Grey patches persist in takeover, funding

The RBI is expected to come out with clear-cut guidelines on financing of takeovers shortly. As there is ambiguity in rules governing takeover financing, banks have already taken up the issue with the RBI. The current RBI rules don’t permit banksand institutions to finance whether it is friendly or hostile takeovers. In fact, RBI had pulled up American Express Bank for financing share acquisitions by Tata Sons and Godrej Soaps.The Sebi board, which is meeting on March 27, is expected to consider the changes required in the existing takeover code. The major discrepancy in the existing code is that there is no consideration for buy-outs of assets and brands. “There have been numerous instances of companies selling their brands and assets without actually selling the company. This is a kind of stripping assets and goes against the interest of investors. Sebi should have view on this in the larger interest of investors,” said an institutional source.

Hindustan Lever acquired the manufacturing units and brands of Lakme for nearly Rs 200 crore. Lakme is now a shell company with no business activity and its share price plummeted by over 50 per cent after the sale of assets. Lakme’s shares are widely held by the public and institutions. Several pharmacompanies had also sold their brands in the recent past. For the acquirer, such buy-outs of assets make sense as it need not go for the public offer and can avoid the uncertainty associated with it.

There are no pricing norms for transfer of shares among promoters. Promoters are now pricing their share acquisitions at their whims and fancies. “India Cements has offered to buy Raasi Cement’s shares at Rs 300 per share.

Wockhardt also paid very high price for Tata’s stake in Merind. Sebi should enquire whether such offers will be detrimental to the other shareholders of these acquirers,” institutional sources said. Sebi is also planning to withdraw open offers in the case of share acquisitions where promoters already hold over 51 per cent stake. It will also review acquisition of shares pledged by one company.

The threat of delisting a company from the stock exchange is also staring at investors. If an acquirer manages to get good response for a public offer and manages to acquire 90 per cent of theequity capital, the former can delist the company and make it a private firm. If the shareholding of public is below 10 per cent in a company, it can be delisted. Investors who hold this chunk of shares may not want to sell the stake to the acquirer, but are forced to sell as delisting will make the share less liquid in the market.Yet another grey area is ownership of private investment companies. In most of the business families in India, the controlling interest in their major companies is held by private, unlisted investment companies. Tata Sons owns major stakes in several Tata companies like Tata Steel, Telco, Tata Power and Tata Chemicals. If the ownership of such private investment firms changes hands, the acquirer will also control companies where the investment firm has major stakes. “Although the change in ownership of unlisted companies has not taken place so far, one cannot rule out such a possibility in the future,” said a corporate source.

A member of the Sebi takeover committee said “it isextremely difficult to plug all the loopholes. Even after sorting out all the operational problems, some grey areas will remain. Here Sebi will have to interpret the laws in a prudential manner.” For example, when Sterlite first announced the open offer, it was limited to 10 per cent of Indal’s equity but later revised it to 20 per cent as per SEBI’s wishes.