DoD’s proposal is justified
This refers to the article ‘Short changing the small investor’ (Nov 10). Perhaps Mr G V Ramakrishna was not aware of all the facts when he wrote it, recommending a rejection of the Department of Disinvestment’s proposal regarding “Open Offer”. The answer to the question lies in Mr Ramakrishna’s statement “The take over regulation is not meant only for disinvestment cases but also for possible collusive low prices paid in friendly takeovers by private parties.” When the Takeover Regulation was drafted, it was designed to prevent collusive low prices in friendly takeovers. On the other hand, in the case of government disinvestment, prices are sought from strategic bidders in an open competitive environment. Let us now look at the other side. Manipulation of the closing deal of the day for 26 weeks, or a lesser period, can raise the market price of shares to unreasonable levels. This is not possible in a private deal, because the deal is announced only upon completion. On the other hand, in a transparent government disinvestment everyone knows about all the stages of a disinvestment deal and if the “small shareholder” or a broker knows that he can get a higher price after a strategic sale, it would be naive to believe that he would not manipulate prices, close to completion of deal.
CMC is a text-book example. In the pre-disinvestment period, the prices of all similar companies went down and if CMC’s share price had behaved similarly, it would have been closer to Rs 80 but it reached more than Rs 300 on closing day. Tata’s bid was Rs 197. As a matter of fact, Tata’s were reluctant to bid, owing to artificially manipulated prices. In case the prices had gone up a little further, Tata’s bid would have been lower and led to the bid’s rejection. This rejection would have caused the share price to fall to double digits. Indeed, it did collapse to Rs 200 within two days, due to fear that the government may reject the bid due to manipulation. No small investor would have benefited had the deal collapsed.
The strategic investor makes the bid on a particular date and gives a large security deposit. If the government takes one-two months to take a final decision on the bid, and if in the meanwhile, the prices are manipulated, the strategic bidder takes an unreasonable risk as he does not know the total price he will have to pay. In the Hindustan Zinc case, a number of bidders were, therefore, reluctant to bid. The strategic bidder can’t be expected to bid for an open ended price.
If strategic disinvestments in government can be negotiated across the table, there is no justification for amending the Sebi rule. But if strategic bids are to be invited in an open competitive platform, the Sebi rule needs to make a reasonable classification for government’s disinvestment, and that is precisely what we have sought from Sebi.
— Pradip Baijal, Secretary, Ministry of Disinvestment, New Delhi