'Bulk Deals, Straight Offers Not Distinguished'

The new rules are an improvement, but some crucial aspects have been left out. Take, for example, the clause which says that promoters holding more than 50 per cent can increase their stake without making a public offer.

Before giving effect to this provision, Sebi should formulate clear, specific rules about insider trading. Promoters cannot be allowed to make purchases any time of the year they want to. Sebi should lay down when promoters can buy shares and what the time-gap should be between purchases and company results. Without such rules, cases of insider

trading, already rampant, will only get worse.

 

The second aspect is regarding advice tendered by the board of directors of the target company to their shareholders. Sebi has taken a half measure by making this advice optional. It should be the duty of every board to advise shareholders on whether to accept the proposed offer or not.

When a company makes a public or a rights issue, the prospectus is signed by the entire board. This says everything about the company, its prospects, its potential and why investors should put their money. When the entire board can come together and advise shareholders about a public issue, they should be made to do the same in case of a public offer. Shareholders have a right to know what the board feels about the proposed offer, and it is the directors' duty to tender such advice. The rules should make bidders accept whatever shares are offered to them in the public offer. When the negotiated deal is struck with promoters, the bidder does not restrict himself to 15 or 20 per cent; he buys out the entire stake.

Why should the shareholders be denied this facility? The bidder should not just buy 20 per cent, but pick up whatever stake is offered to him during the 30-day period. There is no mention of GDR holders in the new regulations. What happens to them if there is an offer for the company in which they hold GDRs? How do they participate in the offer?

Sebi should work out with RBI a mechanism by which GDRs can be converted into shares quickly so that foreign shareholders can participate in the offer. Owing to the rush for foreign money, many Indian companies have large GDR holders.

If they are not allowed to participate, their holdings will become worthless. If this trend continues, Indian companies will find it difficult to raise money from GDR issues.

The regulations have not distinguished between different types of acquisitions.

One is a negotiated deal after which the acquirer makes an open offer. The second one is a straight public offer without negotiations. This is different from the first, and has to be treated separately.

As told to R Sriram

(This article is part of a series of views on the new takeover code)