25 June 2008

Delisting for violating anti-competitive laws

A news report states that the Competition Commission of India (CCI) has written to SEBI asking it to a) include compliance with anti-competitive behaviour a violation of the listing agreement b) the consequence of such violation could potentially result in delisting of the company.

While a) is debatably unacceptable, b) should clearly be rejected by the securities regulator.

Accepting the first proposal would open the floodgates to every other regulator/governmental body asking for similar rights. Imagine having a clause in the listing agreement which bars companies from evading taxes based on a recommendation by the Central Board of Direct Taxes (CBDT) to SEBI. The effect of such insertions would be that for violations of various assorted legislations and even delegated legislations, SEBI would need to take corrective steps even though it has no competence or jurisdiction to determine if a violation had occurred. In the same example, SEBI would need to rely on the competence of the tax authorities based on which it would take enforcement action. This is both a convoluted form of enforcement and is the wrong means of dividing investigation (with CCI etc.) from enforcement (with SEBI) across two agencies neither of which have any formal duty to each other.

The second proposal is even less acceptable. Delisting is a very difficult remedy for a securities regulator. When a company stops substantial compliance with the various enactments including the listing agreement, the regulator (or the exchange) could possibly either take penal action or delist the company. Were the company to be delisted, the non-control shareholders lose any possible exit option. Often the company deliberately violates the norms so that they can be delisted without a need to pay the shareholders the share price as determined by reverse book building method (which applies to the voluntary delisting process). While the promoters get a freer hand in committing further misconduct, the other shareholders suffer the lack of an exit option. Thus in the cartel context, a cartel operator company's management may in fact be happy with the delisting which would result from such violation – thus the violator gets twice the bang for the buck.

1 comment:

Sumit said...

Yes, i second your opinion. Allowing of such a proposal by SEBI would open floodgates for many other governmental agencies to interfere with SEBI’s investigation and enforcement process. Further, i believe that cartelisation by companies can be by no stretch of imagination be put as a core securities laws violation. And how SEBI is concerned for a violation for a violation of competition law or earlier MRTP Act violation???