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Krishnan Thiagarajan

TRUST ME, it all hinged on a "date". A change in the reference date for working out the price in an open offer may come as a windfall for the shareholders of South-East Asia Marine Engineering Construction (Seamec) under the SEBI Takeover Code.

In end-October, the Securities Appellate Tribunal (SAT) ruled that the reference date for calculating the offer price should be April 12, 2000 instead of July 3, 2001 as directed by the Securities and Exchange Board of India (SEBI) in its order.

With the change in reference date, the new offer price of about Rs 225-250 becomes payable, instead of the Rs 43 paid to the accepting shareholders in December 2002.

The Seamec stock had touched an all-time high of Rs 385 in mid-February 2000. SAT has directed the acquirer to pay the differential amount in this case to the shareholders within 30 days of this order.

The prospects of an open offer emerged when Technip SA of France put through an acquisition of shares/control with Coflexip SA at the global level. By virtue of this indirect acquisition, Seamec became the subsidiary of Technip-Coflexip SA. On SEBI's directions in November 2002, the latter made an open offer for Seamec.

This SEBI order was challenged by a group of shareholders and came up before SAT on the question of reference date for the open offer. The verdict was pronounced recently.

The Seamec instance may appear an isolated case of a windfall for one set of shareholders. But, following the SAT verdict, the focus is once again on "indirect acquisition of control at the global level" and its implications for an Indian target company.

Early last week, the Supreme Court took up hearing in two cases — acquisition of Colour Chem by Clariant International group, and Ray Ban Sun Optics India by Luxottica of Italy.

This followed an appeal by SEBI against a SAT order. The issue is the eligibility criteria for interest payment to shareholders on account of the delay in making an open offer in indirect acquisition.

Unusual activism

Over the past two years, SEBI has been exceptionally active in taking up investigation in cases involving indirect acquisition of control at the global level. Pending cases relating to the years 1999-2002 such as Ray Ban Sun Optics India, Widia, Seamec or Ondeo Nalco have been taken up by SEBI for investigation and orders issued on that basis.

For instance, in the Ray Ban case, the global deal involving the purchase of the eyewear business of Bausch & Lomb Inc., US, by Luxottica of Italy took place on April 28, 1999. It was only in September 2001 that SEBI took notice of this development based on an affidavit. And it passed its order only in August 2002. The acquirer went on appeal and the final SAT order was delivered in August 2003. Similarly, in the case of Ondeo Nalco India, Suez, a French MNC, entered into an agreement to acquire Nalco, US, on June 26, 1999. Based on a complaint received by SEBI in 2001, it issued a show cause notice in this case only in July 2002.

It passed an order this April, against which an appeal has been filed with SAT by the acquirer.

While these orders may seem to have come too late in the day for shareholders, they augur well for the future.

On the one hand, delays in the SEBI investigation have prevented shareholders in the target companies involved in indirect acquisition from capitalising on attractive exit options at the right time.

In some cases, such as Century Enka, Hughes Software or FAG Bearings, the stock price in the secondary market was significantly higher than the offer price. However, there have been a few exceptions.

On the other, almost 10 precedents arising from the SEBI investigation and SAT have emerged which may enhance regulatory clarity on indirect acquisitions.

Emerging regulatory clarity

Each and every case taken up by SEBI for investigation and appealed before SAT is bringing greater clarity on the regulatory perception on the issue. Shareholders who were groping in the dark about the applicability and terms of indirect acquisitions may now breathe easy. There are now enough precedents that spell out the regulator's stand on some of the contentious issues. These are:

Onus on the acquirer: The message that comes out loud and clear from all the SEBI cases investigated so far is that the onus is on the acquirer to come out with an open offer whenever an indirect acquisition takes place.

Almost all the earlier loopholes in the Takeover Code have now been plugged by the latest September 2002 amendment to the Takeover Code. And SEBI's activism may also help acquirers exercise their minds over the possibility of open offer in every global level acquisition, or agreement to acquire, that takes place hereafter.

The precedents will also help SEBI act swiftly in similar cases.

Exit option: An assessment of most of these cases demonstrate that if the acquirers conform to the basic conditions under Regulation 14, then they must make a public announcement.

Take, for instance, a case where BP Amoco, UK, announces its intention to acquire the shares of Burmah Castrol. This, in effect, constitutes an intention to acquire (though indirectly) the control over all its subsidiary companies, including the Indian unit, Castrol India.

This will essentially provide an exit opportunity to those shareholders who may or may not wish to remain invested under a new acquirer or management.

Moreover, in the Rayban Sun Optics case, SAT also spelt out that a public announcement can be made subject to the fulfilment of conditions, including obtaining of statutory approvals in certain cases.

It also added that if any of these conditions are not fulfilled or met, then the acquirer can withdraw from the offer (under Regulation 27) after SEBI is convinced about the acquirer's explanation.

Take, for instance, a delay in the payment of consideration to shareholders in the Kennametal-Widia India case. In this case, a No Objection Certificate was required from the Yash Birla group for the acquisition of equity stake in Widia by the US-based Kennametal Inc.

This caused some delay, but was ultimately sorted out. It appears that this is unlikely to deter SEBI from allowing conditional open offers in future.

Reference date for acquisition: The reference date for indirect acquisition will be the date on which acquirers at the global level "enter into an agreement for acquisition of shares" or "decide to acquire shares". Take, for instance, SAT's verdict in the Seamec case.

In this case, Technip, France, decided to take control of Coflexip at the global level and acquired 29.68 per cent of the latter on April 12, 2000. The final act of acquisition was completed on July 3, 2001.

In this case, the reference date for the acquisition was determined as April 12, 2000. There was a similar SAT verdict in the case of BP Amoco, UK, and Burmah Castrol, which was upheld by the Mumbai High Court.

Price and timing: The latest amended regulations suggest that offer price will be computed based on average market price calculated on the basis of a 26-week average or a two-week average, whichever is higher. Till September 2002, the offer price is to be based only on the 26-week average.

The case of using the negotiated price at the global level as one of the parameters for considering the offer price has not come up so far.

The only exception has been in Aventis Crop Science, in which India Syntans and a few shareholders claimed that the cost of global acquisition of Aventis CropScience SA by Bayer CropScience AG should be the negotiated price. At this point, this issue remains unresolved.

The amended Takeover Code, which offers an acquirer three months, unlike four days in the past, for making a public announcement, may also be helpful. This will provide more time for the acquirer to decide on the applicability of open offers in an indirect acquisition.

A parting word

Though considerable progress has been made in understanding the scope of indirect acquisition, attempts at codifying it may still be a daunting exercise.

The only way out appears to be to put indirect acquisitions on the same platform as direct acquisitions and make an open offer mandatory in all cases.

The only exception can be "mergers" (in the strict sense) at the global level.

The mandatory nature of an open offer will automatically bring it within the SEBI purview for evaluation on merit. Acquirers may be allowed to withdraw their offers based on the merits of each case.

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