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SEBI's amended Takeover Code: Levelling the playing field?

Krishnan Thiagarajan

AFTER five long years, the first major amendments to the SEBI's Takeover Code, 1997 have finally come into force. This overhaul is based on the recommendations of the Committee set up under the Chairmanship of Justice P. N. Bhagwati, opinions solicited from the investor community and the experience of SEBI officials in handling more than half a dozen high-profile offers.

Has the amended Code come out too late in the day for the shareholder/ investor community? To some extent, that indeed seems to be the case. At least in a couple of key areas, such as preferential allotments and inter-se transfers. The loopholes in these two areas were exposed in the first year of the Takeover Code (in 1997 itself) and the promoters/ potential acquirers have been exploiting them to the hilt since then. But given the strong vested interests at work, it has taken SEBI nearly five years to plug those loopholes meaningfully.

Business Line examined the amended regulations of the Takeover Code in the context of the draft recommendations made by the Bhagwati Committee in May 2002. Since the Bhagwati Committee recommendations were not accepted in toto, the amendments were classified into two broad categories.

The first highlights the revisions made in the amended Takeover Code that are at variance with the Bhagwati Committee recommendations. The second examines the areas in which the Bhagwati Committee recommendations were accepted completely in the amended Code. Based on this categorisation, Business Line also evaluated the relative merits and demerits of these amendments from the standpoint of the shareholders.

Revisions in the Code

Some of the shareholder-friendly changes made in the amended Takeover Code, which are at variance with the recommendations of the Bhagwati Committee are:

Creeping acquisition: In its draft recommendations, the Bhagwati Committee had proposed the extension of the creeping acquisition limit at 10 per cent, which was set to expire by September 30, 2002, to March 2004. However, in the final amended Takeover Code, SEBI has acted prudently by reducing the creeping acquisition limit from 10 per cent to 5 per cent with effect from October 1, 2002. In our opinion, there was no justification for pegging the creeping acquisition limit at 10 per cent. The promoters/persons in control of target companies have mainly used the creeping acquisition limit as a strategic ploy to deter takeovers rather than as a healthy attempt to shore up their equity stake in these companies.

Preferential allotments: The Bhagwati Committee had recommended that the current exemption for preferential allotments from open offer be allowed to continue. The only condition it prescribed was postal ballots (to enable greater shareholder participation) while passing the resolution for preferential allotment.

But, in the final amended Takeover Code, SEBI has done well to remove the exemption altogether. Hereafter, all preferential allotment of shares aggregating to an equity stake of 15 per cent or more will be automatically referred to the Takeover Panel for applicability of open offers.

Since 1997, scores of promoters/persons in control of Indian companies (both domestic and multinational) have employed the preferential allotment route conveniently to enhance their equity stakes or allow potential acquirers to acquire equity stakes, thereby avoiding the open offer obligation altogether. The removal of this exemption will prove favourable to minority shareholders to a large extent.

Where the status quo holds

The Bhagwati Committee recommendations packed a punch in several areas. And SEBI has done the right thing by accepting these recommendations without any changes.

Some of these areas are inter-se transfers, change in the offer pricing formula, asset stripping, composite offers (cash-cum-security offer) and withdrawal of acceptances tendered. Of these, the two highly progressive change, from the point of view of minority shareholders, were the withdrawal of acceptances tendered and inter-se transfers.

Hereafter, shareholders will be allowed the option of withdrawing the form of acceptance tendered up to three working days prior to the closure of the offer. This will allow shareholders to opt for a higher offer price in competitive open offers of the Indal-Sterlite genre.

Second, in the case of inter-se transfer of shares among promoters, the exemption from such transfers will not be available if the transfer takes place at a 25 per cent premium to the market price. This, again, is a good move as it affords an exit option to minority shareholders.

But the amended Takeover Code has adopted the Bhagwati Committee recommendations in toto, though many of these moves are shareholder-unfriendly and lack clarity:

Disclosure of holdings: The Bhagwati Committee had proposed that any acquirer acquiring shares or voting rights has to make a three stage disclosure — at 5 per cent, 10 per cent and 14 per cent of equity to the target company and the stock exchanges vis-a-vis the current requirement of disclosure at the 5 per cent level. And in the amended Takeover Code, SEBI has adopted this disclosure practice in toto.

In our view, a three-staged disclosure mechanism has the potential of stifling the development of a vibrant market for corporate control in India. As long as the widest possible dissemination of shares acquired by the acquirer is made (say, through the stock exchanges or even SEBI), a single-stage disclosure at the 5 per cent level is more than adequate.

Changes in control: The Bhagwati Committee recommended that "change in control" is possible only when a special resolution (as against a general resolution applicable currently) is passed by shareholders in a general meeting. In addition, postal ballots are to be allowed at such meetings. In the amended Takeover Code, SEBI has incorporated this change.

But this amendment will make little difference on the ground, primarily because the word "control" continues to have a loose and ambiguous definition. No attempt has been made by the Committee to simplify this definition. And as long as regulators shy away from simplifying this definition, "change in control" cases such Gujarat Ambuja-ACC and Grasim Industries — Larsen and Toubro will continue to elude their net.

Indirect acquisitions/global level arrangement: According to the Bhagwati Committee recommendations, "in the case of indirect acquisition or change in control, a public announcement has to be made by the acquirer within three months of the consummation of such acquisition or change in control or restructuring of the parent or the company holding shares of or control over the target company in India."

And this complex provision has been adopted fully by SEBI in the amended Takeover Code.

Such a complex provision is only going to add to the prevailing confusion over applicability of indirect acquisition in individual cases. For that matter, even a distinction between a merger and an acquisition (at the global level) has not been spelt out in the provisions. It is obvious that this lack of clarity will continue to haunt the regulator in the future.

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