First of all, the fact that Sebi took nine months to decide on the issue reflects poorly on its efficiency, as time is the essence in any takeover deal. But the other issues relate to the substance of the Sebi order itself. Among other things, the markets regulator held that the investment companies which acted in concert with Saurashtra Cement's promoters to take up the company's preferential allotments should make an open offer to the company's minority shareholders.

These preferential allotments enabled the Mehtas of Saurashtra to thwart a takeover bid by the Autoriders group, which had made an open offer for 20 per cent without knowing that the equity had already expanded by the preferential allotment. Sebi ruled the Autoriders' bid as invalid since the offer did not amount to 20 per cent of theexpanded equity.

The question is: whether Sebi, by asking the party acting in concert with the existing management of Saurashtra Cement to make an open offer at a price "in accordance with regulations", has actually ended up legalising the use of preferential allotments as a takeover defence tactic?

Once the parties which have been asked to make an open offer do so, a precedent will be set and subsequent defenders in corporate raids will claim to follow what Sebi decided in this case. Saurashtra Cement's promoters had obtained a blanket approval from shareholders for many things, including a preferential allotment, but these approvals did not specify to whom such allotments would be made. The company made these allotments only around the time the Autoriders' bid was announced.

The third issue thrown up is that of the open offer that has to be made by parties acting in concert with the cement company's promoters for at least 20 per cent of the voting rights. But the question is: voting rights as on whichdate? In the Saurashtra Cements case, two preferential allotments were made.

The first was in violation of Sebi guidelines and the second in accordance with it. It is not clear whether the open offer, if and when made (assuming the matter is not taken to high court), will be to acquire 20 per cent of the equity prior to the preferential allotment, or after the first preferential allotment, or on the fully diluted equity? Depending on what the answer is, one could well ask whether there is not a serious possibility that managements may use this route to frustrate future bids on a company?

The Companies Act, 1956, does not specify any time-limit for the validity of an approved resolution. Once approved, it is valid forever. The penalty for not complying with Sebi guidelines is an open offer as per the price specified in Regulation 20(2) of the Sebi (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, which means that Sebi is essentially toothless.

Why did Sebi not take any action in thiscase? Though Sebi does not have the powers to nullify a preferential allotment, it can always approach the Company Law Board not to allow any further dilution of equity till the issue of validity of the preferential allotment done in violation of its guidelines is settled. (The cement firm apparently took its time to inform Sebi and stock exchanges about the first preferential allotments). This way it can at least nullify the allotments which were not in accordance with its guidelines.

However, it is possible that Saurashtra Cement was a freak case and it is unlikely to be repeated. According to Ind Global Financial Trust vice-president V Anand: "There is a serious possibility that the validity of material resolutions may be restricted. A resolution authorising buyback of shares is valid for 12 months and this may be applied to preferential allotments and 293 (1)(a) resolutions also." (Sec 293(1)(a) resolutions are ordinary resolutions authorising the sale of a substantial stake or the entire undertakingand no court approval is required). If the Saurashtra Cement case becomes a precedent, takeovers in this country will no longer be a viable option.

The case also highlights the need for speeding up Sebi decisions. It has taken Sebi almost nine months to decide what amounts to an open-and-shut case of violation of its own preferential allotment guidelines. Admittedly, the matter was taken to court by one of the beneficiaries of preferential allotment, but the order of the court restrained the parties from taking any steps to acquire shares of SCL.

In any case, Section 20A of the Sebi Act specifies that "no order passed by the board under this act shall be appealable... and no civil court shall have jurisdiction in respect of any matter which the board is empowered by, or under, this act to pass any order and no injunction can be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any order passed by the board by, or under, this Act."

Another open-and-shutcase where Sebi has been a mere spectator is that of Vishnu Cement. Vishnu Cement logically should have been owned by India Cements, but was hived off by the former management of Raasi Cement as a poison pill when it felt threatened by a takeover.

Another interesting case of how delays can hurt a takeover relates to Charminar Brewery. In 1993, Shaw Wallace wanted to acquire Charminar by making an open offer. The problem was that Charminar had done a public issue and as a result the promoters' holdings had lock-in problems. In the normal course, a no-objection certificate from Sebi is sought and a lock-in is made applicable to the acquirer. By the time Sebi made up its mind in this case, Andhra Pradesh had introduced prohibition, making the acquisition meaningless.

One issue that has not attracted any attention in the Saurashtra Cement drama is that the institutional nominees on the board were silent spectators even as Sebi guidelines were flouted. If, as is reported, the UTI manages to appoint itsnominees on the boards of companies, will they be able to prevent such abuses?