A Step Ahead

The regulations are forward-looking in that they cover a wide canvas by including certain intermediaries like mutual funds, foreign institutional investors, and banks, which"" with large holdings and the financial capacity of bulk acquisition"" could play an important role in future takeovers.

While some clarity is brought in the concept of persons acting in concert, it could have been further clarified by including members of a group or companies under the same management as defined by SEBI in its public issue guidelines, for the purpose of identifying concerted purchases. The takeover code does not cover either gaining management control through acquisition of shares of an unlisted investment company, or, takeover through applications in a public issue .

 

The provision for the existing management to strengthen its holdings through further acquisition of shares (without making an open offer) is a welcome one. However, the percentages fixed at 2 per cent and 5 per cent for a twelve-month period (for persons holding between 10 per cent to 25 per cent shares and not more than 50 per cent shares, respectively) are low. Therefore, higher mandatory levels need to be set for the additional acquisition over a twelve month period, say, 5 per cent for holdings upto 25 per cent and 10 per cent in the case of existing holdings of between 25 per cent - 50 per cent.

Additional disclosure of the highest price paid by the acquirer during the past 12 months preceding the offer and also the price at which preferential allotment was made in the price fixation norms, would strengthen pricing norms. Leaving the minimum offer price to be fixedin consultation with the merchant banker in the case of infrequently traded scrips and to be justified on parameters specified is a fair suggestion. However, defining frequent trading as trading for at least 13 days in a month for a six month period may not be entirely correct.

Take an example. If 100 shares are traded for 15 days a month for six months, does the share become frequently traded? While this would fit in the definition of frequent trading, the low volume would make the share illiquid and prone to price manipulations. Further, take the case of a month which has a large number of holidays that reduce significantly the number of trading days. A more appropriate criterion would be to fix a minimum monthly turnover based on minimum percentage of share capital. For example, a share could be classified as frequently traded if at least 0.5 per cent of the total issued shares are traded in a month for a six month period.

The provision of the acquirer buying out the balance shares in case public shareholding falls below 10 per cent, or of bringing public holding to 25 per cent through subsequent offer for sale might prove counterproductive in some circumstances. Take a case where 50 per cent of the shares are held by the promoter and the balance is with the public. A hostile bidder might make an offer for the balance 50 per cent public holding and if he succeeds, the company would have to be delisted. While the raider may not gain management control, the concerned groups who would be worst affected are the creditors and employees, what with two promoters holding large chunks being at loggerheads. With this provision, a management holding even 50 per cent shares could spend sleepless nights.

A frequent question that would be asked by concerned groups would be whether the new regulations make it easier to take over a company. It must be kept in mind that a committed raider, targeting a low promoter holding company whose management is uncommitted, would succeed no matter what the regulations. I feel the president, Apple Industries.