A job half done

This is not the first time that the Securities and Exchange Board of India (Sebi) has tinkered with the creeping acquisition limit.

At various times since the takeover code was formulated, it was stipulated that the creeping acquisition limit would be 51 per cent; that an open offer would be triggered when an acquirer crossed the 10 per cent shareholding threshold; that creeping acquisition would be 2 per cent per year; that it would be 10 per cent per year, and so on.

The rationale for allowing creeping acquisition was that promoters needed a means of building up their defence against hostile takeovers. That was the logic in allowing promoters to go up to 51 per cent through the creeping acquisition route.

Sebi now says that 55 per cent is a more logical limit, because an open offer, for a minimum 20 per cent, would take the promoters' stake up to 75 per cent, beyond which it would be necessary to de-list the company.

Market purchases or preferential allotments that take the acquirer's stake beyond 55 per cent are therefore prohibited. All promoters or acquirers that want to increase their stake beyond 55 per cent will now have to make an open offer.

The core issue with regard to the takeover code is whether it fosters the development of a market for corporate control. Creeping acquisitions and preferential allotments are measures in favour of incumbent managements and therefore act as deterrents to potential acquirers.

But when promoters already hold 51 per cent in a company, acquiring a bigger stake is usually unnecessary. It really shouldn't matter for promoters, therefore, if creeping acquisitions or preferential allotments are not allowed beyond 51 per cent.

Similarly, for potential acquirers, it makes little sense to mount a hostile bid when incumbent managements already hold 51 per cent in a company. Sebi's recent changes, therefore, are not really all that important for those promoters who hold less than 55 per cent in their companies.

As a matter of fact, this could have been an opportunity to harmonise the various regulations governing the public holdings of companies. Currently, various limits are prescribed by the listing regulations, by the Securities Contract Regulation Act, and under the takeover code.

Under the listing regulations the promoter' s stake in a company is dependent on the year in which it was listed and the rules for minimum public holding in place at the time. This should be made uniform for all companies.

However, it's unclear why creeping acquisition is such a bugbear. After all, the promoter is laying out his own money for the purchases and for small companies, he could very well support the market.

One way of making creeping acquisitions more beneficial to all investors would perhaps be to make mandatory a public announcement of such purchases by promoters.

Further, so far as the decision to make an open offer beyond a 55 per cent stake is concerned, suitable time exemptions must be made for promoters who already hold such stakes. Forcing these promoters to divest their holdings could be disastrous for the prices of these shares, and for the market.