Concern over PE offers misplaced

WITHOUT CONTEMPT

An unforeseen controversy is brewing in the capital markets. Recent news reports suggest that the Securities and Exchange Board of India (Sebi) has written to the Ministry of Finance about the need for a policy on foreign private equity funds before they are permitted to take over listed companies in India and make open offers under the takeover regulations.

One could ask why Sebi has raised this issue now "� nearly fourteen years after India first introduced regulation for substantial share acquisitions and takeovers, with the regulator consistently refraining from licensing entry and exit of investors in the capital market.

For instance, with initial public offerings, the regulator cannot veto the entry by any specific company into the market. It only ensures that full and fair disclosures are made so that investors may make an informed decision.

Similarly, with the takeover regulations, the remit of the capital market regulator is to only ensure orderly compliance with securities laws, and not to sit in judgement over who may be allowed to make open offers.

The ability of a foreign investor to enter or exit the Indian market is not a function of capital market regulations but a function of foreign investment laws and exchange controls. Over time, the government of India has liberalised these laws to enable a smoother inflow of foreign capital into India.

The provocation for Sebi initiating this controversy lies in the liberalisation of foreign investment that the government has recently effected. Until February this year, any transfer of shares from a person resident in India to a person resident outside India that attracted the provisions of the takeover regulations, required consent of the Foreign Investment Promotion Board (FIPB). This measure was meant to prevent unscreened hostile takeovers by foreigners.

However, in February this year, in the rush of blood that saw the Indian economist prime minister throwing desi weight behind NRI LN Mittal's acquisition of European Arcelor, foreign investment into India was further liberalised. FIPB approval for takeover transactions was dispensed with as long as the acquisition entailed approval of Sebi or the Reserve Bank of India (RBI). The RBI had, even earlier, freed transfers from residents to non-residents with minimal regulation on pricing, even leaving the policing of the price regulation to self-certification by the transacting parties. Therefore, takeover transactions exclusively fell into Sebi's court.

No open offer can be made in India without Sebi "approving" the disclosures made in the letter of offer that forms the contract between the acquirer and the public shareholders. Without Sebi's consent, the letter of offer cannot be dispatched to shareholders. Sebi, of course, prefers to term its approval as merely a set of "observations" and "comments" but nevertheless unless Sebi gives its observations, which invariably contain specific directions and orders to carry out specific changes in the letter of offer, no open offer can proceed.

Sebi has recently even introduced a fat ad valorem processing fee linked to the potential value of the open offer.

Therefore, the nervousness of the capital market regulator may be understandable "� it is the sole government agency left in the takeover space. However, its concerns are unjustified. Sebi is reported to have written to the government of India raising concerns about open offers by private equity investors, and the need for a policy on whether such foreign funds may be allowed to make open offers in India.

The takeover regulations, which evenly apply to every acquirer including Indian and foreign investors, and private equity investors, contain detailed provisions and requirements for disclosure of the background of the acquirer and future plans with the target company. Despite the ad valorem fee, letters of offer invariably do not get cleared within the statutory 21-day period because it takes time for Sebi to get comfortable with the disclosure language.

This is understandable because the takeover department very spiritedly ensures that the letter and spirit of the takeover regulations are followed.

Sebi's concerns are not only a fundamental departure from the stance of securities regulations applied in India for the past decade and half, but are also a bit late in the day. There have already been several open offers by Indian and foreign private equity investors under the takeover regulations. Some of the transactions have resulted in enormous amounts of money being paid to the exchequer since the open offers by such investors related to takeovers of listed public sector undertakings. Moreover, it is in Sebi's interests that institutional investors come to own Indian corporates as they would bring in professional management, improve corporate governance and maximise shareholder value.

If India 's foreign investment law freely permits any foreign investor to take over Indian companies in compliance with exchange controls and securities laws, it would be out of place to sit in judgement over the identity of the investor or the wisdom of the government in having formulated such law.

One is of course aware of how the RBI has systematically stymied the government of India's foreign direct investment policy in the banking sector.

For Sebi, this is hardly a good example to follow. The legal framework for foreign investment being an ambiguous and treacherous minefield is not a spectacular feature for an economy that likes to boast of an additional decimal point in its growth rate every quarter, with arms outstretched to invite foreign investment.

The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own

somasekhar@jsalaw.com