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Creepy move

THE SEBI DECISION to raise the limit for creeping acquisition from 5 per cent of the paid-up capital to 10 per cent is a setback to enhanced corporate control. This is the second round of easing up on the creeping acquisition limit in the past two years. Even when SEBI raised the limit from 2 per cent for a 12-month period to 5 per cent, the head of the SEBI committee on takeovers expressed reservations Now, SEBI has made things much easier for incumbent managements keen to have more leeway. Given the c urrent bearish phase in stock prices, they should be able to shore up their holdings at a low price.

The protagonists of the move may argue that promoter-buying would bolster stock prices. This may happen but such extraneous, one-time moves do not lead to sustained improvement in valuation. Of course, SEBI, in keeping with its track record of presenting a fait accompli to the market, has not explained how allowing a higher limit for promoters would help investors. The entire process of regulation-making appears to be hustled along by vested corporate interests (only last week the segment reporting requ irement was put on the backburner). As it is there has been a spate of voluntary open offers and buybacks at low prices in the past eight months leading to a drop in the number and quantum of stocks available for trading. But SEBI seems to have turned a blind eye to such goings-on that ought to be causing serious concern. How the enhancement of the creeping acquisition limit would help the market for corporate control is difficult to see. In fact, the move may cause a serious setback to an already enfee bled market. Instead of finding ways to encourage the market for corporate control, including hostile bids, SEBI has added one more defence to promoters. Indeed, the Takeover Code may well be re-christened a shield against takeover regulations.

Even a cursory look at the financials and quality of management of many companies would show up the scope for a vibrant market for corporate control that could unlock value for shareholders. This has happened in a few cases over the last three years. But ever since the open offer threshold and the creeping acquisition limit were raised, only in a couple of cases has the strength of the market for corporate control been visible. The gap between the outside acquirers limit for an open offer (which is stil l 15 per cent of the paid-up capital) and the new 10 per cent creeping acquisition limit for promoters is so small that the cost of finding out the under-valuation in a company may more or less neutralise the benefits of mounting the takeover. A takeover attempt is made when a would-be acquirer sees value and has the means to capitalise on the discovery of pricing inefficiency. Now not only are there more regulatory hurdles, they also make the takeover more expensive than it ought to be even allowing fo r a premium for control.

SEBI needs to rethink the entire gamut of the Takeover Code. More important, it needs to ensure two things while making regulation: One, the process must not be hostage to incumbent management but should aim at protecting the interests of investors and a dvancing capital market development. Two, SEBI must put in place a due-process that takes into account a range of views, as does the US Securities and Exchange Commission. This would ensure better balance in regulation framing and oversight.