On the heels of the insurance regulator raising concern on the government move to allow Life Insurance Corporation (LIC) to own up to 30 per cent in a firm, the securities market watchdog has expressed displeasure over the step. The Securities and Exchange Board of India (Sebi) feels the move could lead to violation of the country’s takeover laws.
According to the latest takeover rules, an entity acquiring 25 per cent or more in a firm has to make an open offer to buy an additional 26 per cent from public shareholders. That means, if LIC’s investment in a firm exceeds 25 per cent, it would have to buy another 26 per cent from non-promoter shareholders. If the open offer is fully subscribed, the insurer would end up holding as much as 51 per cent, breaching the cap of 30 per cent.
The thinking within Sebi is that LIC — the biggest domestic institutional investor — might get away without making an open offer, even if it purchases beyond the permissible limit.
| HIGH STAKES Currently, LIC holds more than 20% in 5 firms | |
| Company name | LIC shareholding (%) |
| Corporation Bank | 25.49 |
| TCM | 23.72 |
| Simplex Realty | 22.92 |
| Gloster | 22.50 |
| Standard Battery | 20.89 |
| Modella Woollens | 19.47 |
| MTNL | 18.81 |
| L&T | 17.70 |
| PTC India | 15.75 |
| Tata Steel | 15.00 |
| Source: Capitaline Compiled by BS Research Bureau | |
“Though LIC has been allowed to buy up to 30 per cent, there is no clarity on what happens if open offer is triggered,” says a senior Sebi official on the condition of anonymity. It is, however, unclear whether Sebi has officially conveyed its displeasure to the finance ministry.
The step has also met with criticism from the Insurance Regulatory and Development Authority (Irda), which thinks high exposure to a stock is “imprudent”. Earlier, LIC, too, was governed by the insurance Act, which says no insurer can invest more than 10 per cent of the fund or 10 per cent of the firm’s stake, whichever is lower.
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An Irda official said the issue of takeover code violation as a result of the step was raised before the finance ministry. “The ministry was apprised of the risks in letting LIC pick up to 30 per cent in a company. The possibility of an open offer trigger getting breached was also discussed. However, the ministry went against our recommendations,” said a senior Irda official who didn’t want to be named.
A senior LIC official indicated the insurer might seek an open-offer exemption from Sebi in the event of open offer being triggered. “We would not go and invest 30 per cent in all companies. However, if we decide to raise our stake in a firm in the future, we will see how to go about it. Sebi had made some exceptions when we decided to invest 26 per cent in a public sector bank. I believe exceptions have been made and could be made in future in specific cases.”
The market regulator had exempted LIC from making an open offer when its shareholding had breached the threshold limit in Corporation Bank.
Securities law experts say, under the current takeover laws, LIC cannot be exempted from the open-offer obligation and it will have to ensure its shareholding in listed companies stays below 24.99 per cent.
"LIC getting an exemption in the case of Corporation Bank was justified. But, if an open offer gets triggered in case of a private company, getting an exemption from Sebi would be difficult," says Pavan Vijay, founder, Corporate Professionals.
Echoing Vijay, Siddharth Shah, partner and head of funds practice, Nishith Desai Associates, says: "The move to allow LIC to buy 30 per cent stake in a company may have arisen out of the banking regulations. That doesn’t mean you are exempted from an open offer. LIC will have to monitor how much it picks up in a company. Practically, it has to remain below 25 per cent."
Sebi could exempt LIC from making an open offer for banks as voting rights in banks are capped at 10 per cent.
"The underlying objective of the takeover code is control. As no single shareholder in a bank can have more than 10 per cent voting rights, Sebi has no problem giving such exemptions in case of banks. But, if the voting rights are removed in future, these entities may have to make an open offer," Shah adds.
Somasekhar Sundaresan, partner, J Sagar Associates, says, even as the rule gives LIC the leg room to buy up to 30 per cent, it doesn’t mean it will go to that level.
"The move could only be an enabling resolution. It might do it in case of unlisted firms," he says.