The Hindu Business Line : SEBI raises the bar

EVEN IF LATE in coming, the amendments proposed by the Securities and Exchange Board of India to the public shareholding norms are welcome as they bring greater clarity in the administration of the Takeover Code. But to make it really effective, additional safeguards must be introduced in other laws/guidelines linked to the Takeover Code. The latest amendments to the Code feature two elements. First, when promoters wish to buy up the equity from the public in a bid to de-list the company, they must use the reverse book-building process, which will let retail investors determine the exit price. This will ensure that the promoters do not delist in a bearish market, using the market-linked prices. Second, the amendments finally integrate the Takeover Code with the SEBI Delisting Guidelines. Effectively, this step has increased the public shareholding threshold from 10 per cent of the non-promoter holding to 25 per cent (in most cases), so as to be harmonious with the condition of initial listing.

One may quibble over whether 10 per cent or 25 per cent is the right ceiling for public shareholding. From a retail shareholder's perspective, the scope for fair and rational price discovery would be greater if it is fixed at the higher level, especially as participation by institutional and savvy retail shareholders will help them better. Also, the SEBI Guidelines must now insist that the reverse book-built process will go through only if the acquirer is able to mop up, say, 15 per cent of the equity (out of the 25 per cent) tendered. Unless this is specified, promoters may delist their stock, beyond 75 per cent, by mopping up just a token 2-3 per cent.

Second, SEBI has stipulated, rightly, that any acquisition of shares beyond 55 per cent but less than 75 per cent can be done only through an open offer under the Takeover Code. The latest amendments specifically prohibit both market purchases using the creeping acquisition route (at 5 per cent of holdings every year) and preferential allotments, which were allowed earlier. The current regulations allowing the promoters to shore up their equity stake up to 75 per cent using the creeping acquisition or the preferential allotment route have led to a substantial reduction in liquidity and a marginalisation of the role of the retail investor. Since the market for corporate control has matured over the past seven years, these crutches are no longer necessary.

Finally,the vexatious and tricky issue of companies in which promoters hold between 75 per cent and 90 per cent of the equity has been left unaddressed. While the latest amendment is silent on this issue, the SEBI Chairman has talked about giving sufficient time for such promoters to dilute their holdings so that the public holds at least 25 per cent of the equity. Unless SEBI takes this up proactively, the issue will rear its head sooner or later. Outside of this, these amendments will be effective only if SEBI harmonises the public shareholding norms across all listed companies regardless of the year they are listed, maintains the exemption for large companies with a public float of at least 10 per cent under Rule 19(2)(b) allowed under the Securities Contract (Regulation) Rules, and also tightens the Delisting Guidelines.

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