Regulation 20(2) of the Takeover Code says that an acquirer has to make an open offer at a minimum price, which is the highest of:

1) the average weekly high and low price of the company in the past 26 weeks quoted at the stock exchange where the shares are frequently traded, or2) the highest price at which the acquirer or persons acting in concert with him have purchased shares in the past 26 weeks.

Sebi's move is welcome as many acquirers have violated the present regulation to escape from the obligation of making an open offer at the price paid by them to the promoters, which is normally higher than the price at which the open offer is made. Needless to say that in such cases, small shareholders suffer invariably, owing to the loopholes in the Code, even as promoters and acquirers make the best of the situation.

Acquirers have their own ways of circumventing provisions of the Takeover Code. An acquirer has to make an open offer for a further 20 per cent of the company's share capital, if he acquires 15 per cent or more of the capital of the company. If the acquisition is done through the stock markets, then the acquirer may have to pay higher price, as the share price of the target company goes up as the news of acquisition filters through the market.

Therefore, the cost-effective route to get a hold over the target company is to acquire in the first stage, less than 15 per cent of the promoters' stake in the company at a mutually agreed price, which is normally higher than the market price. Following this acquisition, the acquirers do not acquire any shares for a period of 26 weeks.

After the waiting period of 26 weeks is over, the acquirers purchase the remaining holding of the promoters, although at a lower price than before, or buy some shares from the open market, pushing their stake in the target company above 15 per cent and thereby triggering the Takeover Code.

Takeover Code regulations stipulate that the price to be paid by the acquirer would be the price at which the acquisition of the second lot was done, since the first lot was purchased "before" 26 weeks of the announcement of the public offer and not during that period. However, if the average weekly market price of the past 26 weeks is higher, then the average price would constitute the offer price.

This can be illustrated with an example. Gujarat Ambuja Cement acquired 14.4 (not 15) per cent stake from the Tatas in ACC at Rs 370 per share. After waiting for 26 weeks from the date of that acquisition, if it decides to increase its stake in the company by purchasing shares from the open market, then it will have to make an open offer at the highest price at which it had purchased shares from the market during the 26-week period. The closing price of ACC on December 13 was Rs 163. Even if the price goes up to Rs 200 due to the purchase of shares by GACL, then too, it would have to make an open offer at Rs 200 and not Rs 370 which it paid to obtain Tatas' stake.

Thus, the acquirers gain control over the company and the promoters sell their stake at a huge premium to the market price. But in this game, the hapless small investor can do little, except put up with this grave injustice. He also suffers in another way. The promoters can divest their entire stake in the company. But small investors have to be content with selling of their shares in the open offer proportionally in case of over- subscription to the open offer. Therefore, he gets lower price and suffers loss owing to the proportional condition.

Sebi's move to consider the provisions of Regulation 20 should correct this gross violation indulged in by the acquirers. Instead of the stipulation of 26 weeks, the Code should stipulate that the minimum price would be the highest price paid by the acquirer during a period of 76-104 weeks preceding the date of the open offer. This move would ensure that the small shareholders are treated on par with the promoters of the target company.

The promoters enjoy a slew of advantages in the Sebi Takeover Code. If the shareholding of the promoters in the company is more than 15 per cent, then they can acquire 5 per cent every 12 months through the creeping acquisition route. They can also go in for a buyback and increase their shareholding in the company.

However, many promoters who control the company having less than 30 per cent holding, lack a sense of responsibility towards small shareholders. They are the first ones to run to Sebi for imposition of strict regulations on corporate predators.

It is time such promoters realised that management of companies is not their personal fiefdom. They must inject certain professionalism in the management or make way for a new management. Sebi must drive across the message "Swim or sink".

Prashant Kothari