The issue is important because if such a connection exists, there would be a need of complying with such regulations, including making an open offer to the other shareholders. Let us understand the background.

When a listed company is taken over, the existing management typically sell its shares to the acquirer. The shareholders, however, do not have an opportunity to participate. Further, such shareholders may prefer not to continue their holdings under the new management, and hence, also want an exit option.

Thus, earlier, the listing agreement and now, the regulations, require the acquirer to make a public offer to acquire at least 20 per cent additionalshares. For the acquirer, this is a substantial additional cost. Further, he has to go through the process of public announcement, escrow, etc, which is not only costly, but delays the acquisition. Further, particularly in the case of a hostile bid, the acquirer may not want to reveal his intention until he has acquired a substantial number of shares. Hence, he may seek to avoid making such a public offer. The earlier provisions of the listing agreement and loopholes, whereby for example, if there is more than one person, each not acquiring less than 10 per cent shares, there was no need of making a public offer. The Sebi Takeover Regulations, 1994, recognised this and taking a leaf from the UK takeover code, the concept of "persons acting in concert" was introduced. It was provided that if a group of persons has an agreement (written or oral), or even an understanding to acquire shares together, their acquisitions would be clubbed, and if the acquisition including existing holdings cross 10 per cent, thepublic offer has to be made before such an acquisition.

Additionally, certain persons who would normally have some relations (such as relatives, directors of the same company, holding company with its subsidiaries, etc) were deemed to be acting in concert. The 1997 regulations improved upon these definitions, making them even wider. The net position is that a group of persons having any understanding, agreement or cooperation in acquiring shares or control of a company would be clubbed together to applicability of provisions. Certain persons, as described earlier, would be deemed to be acting in concert, unless they prove to the contrary.

It would seem that the matter has been brought under control. However, while the terms are seemingly foolproof in theory, in practice, several difficulties arise. How does one prove that there is an understanding or cooperation? Are mere circumstantial factors sufficient? Take for example, an alleged attempt to take over Bank of Madura, which came before the Company LawBoard recently (Bank of Madura Ltd, In re, (1995) 3 SCL 339 (CLB-Mad.)). It was found that in a short time, an abnormally large number of shares changed hands. All these shares were acquired at an identical price though the number of acquirers were 122. All the acquirers were either dealers or had some link with an industrial group allegedly behind these acquisition. In fact, the CLB acknowledged this by saying that "we also find, as rightly pointed out by the learned counsel for the bank, that these transferees have one way or the other, directly or indirectly some sort of connection with a particular group." The counsel representing all these acquirers was a common person. The transfer documents were lodged by a single person. The reply filed by each of these acquirers was identical.

The CLB noted these facts, acknowledged that it is extremely difficult to actually establish linkag bysaying that, "Normally, it is extremely difficult to establish a group connection unless and otherwise solid evidence forthe same is produced. However, group connection can be presumed from circumstantial evidence." However, strangely, at the end, the CLB refused to conclude that there was a connection by saying that, "However, in the absence of any solid evidence of involvement of (the industrial group), we do not propose to express any opinion on this." In another case (Mrs Padma Taparia Vs Assambrook Ltd (1996) 9 SCL 35 (CLB-Delhi)), the CLB refused to accept that being a daughter-in-law by itself makes her connected. There are several other such instances.

Clearly, therefore, while there may be substantial circumstantial evidence, a court of law would require some clear-cut evidence to accept a connection, and wide wordings of terms would not by itself help. As instances of takeovers in general, and hostile takeovers in particular, increase, this issue needs consideration.

If it is any consolation, similar difficulties are faced in the United Kingdom also, though the important difference is that the UK code is not alaw and hence interpreted in the spirit, while the Indian regulations are a law requiring strict interpretation.

There can be several ways out. For example, an undertaking may be required to be given by the acquirers to Sebi or the company that there is no connection. The definition of persons deemed to be acting in concert could be further widened. Giving of finance could be a rebuttable presumption of being in concert. To conclude, this issue will acquire serious attention in the times to come.

(The author is a Mumbai-based chartered accountant)