Promoters take merger route to avoid open offers
A large number of promoters have increased their holdings in listed companies by more than the permissible limit specified by SEBI during a financial year but have escaped the obligatory public offer to minority shareholders.
This has been possible by merging a non-listed company owned by the promoters with the listed company through a swap ratio that are often tilted in favour of the unlisted entity.
Since SEBI does not have a valuation procedure for unlisted companies, the valuation made by independent valuers is taken as final.
This is a trend gaining ground among Indian promoters that offers a route to escape mandatory open offer to the minority shareholders in cases where the promoters’ stake in the company increases by more than five per cent during a financial year.
Schemes of merger or some other arrangement involving companies and sanctioned by the courts are exempted from the purview of a `public offer’ for acquiring shares beyond the permissible limits under SEBI’s `open offer’ requirements.
There have been thousands of complaints from small investors to SEBI against this practice of avoiding open offers, but most have not even been replied to.
Mr Anil Jindal, Director of Jindal Securities, who as a minority shareholder has moved the courts against such mergers on several occasions, said: "I wrote to the SEBI and to a number of companies involved in such arrangements. The companies send in a routine answer that this is done as per this rule. The SEBI does not reply at all."
According to market sources, this trend is prominent in sectors that are likely to see high growth in the next 2-3 years, such as real estate or IT.
There are also instances where the promoters have increased their stake in the listed entity by more than 10 per cent through mergers; since these shares do not have any lock-in period, they subsequently placed the same shares with FIIs. According to Mr Vijay Bhusan, senior broker and former President of the Delhi Stock Exchange, foreign promoters are also using this route to avoid open offers.
He cited the ongoing merger process in EDS-India with MphasiS BFL.
EDS, the US-based IT and BPO company, had acquired Barings Private Equity Partners’ stake in MphasiS and subsequently came out with an open offer.
Because the market price was lower than the company’s offer, it received an overwhelming response and the company had to return some of the shares that were offered.
Then, in July this year, EDS announced that it would further increase its stake in MphasiS BFL and, expecting another open offer, the share price started moving up.
"Then we came to know that EDS would merge its Indian operations with MphasiS and increase its share and thus there would be no open offer."
Mr Prithvi Haldea of Prime Database said: "First of all, we need to get rid of the word promoter and move to controlling stake holder. All guidelines should be applicable to people who control the company at the time of specific corporate action. Also, all the rules and takeover guidelines would have to take into cognisance the persons who directly or indirectly control the decision-making."
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