The Hindu Business Line : Not everything need show on radar screen

THE market watchdog Securities and Exchange Board of India is reportedly perturbed over the recent spate of bulk sale of shares of a few banking companies in negotiated deals that leave no imprint on the records of recognised stock exchanges in India. It seems SEBI would want all transactions to be routed through the Indian bourses.

One wonders what SEBI seeks to achieve by this. Maybe in its perception, routing all transactions through Indian bourses would be conducive to transparency. But, then, historically and world over, purchase of controlling interest in a company is more often than not accomplished across the table in negotiations spanning many anxious days. Acquisition of controlling interest has a price tag — control premium.

The man coveting a company cannot get it at the ruling market price. There is always a premium to be paid for bulk shares that give controlling power in a company. What SEBI, perhaps, wants is the public at large should benefit from such higher price. SEBI's heart is at the right place. But insisting on negotiated deals being done through screen-based trading, which otherwise is the norm, is clearly unworkable.

An aura of secrecy invariably surrounds such deals. But if the parties are compelled to seal their deal out in the open as it were, the results could be anything, including the bizarre, unless both the sides time their screen-based operations in such a way that others do not get the time to react.

SEBI's concern that the public at large must benefit from the much higher price that the bulk buyer pays to the bulk seller is met half way by its own regulations — the SEBI Takeover Regulations — which mandates anyone acquiring more than 15 per cent of voting rights to acquire at least 20 per cent of the share capital of the company in addition.

The Takeover Regulations were put in place to secure for the garden-variety shareholders partially the same benefits that the negotiated deal got for the seller. That 20 per cent is hardly enough is another matter.

Negotiated deals cannot be wished away. The company law itself does not mandate the stock exchange as the only exit route. What it mandates is a company going public must get its shares listed in a recognised stock exchange.

This does not mean that such stock exchanges are the only exit route. Can one not sell his shares in a company to one's own friend next door? If he can, why should he go through the rigmarole of routing the transaction through the bourses?

At any rate, there is a built-in disincentive for those selling outside a recognised stock exchange in India — denial of tax exemption if the shares sold happen to be long-term capital assets because that exemption is on only when the sale takes place through the medium of a recognised stock exchange in India.

Incidentally, SEBI did not pay any heed to the orchestrated clamour for finding a via media — when Infosys shares were recently pooled and offered to the American investors through an ADR issue — so that what was avowedly a foreign transaction could get the trappings of an Indian sale. And rightly so.

The Infosys shareholders participating in the exercise, bulk of whom incidentally happened to be the men at the helm of the company, wanted best of both the worlds — higher price which the American investors are prepared to pay for technology shares vis-à-vis the price commanded in the Indian bourses as well as the tax exemption which is on only when the transaction takes place in a recognised stock exchange in India.

If SEBI could brook transactions happening beyond borders, outside Indian bourses, then there is no reason why it should insist on all deals being routed through the Indian bourses when they are done in India.

(The author is a Delhi-based chartered accountant.)

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