Wednesday, November 5, 2008

New 5% creeping acquisition permission for 55-75% holders to go soon?!

Further to posts here regarding amendment to SEBI Takeover Regulations allowing persons holding 55-75% to acquire further 5%, see report in ET dated 5th November 2008 that says that this permission may soon be reversed.



Readers may recollect that this new amendment allowing such 5% increase was without any time limit and also not a recurring annual feature. Apparently it was to allow Promoters to acquire shares from the market since the prices were, as per perception, too low. This mopup may help restore prices to what they think are fair prices.



Now the ET report is like a "Last few days of SALE - buy quickly" signboard! Whether Promoters will respond is to be seen.



The ET report also shows how multiple authorities may come in each other's way and at times even carry on a perverse turf war. The Finance Ministry's logic for the demand for withdrawal of this amendment is that the public's holding would go down to below minimum public holding . Why, would you ask, should the public holding go down below public limits when the maximum limit for Promoters' holding is 75% even after the amendment? That is because the Finance Ministry wants to treat some categories of shareholders as non-public shareholders though as per SEBI's definition, these would fall under public shareholding.



The ET report is actually about the Finance Ministry's decision to defer the proposal to delist companies who do not have minimum public holding. ET says that this deferment is because the Ministry feels that the prices of shares today are too low and interestingly, a study by the Ministry has "revealed" that there is no relationship between Q1 and Q2 corporate profits and the "sharply lower valuation of blue-chip scrips". The Finance Ministry might "reveal" the "fair prices" of these shares so I can borrow and then rush and buy them!



- Jayant Thakur

5 comments:

Sandeep said...

The finance ministry is a riot these days. Sandeep

Somasekhar Sundaresan said...

I would discount the reasons in newspaper reports. The amendments to increase the creeping acquisition scope for market purchases seems to have been aimed by the government to boost market purchases and bolster stock price discovery in the market.

However, there are several reasons for why such a collateral objective would not be smoothly met. People holding more than 55% would more of less be "promoters". Such persons would invariably be in possession of unpublished price sensitive information and would find it very difficult to effect day-to-day market purchases. Indeed large corporate houses that do not want any trouble whatsoever with the regulators have not availed of the creeping acquisition limits. Therefore, the government's objective would not be immediately met.

Another reason for reviewing this amendment ought to be not to restrict the mode of such creeping acquisition merely to market purchases. Even if a substantial shareholder infuses money into the company through a preferential allotment, it would equally bolster investor confidence and therefore, in fact, meet the government's apparent objective of increasing investor confidence in the equity market. The proviso restricting the ability to creep up by 5% beyond 55% was far too restrictive and ran counter to the seeming objective of infusing more investor confidence in the moribund equity market.

As for the restriction on buy-back, I had commented on it in my last column in the Business Standard. The issues there raise a separate story altogether.

Jayant Thakur, CA said...

Thanks, Somasekhar, for your pertinent comments and I agree with your concerns about the newspaper report.

The timing of the report is also strange. SEBI amends the law on one day and then there is a “leaked” demand to reverse it two days later. In fact, considering other absurdities, I could not decipher whether it was a serious report or a tongue-in-cheek piece with understated irony – I think it was the former, which probably prompted Sandeep to use the word “riot” (see 1st comment above).

I also agree with you that preferential allotment should have been a permitted increase route as it too should evoke confidence – after all, the added advantage is that the money goes into the Company and not possibly to panic-driven, cash-strapped FIIs who are selling at any price on the stock market! (though SEBI wants it to go to retail investors).

One incidental point regarding preferential allotment as an alternative mode of increasing holding is that in many cases the formula of minimum pricing may come in the way. The formula envisages taking six months average price into account which may be far higher than current prices, considering the almost 50-60% fall generally in stock market in last few months. In fact, many Promoters who had subscribed to warrants in last 1 year or so are already considering to let them lapse – after all current market prices are far cheaper even if the 10% deposit is forfeited (subject of course to issues of insider trading, etc.)!

As regards your article in BS on the buyback issue, which was very timely as you wrote in the very first Monday following the announcement, it was still too late for SEBI who must be in a real hurry and who passed the amendment in just 3 days of its announcement! The buyback/takeover controversy thus remains live.

Thanks again!

- Jayant

Anonymous said...

Thank you for the insights. In doing some additional analysis, is it true that the creeping acquisition permission is only a one time 5% purchase vs. 5% per annum so long as ownership is less than 75%?

Anonymous said...

why is the aforesaid acquisition of upto 5% calculated by aggregating all purchases without provided the aquire/promoter the benefit of netting the aggregate sales?