14 February 2011

Taken over from the wrong side

I have an opinion piece in today's FT.com on the perversity of the the SEBI takeover committee recommendations (registration may be required). Here are excerpts:

If permitting or enabling a market for control is an important aspect of creating a competitive economy, India has just pushed the clutch and is expected to move into reverse gear.The Securities and Exchange Board of India, the country’s market regulator, formed a committee of experts last year to look into whether the current regulations on takeover of Indian listed companies need to be reworked. The recommendations, which appeared to be a step towards investor protection, are likely to entrench existing promoters and control groups. If implemented they would be a step back for the market and two steps back for the cause of corporate governance in the country.
Investors, who could now get a larger exit window, will in fact have no exit option as the market for control itself will materially smaller given implementation of the proposal. In any case, the difference between the 20 per cent and 100 per cent offer is not so material as far as investors are concerned as they can always sell their shares on the liquid stock exchanges although at a discount.

The proposed regulations are an unnecessary copy paste job from some developed countries like the UK which provide for a 100 per cent open offer, even though the ground situation in India would make such similar provisions perverse and investor unfriendly.
Given that the ministry of finance has mandated a much higher public shareholding of listed companies just a few months ago, the shareholding of promoters and control persons will come down as public holding goes up. With an increase in public shareholding, it is a clear that shareholding will become more fragmented. With a more fragmented shareholding, it would become easier for an acquirer to control a company with even fewer shares than before. Thus if yesterday it was possible to control a company with a 15 per cent level, in tomorrow it would be possible to control the same company with 10 or 12 per cent shareholding. That is an argument for reducing the 15 per cent public offer threshold, not for increasing it.
The proposal as suggested would enable greater entrenchment of control persons as it will be more difficult to dislodge such persons from the control of companies. This would have an adverse effect on the corporate governance of companies and would fly in the face of the ministry of finance’s attempt to create a wider dispersal of shareholding amongst the public rather than family dominated listed companies. All in all, the proposals would be bad for listed companies, investors of all stripes big and small in those companies and for corporate governance and efficiency in the public companies.

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