The Hindu : Testing the takeover code: in letter and spirit

Online edition of India's National Newspaper
Saturday, Mar 22, 2003

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Testing the takeover code: in letter and spirit

By C. R. L. Narasimhan

The verdict on the two high profile episodes involving the takeover code are out. But has capital market regulation gained?

Two highly publicised cases involving alleged breach of the takeover code have recently been in the news. In quick succession, the Securities and Exchange Board of India has let it known that it saw no breach in either of the cases. The more recent of the two has been the acquisition by Grasim, a company of the Aditya Vikram Birla group, of a substantial chunk (a little over 10 per cent) of L&T shares from Reliance. That along with other purchases took Grasim's share to slightly below 15 per cent, at which point the takeover code's trigger forcing the acquirer to make an open offer would have been effected. Grasim, although not bound to do so, proceeded with an open offer to acquire another 20 per cent of L&T shares at Rs.190. The open offer was deferred at the instance of the SEBI. Although the pricing of the open offer was widely criticised as being too low and therefore discriminatory to the other shareholders that was not the reason for the deferment of the open offer.

The issue here as well as in the earlier case involving ACC was whether there was a change in control of the target company even if the acquirer did not cross the threshold of 15 per cent. In the case of ACC, Gujarat Ambuja Cement's acquisition of shares took place as far back as 1999-2000 and although its stake went up to just below 15 per cent it had claimed that it had merely entered into a strategic alliance and was not in it for a take over. That was a claim that though upheld by the SEBI was faulted by the capital market's appellate authority, Securities appellate Tribunal (SAT). The SEBI, which was asked to review the order found once again no evidence of a change in control at the target company, ACC.

The common strands in both cases are obvious. The principal players, Gujarat Ambuja, ACC, Grasim and L&T are all well known companies with reputations going well beyond share markets. Interestingly the two other companies which though not part of the immediate controversy but have had significant roles are Reliance which sold its stake in L&T and the house of Tatas (whose stake in ACC passed on to Gujarat Ambuja). Thus the two episodes, by virtue of their principal players being among the top names, automatically ensured a certain degree of visibility. Add to this the fact that the takeover code is itself comparatively new and even by the generally minimal standards of capital market regulation waiting to be refined. Specifically important precedents would have been set on issues relating to take over. For instance, whether there was a change in control at the target company consequent on an acquirer getting hold of a chunk of its shares but ensuring that the stake did not cross 15 per cent. It is certainly easier to monitor the acquisition levels but infinitely more difficult to rule in cases where the stake fell marginally short of the trigger point. The issues in both the episodes: did the acquiring company cause a change in control even though its level of shareholding did not cross 15 per cent?

Now that the SEBI has given a clean chit to both companies — Grasim and Gujarat Ambuja — attention must perforce turn to the other stakeholders who are affected. The non-institutional shareholders of L&T and ACC would have had an option to surrender their shares in an open offer that the acquirers would have made. Here of course there is one difference: while Grasim did announce an open offer (whose price though low was still in accordance with the relevant rules) Gujarat Ambuja had argued out its case for not making one. But the crucial point here ought not to be missed: Gujarat Ambuja paid at Rs. 370 to acquire Tata's shares in ACC. Grasim's acquisition of L&T shares from Reliance was at Rs.306. In relation to the prevailing prices; these were at a premium, justified on the grounds of acquiring bulk shares. As Grasim went on to prove, the open offer could be priced in accordance with the rules and yet be made in "a cost-saving manner.'' (The open offer was priced at Rs.190 a steep discount to what was paid to Reliance). Clearly Grasim was entitled to take advantage of the generally depressed market prices in timing its open offer. But should one of India's top groups stick merely to the letter of the law? A similar question may well be asked of Tatas who received a premium on their stake in ACC which was sold to Gujarat Ambuja.Again, no violation of rules, just a matter of helping create healthy precedents at a time when the rule book is just evolving. In the case of L&T institutional shareholding being significant the nominee directors might well influence the next course of action. While Grasim is expected to revive its open offer albeit at a higher price and more disclosures, it is unlikely that the new price will match the expectations of investors. Gujarat Ambuja of course is under no such obligation.

Even granted that the SEBI has had a daunting task, it is clear from these two episodes that it has to learn to be more proactive and transparent. In matters such as these the logic and reasoning behind its considered decision making are as important as the decisions themselves.

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