Sub-rule of takeover code resulting in loss to general shareholders
Ambarish Mukherjee
With a booming stock market and rise in the number of open offers that follow acquisitions, rampant use of a particular sub-rule , incorporated in the Securities and Exchange Board of India (SEBI) takeover code in September 2002, is resulting in substantial lower price realisation by the non-promoters and small shareholders of such companies vis-à-vis the promoters. The amount involved runs into thousands of crores of rupees.
The sub-rule 20(8) of the takeover code had created a provision of paying up to 25 per cent more to the promoters for their shares than what would be paid to other shareholders who would accept the open offer and sell their share.
Before this provision was made, an acquirer had to pay effectively the same amount for the shares purchased either from promoters or from other shareholders.
However, anything paid to the promoters beyond 25 per cent needs to be included in the open offer price.
According to stock market analysts, since this provision had been created, in almost 100 per cent of takeover cases, this sub-rule has been used. In a sample study of five recent takeover cases (see table), for which the acquirer had made subsequent open offers, the notional loss to non-promoters and general shareholders sums up to Rs 564 crore.
A quick glimpse at SEBI’s Web site shows that there have been more than 50 such acquisitions, both domestic and foreign, and subsequent open offers since 2004.
According to Delhi-based analyst and Director of Jindal Securities, Mr Anil Jindal, the provision is being turned on its head by the bankers so that the acquirers have to pay the minimum to non-promoter shareholders.
According to Mr Jindal, the modus operandi involves the promoter and acquirer reaching an understanding on the price of the shares the promoter is selling. "Suppose the amount is Rs X and it is obvious that there has to be an open offer. Here enter the bankers. The deal for the full amount is structured in two segments — a negotiated price and a non-compete fee, which would then add up to the original Rs X. The fact that it is misused is evident from the fact that the SEBI rule allows up to 25 per cent and in almost each and every case this is paid at the 25 per cent ceiling level and only in some stray cases it is less than 25 per cent. If the deal between promoter and acquirer is actually struck at Rs 100, the non-promoter shareholder would get only Rs 80 per share, while the promoter would get the predetermined Rs 100," he explained.
According to Mr Kirit Somaiya, President of the Mumbai-based Investors’ Grievances Forum and a former Parliamentarian, it is debatable and there are two sides to it, but the purpose of such a provision was to bring in transparency.
"Non-promoter shareholders were being deprived earlier also because every deal involved huge underhand payments. Since that was happening anyway, the acceptance of the idea that the promoters deserve a premium and making that payment process transparent was desirable. But whether it would be 25 per cent or something different is subjective and debatable," Mr Somaiya said.
Mr Somaiya said that the promoters would make money anyway. "Our objective is not to see how much the promoter is getting but to ensure that the general shareholder is getting not less than his legitimate dues," he said.
"But if you see the individual cases of negotiated takeovers, you will find that often the offer price has been rewarding for the small shareholders which might not have been otherwise. Actually, incentivising the promoters also in a way leads to incentivising the shareholders," he said, adding that an exact assessment of the whole issue would be required in the future.
Source:
