In a recent study on Indian takeover behaviour from April 1, 1994, to March 31, 2001, conducted by Sebi itself, it was found that a hefty 75 per cent of the total amount involved in exemptions to the code had come on account of preferential allotments. The amount involved was a whopping Rs 11,261 crore which was pumped into these companies to modernise them. Inter-se transfers accounted for 23.22 per cent. The committee has now plugged two of the major routes to sidestep the open offer requirement.
The Bhagwati committee has decided that all preferential allotments, wherever they lead to a change in control, will have to be followed by open offers to the remaining shareholders. The other important change brought about by the committee is that of bringing inter-se transfers, at a price above 25 per cent of the market, within the purview of the code. In other words, if one of two promoters wants to sell out to the other, the code is not activated. But if the exiting promoter charges a hefty premium for the changeover, at over 25 per cent premium to the market price, then the code is triggered and an open offer is mandatory.
The changes reflect the basic point from Sebis side that the small shareholders must be kept in the loop whenever management changes are taking place. The minority shareholders must have an exit route by way of an open offer at a reasonable, market-related price, whenever a change in control is taking place in a company. Even in the case of public sector undertaking disinvestments, which have been a major point of debate between Sebi and the disinvestment ministry, Sebi has stuck to its guns and insisted on an open offer by the successful bidder. In fact, the price for the offer has been made more market-related by changing the cut-off date to the date preceding the date when the financial bids are opened.
Sudden shocks for Corporate India from raiders have also been minimised, with the committee now insisting on disclosures at several levels above the 5 per cent mark. Disclosures of purchases have to be made not only between the 5 and 15 per cent levels, but also beyond that, so that the managements of the target companies are well aware of the goings-on in the marketplace. In sum, the code now proposes to enforce orderly takeovers, whether hostile or friendly, but in an atmosphere of total transparency.
However, the committee has sought to placate India Inc by asking foreign acquirers of domestic stock to first seek the clearance of the Indian government and the target company board before doing so. Whether a protectionist policy of this kind is good for shareholder value is debatable. Whatever be the case, the changes are long overdue, given a massive surge in mergers and acquisitions over the past few years, and a paradigm shift in takeover behaviour.
But most of these changes will add up to naught, if Sebi does not now concentrate on the other aberration in the market that of price manipulation prior to acquisition-related activity. Almost as a rule, whenever there is any acquisition-related development in the Indian market, the stock price movement prior to that is a dead giveaway. There is even blatant ramping of prices prior to open offers being made, and the disinvestment process is also not spared, as was seen in the case of the CMC stock. Sebi, together with the stock exchanges, will have to focus its energies on stamping out such price manipulation decisively as soon as possible. If that isnt done, the open offer price itself will be an imperfect price, and the result of a rigged market. This issue needs to be uppermost on Sebis agenda, if the sanctity of the markets and the takeover code itself is to be protected. The reforms in the takeover regulations will be meaningless if operators who have access to selectively leaked price-sensitive information continue to ramp up stocks and walk away with hefty gains. The level of transparency which Sebi has brought to the takeover process, now needs to be imparted to the secondary market as well.