Takeovers must take care of minority shareholders

Written by Santosh Tiwari | Ira Dugal | Updated: Aug 13 2013, 10:54am hrs
The chairman of the Securities and Exchange Board of India (Sebi), UK Sinha, is confident that all the companies will finally comply with the minimum public shareholding norms. In an extensive interview with Santosh Tiwari and Ira Dugal, Sinha explains Sebis point of view on a number of important issues including the possibilities of National Spot Exchange Ltd (NSEL) problems spilling over to the stock market, Holcim-Ambuja and Jet-Etihad deals, and the impact of changes in the Sebi Act to empower the regulator for tackling schemes like Saradha.

What are the chances of spillover of NSEL developments to the securities market

So far as securities markets and the involvement of our broker members are concerned, we have been reviewing regularlypayments and settlements are happening on time, the margins are nowhere under any stress level. So things are perfectly normal so far as this episode is concerned. We are keeping a very close watch on our system. It is possible that a broker member under the securities market might also be participating in the commodities spot market or in the commodities futures market, but there is a safeguardthey cant do it under the same entity, they have to create a separate legal entity.

So, there is ring-fencing. Its not that any problem that occurs in the commodities market gets transmitted here. Even if some of our brokers are there (commodities market), they are doing it through a separate entity.

The fear is that some of the brokersif their money is stuck in the commodities marketwill have to liquidate the money in the stock market to tackle with the problem there. Are you reviewing that also

Yes. We are reviewing the situation regularly. We have reviewed the situation and margins are not anywhere near stress levels, they are completely within the normal range.

There are obviously inter-linkages between the two markets. Does it make sense that the two markets are not regulated by the same regulator

I can participate in an academic decision on the issue but my reaction to it would only be that we are keeping a close watch on our systems and people who are in the market need not worry.

As the deadline for meeting public shareholding norms has ended now, are you satisfied with the outcome

Nobody trusted that Sebi will be able to enforce it. I am very happy to share this with you that even the government companies have become fully compliant, including the loss-making ones.

Yet some of the private companies have not complied. You have announced measures against them which are quite stringent. Have they started doing it now

June 3 was the deadline for them. Our approach has been very constructive. The underlying thought was that there should be minimum amount of public float so that anybody who is an Indian investor or a foreign investor gets the comfort that certain corporate governance norms can be expected to be followed in this country. Earlier, only 2-3 methods were there for this, we extended that to 6-7; we were conscious of the genuine need of the industry.

We have been proactive in tackling the problems of the corporate in implementing this. For example, there was one company in which there was 75% and one share. Their question was, how do they sell one share We said this is a genuine problem and allowed them to sell it in the market.

On June 4, Sebi passed an order against 105 companies that had not complied. The message was clear; if you dont comply, we will be guided by the considerationdid you make any effort and the quantum of effort made by the company will weigh in our mind. If you look at our order of June 4, it is clear we have ensured that minority shareholders are not penalised, weve prohibited the directors or the promoters from taking new directorships or from getting the economic benefits of their shareholdingsdividends or anything else.

What has happened in the case of the 105 companies that didnt comply by June 3 and against whom Sebi has passed orders

Two-three companies have complied after that and some of them have met us trying to clarify their positions. They have informed us that they will not go down the path of legal remedy. My impression is that those companies that have not complied are seriously thinking of complying now.

Many out of the 105 companies, therefore, have not yet indicated that they would comply

Majority of them do not need to come to us for complying. The facilitation windows are available even today and they can avail those windows for complying. How many of those 105, therefore, have complied after June 3, will emerge over a period of time. But the feedback that I am getting is that everybody now realises that Sebi is firm and so my expectation is that almost all of them will comply. In case some of them refuse to comply, we have passed an interim order; we have prohibited them and that will impel them into compliance. This is only an interim order and hearings for final orders have already started and the penalties will be inversely proportional to the efforts made by them.

And the final orders would be in the nature of

We will hear them out case by case. Suppose somebody comes at the final hearing and it has not complied, the company is exposing itself to serious penalty. But suppose there is another company, which says it was unable to comply with the norms by June 3 but has now complied with the same, the penalty could be less in that case.

Talking about minority shareholders, has Sebi come out with any closure to a final view in the Holcim case

This is a matter under examination and I cant share any development with you. All I can tell you is that we will be following a very consistent approach. If we find that decisions have been taken or are proposed to be taken against the interests of the minority shareholderswe have certain instrumentalities in our handwe will do use that. Before February, there was no guideline, and many corporates unfortunately utilised that. In February, we have come out with a very clear-cut guideline.

Our entire effort is guided by protecting the interests of the minority shareholders. There has to be valuation by a reputed outside party. The minorities must vote, we have provided for postal voting and e-voting. We have also said that if there is an interest of the promoters in this group then they cant vote, which means only non-promoters will vote. Let me ask you a question, if in a situation in any company there is no physical or procedural obstruction for non-promoter voters to vote, and full information is shared, no procedure is violated, and even then if minority shareholders are with majority resolution, then Sebi has nothing to do. Our job is to ensure that full disclosure is made, full information is given, full opportunity is given for the minority shareholders to vote.

Holcim is a test case, isnt it Apart from enforcing minority shareholders rights, what are you looking at

There has to be a third-party valuation. If it has not happened then we will give our observation. We will ensure that valuation is done properly and minority shareholders have been allowed to vote overwhelmingly but even after that if minority shareholders go along with majority shareholders then it is fine with me. Otherwise, I will take a value judgement on what should happen in a particular company.

The government has cleared the Jet-Etihad deal. Do you think Sebis control definition is getting established through this

I will again not like to comment on a particular case. The government has found that amongst all the various definitions of control, Sebis definition was very comprehensive and has adopted it. Again, our mandate is to protect the interest of the minority shareholders. If somebody is acquiring a company, he must give opportunity to other shareholders to exit, which is called an open offer, and we have a threshold for it. If you are acquiring 25% in a company, you must make an open offer based on a pricing formula which is defined. We have another provision that even if you dont kick in this threshold for open offer by acquiring less than 25% but if in our judgement, you have acquired control of the company, then also you have to come out with an open offer. We have made that clear.

In this case, they have structured the deal in a manner that there is no open offer

An open offer is triggered in two situations. One, threshold of 25% is hit. Second, even if the threshold is not hit but going by the contents of the share purchase agreement, in our view, you are acquiring a control, then we will demand that you better make an open offer. If we are not satisfied, then we either ask them to amend their share purchase agreement, otherwise if they want to go ahead, they will have to make an open offer.

Does this mean that in Jet-Etihad case Sebis procedural norms have been satisfied

How do I know They have to file that with us and then we will finally see.

So, they will have to come back to Sebi and file all the documents concerned, showing that they have satisfied the norms

They will have to come to us and tell us what is the final agreement and arrangement that they are going to have. If we find that it does not amount to control, we will tell them. If we feel it amounts to control, we will ask them to make an open offer.

How will the situation change with Sebi getting additional powers through the changes in the Act in tackling cases like Saradha

We are a regulator for securities and exchanges. A collective investment scheme (CIS) originally was not declared as securities. Only in 1999, Sebi Act was amended giving powers to Sebi to regulate CIS, and SCRA was amended the same year to specify CIS as securities. The definition of CIS has major exceptionsnidhi fund, chit fund, a scheme run by a cooperative society, an insurance product, a mutual fund product are not CIS. What was discovered that innovative people came out with schemes which according to us were CIS but they were not registered as CIS. Since 1999, only one company has registered with Sebi as CIS, they also have done no business. I dont think there is a single application pending under CIS, so the intention is not to come under CIS. We act when we receive information and after investigations if we find that the scheme is CIS, then we pass orders. What this Ordinance has done is it has said that in any activity of fund raising, if it is not among the six exceptions, but the corpus is at least R100 crore, then it is a CIS. But the exceptions are still there. They have now provided the threshold of R100 crore.