Stick To The Basics

The attempt to revise the takeover code in order to make it more effective has run into predictable problems because of the compromises that have been made over it in the past. There is a basic clash between the interests of those who control businesses with fairly small levels of shareholding, and a code which seeks to protect small shareholders.

If the code were to deliver its basic objective, it would become increasingly difficult for anyone to control a business with a small stake. As many of those currently controlling businesses do not have the resources to make public offers in order to hike their stake and improve their sense of security, the takeover code has been diluted to allow them to wriggle out of making public offers.

 

One way of doing this has been to waive the need to make an open offer under the code in situations where there is a change of control, if 51 per cent of the shareholders agree to the change through an ordinary resolution. This is obviously not a happy situation for anyone interested in an effective code and so the proposal has come up, during the revision exercise, for the exemption to be allowed only if the resolution is passed by 75 per cent of shareholders. But this, it seems, has opened up a can of worms and may eventually lead Sebi into a degree of micro-management which can be in nobody's interest. For example, if the 75 per cent rule were to be introduced, it would be possible to change a director or directors with an ordinary resolution but a change in directors as a result of a change in control would require a special resolution. If the logic is stretched to its absurd limit it might require a public offer merely to change a managing director.

The review exercise is barking up the wrong tree. Instead of tightening exemptions, they should be removed altogether. The way to avoid such absurdities is to go back to the basics. The takeover code is meant to govern 'substantial acquisition of shares' and should concentrate on it. It is and should continue to come into play through the operation of certain trigger points. The conditions under which there would be an obligation to make a public offer should be made more stringent with time. Right now a very high annual creeping acquisition limit of 5 per cent is allowed, which negates the code but has been incorporated so as to enable those controlling businesses with low stakes to hike them cheaply. Similarly, there is no compulsion to make an unconditional offer -- that is, buy off anybody who comes forward -- once an offerer's holding goes beyond 50 per cent. This keeps out in the cold minority shareholders who miss the ambit of limited offers. There should be a sunset clause to such provisions.