Ravimohan - obituary

Was saddened to hear the passing away of R Ravimohan. Ravimohan, currently with Reliance Industries, was a former Managing Director, South Asia of Standard and Poors and CEO of Crisil Ltd., both rating agencies. I interacted with him during my time at SEBI in various committees and conferences and he came across as a humble, knowledgeable and persuasive person. I celebrate his life and his contribution to the world of securities markets and regulations.

Indian takeover regulations – Under Reformed and Over Modified

I have written an IIM, A Working Paper on the Indian takeover regulations, a copy of the full working paper is available for download at the SSRN website – it is titled Indian takeover regulations – Under Reformed and Over Modified. Here is the abstract:

Abstract:

The takeover of substantial number of shares, voting rights or control in a listed Indian company attracts the provision of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997. The regulations have been amended nearly 20 times since inception, though the amendments have mainly concentrated on areas which needed no amendment. At the same time a vast number of obvious problems have not been rectified in the regulations. The large number of amendments have also created requirement of a compulsory tender offer of such unnecessary complexity as to make it virtually unintelligible to even a well qualified professional.

This paper argues that the complexity in the trigger points for disclosure and tender offer introduced over the years lacks a philosophy, and most of the amendments can not only be deleted but a very simple structure can be introduced making compliance of the regulations straight forward and easy to understand by management of listed companies. Certain other areas which need amendments have also been discussed. Chief amongst these are the provisions relating to consolidation of holdings, conditional tender offers, hostility to hostile acquisitions, definitional oddities, payment of control premium in the guise of non compete fees, treatment of differential voting rights, treatment of Global Depository Receipts and disclosure enhancements.

This paper does not try to portray a particular combination of numbers as the best possible set of trigger points and compulsory acquisition numbers but advocates that whatever numbers are adopted should not be changed for several decades. Arguments that state that the changing economic condition requires constant changes with these numbers, it is argued is wrong.

Takeover norms: Tossed, not turned

I have a piece today in the Economic Times on the SEBI takeover regulations. I believe it is over-modified and under-reformed. Here are some key paragraphs:

The takeover of substantial number of shares, voting rights or control in a listed Indian company attracts the provision of Sebi (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. The 1997 regulations have been amended 19 times in the last 13 years. At the same time, a number of obvious problems have not been rectified in the regulations. The large number of amendments have also created requirement of a compulsory tender offer of such unnecessary complexity as to make it virtually unintelligible to even a well-qualified professional.

The complexity in the trigger points for disclosure and tender offer introduced over the years needs to be simplified, making compliance of the regulations straightforward and easy to understand by management of listed companies.

A vast majority of these amendments kept modifying numbers in trigger points for disclosure and compulsory tender offers contained in the regulations. To give just one example, the concept of ‘creeping acquisition’ exemption was modified from 2% in 1997 to 5% in 1998, to 10% in 200,1 to 5% in 2002, to a modified 5% in 2008. In other words, most of them tried to second-guess the wisdom of the original or amended numbers.

The takeover regulations mandate a compulsory tender offer to public shareholders in a dozen circumstances. It is proposed that there should only be one trigger on acquisition of over 5% unless the acquirer owns less than 15% shares of the target company. This would enable a person to acquire up to 15% shares i.e., up to a control figure, and not trigger a compulsory tender offer. Where a person owns any number of shares up to 50%, such person should be entitled to purchase shares or voting rights up to 5% each year by way of creeping acquisition.

Any acquisition over 55% should not be allowed without a compulsory tender offer of such number of shares as would result in a post-acquisition public shareholding of at least 25%. This is consistent with the view of the finance ministry that, gradually, all companies should be mandated to have a minimum of 25% public shareholding.

Takeover regulations – show

CNBC is running a four episode series on reforms in the takeover regulations. I feature in the third and fourth episodes which covers ‘Exemptions, Indirect Acquisitions and de-listing’. If you would like to catch the episode see it at the following timings:

EPISODE 3 - EXEMPTIONS, INDIRECT ACQUISITIONS & DE-LISTING

December 12, Saturday - 10.00pm

December 13, Sunday - 2pm

EPISODE 4 - INDIRECT ACQUISITIONS & DE-LISTING

December 19, Saturday - 10.00pm

December 20, Sunday - 2pm

You can also get the video and transcript subsequently at the website of the program ‘The Firm‘.

Art funds – time to act

Yesterday’s Mint carried the top story “Osian’s art fund fails in art of investing” about several malpractices in the area of art fund management. The Mint story says: “Five months after the scheme closed, Tuli and his colleagues are still “trying” to return money, many investors claim. While some of them are yet to receive any payment at all, others have been given around 30% less than their entitlement, according to the net asset value (NAV) declared by the fund.”

The key point is that this could easily been have prevented had SEBI acted on its warning put on its website way back in Feb 2008 which clearly stated that Art Funds were illegal unless they registered with SEBI as ‘collective investment schemes’. None were.

I have blogged about this in the past, see here my blog post of Feb 2009 where I conclude:

Since these entities have been given enough time to wind up or register their schemes, it is high time SEBI should take civil and criminal action so that the investors are compensated fully for these dubious investments. Or should we all wait till it blows up like Satyam?

Now that the blow up has occurred, we need some swift action by SEBI even if nearly two years too late.

Endnote: Just saw this very interesting blog where the founder of Osian’s calls all journalists crooks and some particularly egregious words against the authors of the Mint piece. Wow, the person running an illegal scheme calling the journalists who exposed him – crooks! What temerity. See the blog post.

IPO gradings – pass marks given

Much has been written in the media about the efficacy of IPO ‘gradings’. IPO gradings are grades issued by rating agencies as to the fundamentals of a company without making a judgment on the value of the company. Thus Infosys (if it were to come out with an IPO now) would get the highest grading but, an offering of its shares at 20,000 rupees would clearly not be attractive – and the offer would thus be value destructive for an applicant. As the rating agency offers no opinion on the price, investors are expected to balance the grade with the offer price before subscribing.

Hindu Businessline has a piece “IPO grading makes little difference to the returns” on why you should not rely on IPO gradings. Many have asserted its failure on the grounds that those issues which are highly rated in fact provide less return that those which are graded lowly. In fact if that is the case, that in fact shows the efficacy of the grading process. It was stand to logic that people would pay a lower price for a poor quality IPO companies and a higher price for highly graded IPO companies. Also given the respect a higher graded IPO should command, it is no surprise that they are able to leave less money on the table and therefore a less steep discount to the market is provided to shareholders.

One could also safely conclude that in a frothy market with substantial speculative trades, the lowest grades would do well and the better offers in quality, which have left little money on the table for the investors, would not. The same cannot be said over a longer period of time when better run companies with superior corporate governance are likely to outperform the shooting star – low grade companies.

While I am not the biggest votary of IPO grading, I think this result strongly supports such a compulsory grading rather than debunking its usefulness. Clearly, we must wait longer before coming to a definitive conclusion on the usefulness of gradings.

Performance in the government – no oxymoron

Here is the biggest potential game changer in the way the Indian government functions or rather dysfunctions. As I have often said on this blog, India’s governance suffers at least as much from the inaction of its honest people as from the action of its dishonest people. Much of this has to do with inaction not capable of being reprimanded as inaction can never result in people pointing fingers at your integrity (if you don’t build a road, no one will say you did something wrong). There is typically no dis-incentive for sleeping on the job.

While this position will never be history, if the government had specific goals and its ministries had to achieve specific targets which are measurable and measured, this apathy and lack of ownership is likely to reduce from the top down. The Prime Minister of India has set out on a very ambitious agenda to monitor and evaluate the performance of the various governmental ministries and departments. IIM, Ahmedabad is the knowledge partner in this important initiative.

Here is an interesting PowerPoint Presentation of the “Performance Monitoring and Evaluation System“.

The Great Offshore takeover – not wrong, immoral or illegal

I will be discussing the issue of the hotly contested takeover battle of Great Offshore Limited on CNBC shortly (appearing on the 10pm show – news at 10 today). I will post in more detail later giving the context. But here are my two bits in two seconds to those who are familiar with the facts.

ABG dropping out of the competing open offer and selling its 8%+ stake is neither wrong morally nor does it hurt shareholders as some media reports seem to indicate. Shareholders will continue to have a competing offer by Bharti Shipyard at Rs. 590 a share, thus shareholders do not lose out (except to the extent of excess offers). Shareholders are also free to tender their shares to ABG at the substantially lower price (though no rational investor would do so given the substantially lower offer price).

Also, some news that ABG is withdrawing from the open offer is probably inaccurate as they cannot withdraw from the bid – but between two offers one substantially higher than the other, clearly no shareholder will tender shares into the ABG offer. I also find nothing immoral about ABG selling their existing shares (it is not disallowed under the takeover regulations) in the market after making an open offer – whether it is to the competing bidder or otherwise. They find that they cannot bid at Rs. 590 and thus find this the best time to exit from their position when the other offer is about to open. In fact as a fiduciary (the board of ABG as a fiduciary of their shareholders), they are duty bound to exit at this point and price which gives the best deal to their own shareholders. There is also nothing wrong from Bharti Shipyard’s perspective which is permitted to acquire shares outside the tender offer (if they acquire below 590, they only need to make a disclosure).