Date:30/08/2004 URL: http://www.thehindubusinessline.com/2004/08/30/stories/2004083001100300.htm

Back Can Colour Chem minority holders `interest' be protected?

Jayanta Mallick

Kolkata , Aug. 29

THE Colour Chem case is proving to be a litmus test for the SEBI (substantial acquisition of shares and takeover) regulations of 1997 (amended in 2002).

This is the first case involving indirect acquisition and violation of the Indian takeover regulations on which the Supreme Court pronounced its ruling.

The takeover regulations were conceived to be "beneficial stipulations" for the minority shareholders of an Indian company, controlled by domestic or overseas promoters.

The stock market regulator, seeking to protect the minority shareholders' interest, had provided in the takeover rules for compensation in case of an "indirect acquisition" or takeover of foreign parent of a domestic company.

The SEBI, as a quasi judicial body, further ruled in all cases of violation of the Indian takeover norms caused by such indirect acquisition that minority shareholders should have the opportunity to participate in an open offer for 20 per cent stake in the Indian company, which was subject of such indirect acquisition, and to receive an interest on the open offer price for any delay in making such an offer.

In this case, the Securities Appellate Tribunal (SAT) and the apex court accepted the applicability of the takeover norms and that interest should be payable.

However, both the appellate forums accepted the contention of Colour Chem's acquirer (Clariant International) that only those persons, who continuously held the shares from the cut-off date (reference date), mentioned by the SEBI, till the time of the tendering the share in the open offer, be eligible for the interest payment.

The minority shareholders (of Colour Chem and other such companies) feel completely let down by the judgement.

They point out that the apex court's ruling would create two classes of equities with different rights attached to them.

According to Mr Arun Goenka, a chartered accountant and an investor-activist, it means that all shares traded cannot be treated as pari-passu. "This is against the prevailing rules of trading in the stock exchanges and the guidelines set by the market regulator," he observed.

Mr C.V. Desai, managing trustee of the National Investors Foundation (NIF), said that this would create an absurd situation. "Continuity in ownership of a share cannot be made a criterion for deriving rights from the legally transferable asset. It will not only create wrong precedence, but would lead to confusion about the very definition of a tradable equity stock," he added.

The NIF was writing to the market regulator to seek a review of the recent Supreme Court order, Mr Desai added.

"If the order is to be implemented, the rules of trading in equities have to rewritten," commented Mr Goenka.

According to Mr Janardhan Kothari, another investor, the judgment does not seem to have taken into consideration the fungibility and transferability applicable to equity shares. "All rights, liabilities and past accrued incomes/losses are constantly transferred to new owners whenever shares changes hands. This is accepted throughout the world," he observed.