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BUSINESS:
HOSTILE TAKEOVERS
Raid
Terror
Declining
stock prices embolden corporate raiders, forcing promoters to seek changes
in takeover code
By V.
Shankar Aiyar
On
October 20, as SEBI Chairman D.R. Mehta is all set to leave for China,
he gets a distress call from the legal advisers of a corporate chieftain,
seeking an urgent meeting. Mehta asks a senior executive director to meet
the delegation. The issue: their real-estate company is being targeted
by a hostile raider and they want SEBI to intervene. The executive director
explains the new reality of free markets where regulators don't intervene
and lays down the options available before the promoters.
 Over
the past few weeks, a number of companies have approached SEBI with a
similar gripe. While Arun Bajoria's rather suspect bid on Bombay Dyeing
may have focused attention on the threat faced by promoters from hostile
raiders, not everyone is as strongly placed as Nusli Wadia is in Bombay
Dyeing. Gesco Corp is facing a takeover bid by Delhi-based realtors Dalmia,
the Thapars of Ballarpur Industries are battling Bajoria, East India Hotels
is examining investments by ITC's investment companies.
Suddenly
there seems to be a rash of raiders. Since the formulation of the takeover
code three years ago there have been 221 open offers, but only eight companies
have faced hostile bids. Of the eight companies only two raiders-India
Cements and Torrent Power-have succeeded in their bid. Two cases are in
court, two failed and two are in limbo.
So what
is luring the raiders? The answer lies in the valuations of scrips that
are currently at a 17-month-low, particularly in the case of old economy
stocks. For instance, the market capitalisation of car maker Telco is
barely Rs 2,000 crore, down from Rs 4,331 crore in March this year or
just above the cost of the new Indica plant. Companies like Spic, Tata
Steel, Nagarjuna Fertilisers, Century Enka, have also been rendered vulnerable
thus.
According
to SEBI's (Substantial Acquisitions of Shares and Takeovers) Regulation
1997, a raider is required to inform the company and the stock exchange
concerned when he crosses the 5 per cent limit. He can then raise his
holding and has to make an open offer only when it crosses 15 per cent.
In defence,
promoters can either make an open public offer to counter that of the
raider (involving a huge cost as the market flares up) or use the creeping
acquisition route whereby the promoters can buy directly from the market
up to 5 per cent of the total equity of the company every year. That is,
if they have the personal net worth which is difficult in the downtrend
currently faced by promoters. There is also the buyback option. But if
the buyback of its shares by the company improves the holdings of the
promoters, the increase is also mirrored in the holdings of the raider.
No Excuse
For Leniency: FICCI President G.P. Goenka says the takeover code creates
an "unlevel playing field". While promoters are allowed to buy
only 5 per cent a year, raiders are allowed to mop up as much as 15 per
cent. Shashi Ruia, chairman, Essar Group, agrees. "The law must free
the promoter to consolidate his holdings. The buying will only improve
the stock and investors' interests."
Investor
associations who are part of SEBI's takeover panel have resisted any move
to liberalise the code. Manubhai Shah of the Consumer Education Research
Centre explains that the code is based on the premise that the promoter
already holds a substantial stake while the raider starts on a clean state.
"If a promoter has only 5 per cent then he has the same discretion
as the raider," he says. Shah also doesn't subscribe to the thesis
that investors gain when the promoter consolidates: "He is only protecting
his interest whereas a public offer is designed to bring benefits to small
investors." Some members of the panel even believe the trigger for
the open offer needs to be brought down from 15 per cent to 10 per cent.
Members
of the takeover panel have also pointed out that very few promoters have
used the creeping acquisition route since they are not willing to spend
for their stake. CII President Arun Bharat Ram explains that it is more
a question of ability rather than willingness. As he explains, "Promoters
kept their holdings low because of the huge tax implications. This has
rendered their personal net worth low. Thus it is not possible for promoters
to fund creeping acquisitions overnight." While some groups (like
the Tatas) have used cross-holdings to consolidate their stakes in group
companies, analysts and the market do not view this favourably.
One way
out is to allow promoters the same option as the raider: that is, allow
them to raise their stake to 15 per cent without invoking the provisions
of the code. The second step, says Bharat Ram, is for FIs to play a pro-active
role. "Sometimes a company may have a low valuation despite a good
performance. The FIs must assess the predator and support a good management."
Evidently,
there is room for improvement both in the code as well as in SEBI's own
operations. Its response-in terms of timeliness and interpretation-should
be better. In the case of Bombay Dyeing the response has not been fast
enough. Secondly, its interpretation of acquisition and the need for an
open offer has been often violated. Mumbai-based financial consultant
S.K. Shelgikar believes, "SEBI needs to focus on informing investors
rather than just assume sole-protector status." Clearly, while protecting
investor interest is a must SEBI can't be seen to be lenient on rogue
raiders.
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