Exchanges, as the first line of control, should be able to find and act on such irregularities

The Securities and Exchange Board of India’s order passed last night against Astra Zeneca Pharma India, reflects the urgency of its parent, Astra Zeneca Pharmaceuticals AB, Sweden, to own the entire stake in its Indian subsidiary.

This is not the first instance of a pharma multi-national exploiting loop holes in Indian regulations to get their local company delisted. SEBI had similarly received complaints in the delisting process of Fresenius Kabi where investors had reported that few institutional investors had cornered most of the shares in the company’s offer for sale with the intent to ensure the smooth passage of the company’s subsequent de-listing.

Gaming the system

The modus operandi in the Astra Zeneca OFS also is similar. 94.02 per cent of the shares offered by the Swedish parent in the offer for sale of Astra Zeneca, held in May 2013 were cornered by six foreign institutional investors and sub-accounts. All these investors were associated with one entity - Elliott Advisors (HK).

The order also goes on to describe how the six FIIs gamed the OFS process to their advantage. All the six FIIs initially made offers close to the floor price of the offer, that was Rs 490. This would have made other retail investors - who typically see the bidding details put out intermittently by the exchanges to determine their bid price - place their bids at lower levels.

Towards the close of the trading day, these six investors, revised their bids higher, close to Rs 620, thus ensuring that they were allotted most of the offered shares. It is clearly a well laid out strategy that was also executed very skilfully.

The Elliott Group of investors who bagged the shares in the OFS then went on to vote in favour of de-listing in the special resolution through postal ballot thus ensuring that the dissenting retail investors did not stall the offer.

What next

The primary motive behind stipulating that the minimum shareholding be 25 per cent in listed companies is to ensure that more retail investors participate in equity markets, thus increasing volumes and depth. But when a handful of institutional players corner these shares, this end is not served.

In its recent amendment to the OFS rules, SEBI had laid down that 10 per cent of the shares offered through OFS be reserved to the retail investors (subscribing for less than Rs 2 lakh worth of shares). This proportion needs to be increased to at least 30 per cent of the OFS. There should also be mechanism for companies to report to the regulator about the investors who have been allotted shares in the OFS. This will ensure that misbehaviour of this kind does not recur.

Another question that needs to be raised is why the exchanges are not able to spot irregularities in bidding such as the one seen in Astra Zeneca’s OFS. They are the first line of control and should be able to find and act on such instances without waiting for the regulator to alert them.

Third, the company has acted against the interest of the minority shareholders. The minority shareholders had rejected the de-listing offer in 2010 and might have done so again this year. SEBI has said that if the suspected action is found true, it will amount to fraud and unfair practice. It is now up to the exchanges to investigate the matter and penalise the company appropriately, if found guilty.

(This article was published on June 25, 2014)
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