'Corporate Governance Will Come Into Focus'

Lending positive direction to a reform process is critical in the transition phase of an economy. The key to this effort is to establish the ground rules and boundaries within which the economic activity can blossom, rather than establish a case-by-case view which has become so common in India.

The draft Sebi takeover regulations has met with plaudits for this reason, and needs to be viewed in this context. I would like to focus on a sample of the issues that need to be considered.

Let's take the legal environment. The Companies Act and allied legislations do not offer adequate defence mechanisms for target companies and their management to a hostile takeover bid, which may not be construed to be in the interests of the target by its board of directors in its fiduciary capacity.

 

Further, the draft takeover code by itself will not, however, catalyse the process of growth without the free flow of available capital being routed towards acquisitions.

The new code makes a drastic shift from the earlier version in requiring a Category-I merchant banker as advisor to the public offer, without offering sufficient justification for such a shift.

Implicit in the proposed code is that only a Category I merchant bankers (with the requisite net worth) would have the wherewithal to ensure better diligence being exercised and more meticulously administer the public offer process (including justification of the offer price). Experience in India and abroad provide no such corroboration.

Some of the largest deals in India and in prominent mergers and acquisitions markets like the UK and the US in the recent years have been executed by advisors who are not necessarily Category I merchant bankers.

The advisors to the process need to be established based on the repute, track record, and quality of advisor, rather than net worth considerations which have no bearing on the process of managing the public offer.

I feel Sebi should instead be empowered to empanel and periodically review intermediaries who could be entrusted with the responsibilities after examining their credentials on parameters germane to the takeover process.

Touching upon other issues, there are two instances that immediately come to my mind which Sebi needs to address. Worldwide, takeovers having ramifications on Indian operations represent a change in control as far as investors in the Indian subsidiaries are concerned. The code does not clarify on the public offer requirement in such an event.

The second issue is in the event of public shareholding falling below 10 per cent as a result of the public offer. Sebi could clarify the listing status and acquirer's position if the residual shareholders were to refuse to sell their stake and the acquirer is not inclined towards making an offer for sale.

The takeover code will certainly reinforce the attention of the corporate sector on governance issues. The draft code is clearly a positive development in governing corporate activity. The appreciation of the need for a public debate and the welcoming of new thoughts on the code are all steps in the right direction.