'Code Will Keep Managements On Toes'
There is a lot of euphoria and media hype about the new takeover code. However, I don't think it is a watershed as it is made out to be.
The main reason is that two almost contradictory things have been introduced at the same time. On one hand, the Securities and Exchange Board of India set up the Bhagwati panel to draft the takeover code, while on the other, the government has allowed issue of non-voting shares to promoters.
The draft report gives the impression that the new code will further smoothen the process of takeovers and substantial acquisitions. The number of takeovers will go up due to this and companies which are fundamentally sound but badly managed will see a change in ownership. However, such promoters can continue to stay in the company by issuing non-voting shares. Another deterrent for genuine investment in stocks of good companies is the threshold limit of ten per cent imposed for mandatory public offer.
This will affect the long term investors who do not intend to run the company but would prefer investing taking into consideration sound fundamentals of the company.
Why should an investor who has faith in the management of a company be subjected all the process of making a public announcement ? As a result, he may not invest in the company beyond the ten per cent limit even if he intends to do so. The code will certainly help in keeping managements on their toes. However, if the performance of the management is good, then there is a need to provide adequate mechanisms to protect such managements. Similarly, if the performance of the management is not so good, we need to have mechanisms to test such types of corporate
governance. The new code will go a long way in bringing about an attitudinal change among our market players. Earlier, takeover was not seen in a positive light, especially by those in the target company. However, there is a conscious mental acceptance now.
nAs told to Rajas Kelkar
(This is a part of a series of views on the new takeover code)