Capitalism never functions well when it is cozy. And capitalism is never cozier than when incumbent company managements think they are as constant as the sun. So let?s shine the cold light of reason on India?s takeover code and conclude that the law in India is biased towards cozy arrangements. Solrex Pharma?s hostile bid for Orchid Pharmaceuticals may or may not go forward?Ranbaxy, reportedly the mover behind Solrex?s move, is apparently not as keen any more?but the issue makes clear how much influence the ancien regime still has. LIC has a significant stake in Orchid and is also a lender. It is reportedly in favour of the incumbent management. But the question is whether LIC has decided this by unsentimentally evaluating which management would add more value to its investment and would better service its loan. All financial institutions in India reflexively opt for the status quo, and when politicians get into the act, as happens when incumbent promoters are well connected, FIs completely forget about maximising their investment value. India?s capitalism was built on generous participation by FIs under a licence-permit raj, and hostile takeovers were considered alien. A lot of once-alien things are familiar and valued now. So, the takeover mantra needs to change, too.
Happily, the market has made some corrections. FIs are not as dominant in post-liberalisation firms. FIIs are, as are millions of retail investors who participate via mutual funds. These investors are unlikely to remember the good old practices of old days when phone calls from ministers could decide outcomes. And while many ministers are as keen to intervene and many promoters still seek political help, crude sarkari intervention in newer companies will be difficult. The real test, though, will be when a foreign investor targets an Indian corporate icon. How will the government behave then? Will ministers and powerful officials openly seek to influence the process as their predecessors did when BAT wanted to take control of ITC? If they do that, they should remember how the next corporate Indian acquisition of a foreign company might be viewed. As India?s corporate sector grows more attractive, suitors, domestic and foreign, will flock in. The government should remember that its role is not that of a paranoid papa.