Buyback May Be Used To Skirt Takeover Code

The final draft of the takeover code will receive approval from the Securities and Exchange Board of India (Sebi) by the end of this month. A section of members in the takeover committee had reservations about certain regulations.

While investor protection associations feel that the buy back of shares, if allowed, can be used by offerors to circumvent the code, committee member Nimesh Kampani opines that the acquirer needs to buy all shares offered when an open announcement is made and not only 20 per cent as stipulated.

Comments Manubhai Shah, of the Ahmedabad-based Consumer Education and Research Centre, in his dissent note to the Bhagwati Committee Report: It is reported that the finance ministry is inclined to accept the campaign of the business and industry that the companies be allowed to buy back their shares. It is true that at this point of time, the details are not known as to the conditions, system and procedure to be compiled with for buy-back arrangements to be operative.

 

On the face of it, it is apprehended that allowing companies to buy back the shares will be a heavenly route for persons presently in control of the company to increase their control or percentage of holding without investing a single paise from their own pocket.

The funds will be deployed by the company. The entire regulations on the Substantial Acquisition of Shares and Takeover can be rendered irrelevant by companies following the route of buy back primarily strengthening the present management at no costs to them.

It is true that the buy-back arrangement is permissible in developed markets. However, broad features as mentioned below are not present in India.

Developed markets have large institutional investor base such as pension funds of private sector companies, public sector companies and so on. The organised council of institutional investors have a very effective voice.

Holding of the persons in management is around 4 per cent to 8 per cent in the US. In the Indian context, barring some houses, holding of the persons in management is very high.

Quorum required for a general meeting in the US is 50 per cent of the shareholders present in person or by proxy, who has a right to speak in developed markets unlike India.

There is no provision in the Companies Act of India that the interested parties cannot vote on the resolutions before the general meeting nor is there a provision for voting by postal ballot.

Comments of Nimesh Kampani, chairman, J M Financial: The minimum 20 per cent offer prescribed after the takeover code is triggered is not required as it will deny an opportunity to shareholders who want to seek an exit route for their investments. The acquirer should accept whatever quantity of shares is offered to him by investors.

According to him, the acquirer can also misuse the available facility of making an offer for only 20 per cent.

He told Business Standard: It is possible that after acquiring only the minimum 20 per cent holding from shareholders, the acquirer may seek preferential allotment of shares held by the existing management. This means that the offeror can gain control of the company without acquiring shares from the retail shareholders at large.

This will leave a section of disgruntled shareholders who will lose out on the opportunity.