Initial Private Opinion

The new amendments to the takeover regulations - misguided or sloppy? Yes.

SEBI has once again played around with the numbers in the takeover regulations. In light of the recent downward movement of prices, it seems that SEBI is attempting to make it easier for promoters to acquire shares from the market without making an open offer to the public shareholders.

To give a brief background, the securities market regulator has prescribed by regulation (takeover regulations) that if a person exceeds certain threshold acquisition of shares or voting rights, he or she must make a tender offer for at least 20% of the capital of the company. The rationale of the regulation is that if there is any shift in control, non-control shareholders must be given an option to sell out of the company. The three key thresholds have been a) on crossing 15% b) on crossing acquisition of over 5% if the person (along with those acting in concert with him/her) already hold between 15 and 55% c) on acquisition of even a single share beyond 55% upto 75%. There are some minor complications which are not relevant here. The amendment of 30th October 08 creates another layer of creeping acquisition of 5% between 55% and 75% levels, thus enabling promoters to shift control for an additional 20% without making a tender offer.

There are two major problems with this decision. First, these numbers should not be played around with on a routine basis - they have been previously amended on 10/1998, 10/2001, 9/2002, 1/2005, 5/2006. The fact that SEBI has broad power to create its own law book should not be seen as a license to amend the law on a regular basis. All laws should have certainty and even specialized people cannot keep track of changes in these delegated legislation. There are also problems related to keeping track with the transition time e.g. will the new law apply or the old one where public announcement is not yet made but acquisition has already been made?

The more serious issue with this amendment is whether, it is SEBI’s role to manipulate the market merely because it is going down by making it easier for promoters to purchase shares giving short shrift to the exit rights of the public shareholders? If the regulator were allowed to manipulate the market, would it have the moral authority to prosecute other ordinary manipulators?

Also, the amendments seem to be carried out at an incredible speed. I have never before seen amendments being carried out within three days of the board meeting/Press Release. Not only from a time perspective, but also from the sloppiness of the amendment, this hurry becomes very apparent.

Firstly, there is no reference to a time period to the new 5% creeping acquisition. Unlike the Regulation 11(1) creeping acquisition of 5% “in any financial year ending on 31st March”, the drafters were unable to even copy-paste the time period for the acquisition exemption from the previous para. Thus there is now an exemption without a time period – it’s anyone’s guess whether it is one year, one day or some other random period. Similarly, whether the two exemptions of market purchases and buy back can be used in the same year making the figure 10% is not clear.

Second, the new Reg. 11(2) directly contradicts Reg. 11(2A). The former says if you acquire upto 5% from the market while already holding 55 to 75% you are exempted from making an open offer. The latter says you shall not acquire any shares except by making an open offer if you hold between 55 and 75/90%.

Third, if a person holds 50%, he would be able to use both creeping acquisition provisions (of 11(1) and 11(2)) separately. This means a person can jump from 50 to 60% in one go while he can jump from a lower figure of 45 upto only 50% (in a whole year). Then again from 60 he would be able to go only upto 65% the next year. All I can say is those promoters holding 50% of the company are indeed lucky and favoured compared to any other promoter group.

Does it remind you of certain wooden arrows with a diameter of 5/16th of an inch or less?