Activate The Code

own credibility is at stake. So there is little justification in stalling the code because the new company law has not yet arrived.

If anything, the revised code can be faulted for being too lenient to existing managements, thus tending to perpetuate the status quo, rob business of dynamism and retard the reform process. To say that even this weak attempt to provide a more transparent and level playing field for the substantial acquisition of shares is unacceptable, is to become totally anti-reform. The revised code provides several safeguards which hinder hostile takeovers. It also allows those who have the resources to go on hiking their stake without paying a fair price to the average shareholder. The most obvious concession to the existing managements is to allow creeping acquisition without having to make an open offer to all shareholders. This really goes against the principle of ensuring fairness to the small shareholder. The other obvious avenue left open for businessmen to improve their stake, again without paying a fair price to the ordinary shareholder, is to go in for preferential allotments, rights issues or public issues.

 

one of these is covered by the code. So managements can improve their stake by either making a preferential allotment in their favour, or using renounced rights offers or by making firm allotments for large chunks of public issues. All this has been allowed so that the comfort level of existing businessmen can be raised by not giving the proper price to the ordinary shareholder which would have had to be done under an open offer.

The main reason why businessmen are not satisfied with all these concessions is that they do not have the necessary resources. That is also why they have not raised the most obvious demand this time around, to allow banks and financial institutions to lend for a leveraged buyout or defence. They know that their net worth will not allow them to access more borrowed funds. Further, the cost of Indian money is so high, they will not be able to service loans even if they can get them. Access to foreign funds which carry a lower real interest rate is likely to remain restricted to a few companies. We are really back to the age-old dilemma of Indian business: managements not having money to buy a sufficient stake in the businesses they run under fair market conditions. Under the circumstances, businessmen should have the good grace to accept a verdict which Justice Bhagwati has already loaded in their favour.