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| Sunil Jain: Scrap the secondary market | | Sebi betters the UPA when it comes to concerns for the aam aadmi, in this case, the investor |
| Sunil Jain / New Delhi Jul 26, 2010, 00:20 IST |
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Recommending the abolition of the secondary market seems a bit radical, but when you think of it, it is quite in keeping with government policy. For years, we’ve maintained a policy that mandates around a third of the shares allotted under any IPO have to be reserved for the “small” investor (defined as anyone who buys less than Rs 1 lakh worth of shares), never mind that the policy was always open to the kind of abuse we saw in the Rupal Panchal case in 2006 where she applied for IPOs in various names of “small investors” so as to ensure she got the amounts she wanted. Couldn’t these “small” investors buy their shares in the secondary market when the share got listed after the IPO? “Small” by the way is a bit of an oxymoron since with less than 1 per cent of all Indians investing in equity, either directly or through mutual funds, clearly these investors aren’t the aam aadmi.
And now we have a report of a Sebi committee recommending that if, as a result of an M&A or a strategic investment, a person’s shareholding crosses 25 per cent in a listed company, she has to make an open offer to buy all the remaining shares — the current threshold trigger is 15 per cent and the open offer has to be made for just 20 per cent of shares. Since these shareholders can just as well sell their shares in the secondary market, the implicit assumption behind insisting that an open offer be made for all shares is once again the same, that the secondary market doesn’t work!
(The fact that the open offer trigger is now 25 per cent instead of the earlier 15 is good since it makes it easier for private equity investors to put money in companies; there are probably more good/bad aspects of the Sebi committee recommendations; this column is restricted to the most obvious flaw in the panel’s proposals.)
The principal intellectual argument made by the committee is that while promoters have got away with huge sums of money, the “small” investors haven’t got as much. While the report doesn’t mention the Singh brothers of Ranbaxy, this is the example mentioned by most — when they sold their 34.8 per cent stake to Daiichi-Sankyo in August 2008, they got around Rs 11,000 crore. Since the open offer was restricted to just 20 per cent, the argument is that the “small” shareholders could cash out just a fifth of their shareholdings. Apart from the fact that you don’t make a law to take care of exceptions, it’s useful to look at the facts of the case. At the time the brothers consummated the sale, the market price of Ranbaxy was just Rs 560 and it fell to around Rs 500 by the time the open offer closed. In other words, the “small” (and big) shareholders who sold 20 per cent of their holdings to Daiichi at Rs 737 per share did so at 30 per cent more than the market price. Isn’t an extra Rs 2,000+ crore a good enough return, more so considering the way Ranbaxy’s share prices were falling?
How much more money will shareholders get if an open offer has to be made for all shares instead of the current 20 per cent? It’s difficult to say since a lot depends on the circumstances. If the offer price is lower than the market price, there will be no takers. If it is much more, perhaps all shareholders would like to cash out. If you take all the open offers made since January 2006, you find that less than a sixth of all offers have succeeded — in terms of money, while companies had set aside an amount of Rs 51,535 crore to buy 20 per cent shares, they actually ended up spending only Rs 30,255 crore. So, if the open offer has to be at least the price paid to the promoters (as is now the recommendation by Sebi), even if the open offer is restricted to 20 per cent, this would fetch shareholders Rs 20,000 crore more, or a hike of 66 per cent over what they got. That’s a pretty substantial benefit, isn’t it?
It’s difficult to estimate how much paying for all the remaining shares, and at the offer price given to the promoters, would cost, but some examples will help. In the case of Ranbaxy, to buy the remaining 37 per cent shares that were left with the public, Daiichi would have had to spend another Rs 12,500-odd crore; in the case of Gujarat Ambuja in August 2007, the acquirer paid Rs 1,270 crore to get an additional 5 per cent shares — if the remaining 55 per cent that was with the public had to be bought out, this would have meant an additional Rs 14,000 crore or so. While there were 69 takeovers per year between 1997 and 2005, this rose to 99 in the period from 2006 to 2010 — given the substantial hike in costs, and the fact that Indian banks don’t even like financing takeover bids, it is likely that M&A activity will take a huge fall if the recommendations are accepted. The other possibility, of course, is that those wanting to do M&As will restrict their acquisitions to 24.9 per cent, use merchant banks to buy the rest and ensure the paperwork shows there is no collusion between them.
The real problem area, Sebi would do well to keep in mind, is not so much to do with buying into a listed company, but lies in listed companies buying into unlisted ones since there is no transparent way of valuing them — and if the unlisted companies belong to the promoters, this is where they make a killing. This is where Sebi needs to focus on since all shareholders, big or “small”, get shortchanged in the bargain.
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