'Draft takeover code may not stand legal scrutiny'

The draft takeover code circulated by the Securities and Exchange Board of India (Sebi) contains several provisions which may not stand strict legal scrutiny, Shardul S Shroff, managing partner of corporate law firm Amarchand Mangaldas, has said.

Addressing a seminar on capital markets and the takeover code organised by Indian Institute of Corporate Affairs (IICA) here today, Shroff said the penalties prescribed in the code did not correlate with the maximum penalty allowed under the Sebi Act.

Similarly, the code failed to dovetail provisions with international laws without which the timeframe stipulated for completion of takeover proceedings might not be possible, he said.

Shroff was hinting at the suggestions in the draft code to consider foreign depository receipts as shares and reminded that the Sebi Act has no jurisdiction over such depository receipts.

The proposal to delete the clause relating to non-compete fee from the Takeover Regulations, and make any consideration paid in any form inclusive of all ancillary and collateral agreements part of the negotiated price was also criticised. According to Shroff, such a move can be easily challenged in a court of law if the person who is signing the non-compete agreement is just a knowledge or technology partner and not a shareholder.

“You should not draft a law that can be legally challenged and struck down by the courts,” he said.

Jitesh Khosla, additional secretary and officer-on-special-duty at IICA, welcomed the suggestions and wanted such deliberations to be part of the comments that reach Sebi before it finalises the draft code.

Sebi has invited public comments on the draft takeover code prepared by its Takeover Regulations Advisory Committee till August 31.