made by the Ambuja group, Tata group and ACC, SEBI dismissed this petition stating that it did not warrant investigation or enquiry.

Mr Doshi and others file an appeal before the Securities and Appellate Tribunal (SAT).

October 25, 2002: SAT overturned SEBI's order and ordered an investigation under Regulation 12 as to whether Ambujas acquired control over ACC as a result of acquisition of shares held by the Tata group.

March 17, 2003: Based on its investigation, SEBI announced that it did not find any violation of the Takeover regulations by Gujarat Ambuja.

Grasim Industries-L&T

November 18, 2001: Grasim Industries acquires a 10.05 per cent equity of L&T from Reliance Industries at a price of Rs 306.60 per share.

October 14, 2002: Grasim announced that its board had approved an open offer for purchase of 20 per cent of equity of L&T at an offer price of Rs 190 per share.

Grasim reached the open offer threshold of 15 per cent by market purchases.

November 8, 2002: SEBI asks Grasim not to proceed with its open offer. Instead, it plans to conduct an investigation into alleged violation of the Takeover Code in the acquisition of 10.05 per cent stake from Reliance.

The appeal to SAT contesting SEBI's direction was rejected.

February 26, 2003: In the meantime, Grasim made an alternative proposal to the L&T board involving the demerger of the cement business of L&T into a separate company and making an open offer for that company at a price of Rs 130 per share.

April 23, 2003: Following the withdrawal of restrictions by SEBI on the Grasim's open offer for L&T, Grasim announced that it is proceeding with the open offer for a 20 per cent equity in L&T at Rs 190 per share.

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