Selling biz should trigger open offer: Ministry

Divya Trivedi New Delhi | Updated on August 03, 2011

Also favours retaining non-compete fees clause

The Ministry of Corporate Affairs is contemplating making open offer mandatory in transactions involving sale of any business. This is even as the SEBI is said to have rejected MCA's suggestions on this while revising the Takeover Code.

The Ministry was of the view that open offer should be triggered even when a company sells its business, according to sources.

“A shareholder is investing in a textile business. If promoters sell a part of that business to a real estate developer, then a shareholder may wish to exit. When open offer can be allowed for change in control, then logically mandating it for sale of businesses is justified,” according to an industry insider.

Areas of difference

Other suggestions of the Ministry that did not find favour with SEBI reportedly include, triggering open offer for change in object clause and making an exemption on forfeiture of shares. As per SEBI, there is exemption only for buyback of shares.

The Ministry had also advocated for retaining non-compete fees. Under the new Takeover Code, SEBI has abolished non-compete fees.

“An Investor invests in a company considering its business potential and future growth. When the promoters sell out that business, there may not be a change in the balance sheet of the company as the consideration received from the sale of business is shown in cash.

“However, it causes loss to the investor who has invested money considering the profitability and business potential which would be more than the amount of interest accruing on cash portion realised on account of sale of business.

“Further, it cannot be assured as to whether the entire amount received from the sale of business is brought in the company or there may be some misappropriation of funds,” said Mr Pavan Kumar Vijay, Managing Director of a Delhi-based consultancy, Corporate Professionals.

Chance in cos bill

These were reportedly some of the suggestions sent by MCA to SEBI on the Takeover Code which have been rejected by the stock market regulator. However, there is a possibility that some of the suggestions which have been rejected could find mention in the new Companies Bill, sources indicated.

“We were asked to give suggestions as the Secretary is on the Board. They have incorporated some of our points and it is up to them to include or reject whatever suggestions they like,” an MCA official told Business Line.

The Companies (Amendment) Bill, 2011 is expected to be tabled in Parliament during the ongoing monsoon session. If the provisions find their way into the Companies Act, then SEBI will have to amend its Code to align with the mother law.

Published on August 03, 2011

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