Friday, February 20, 2009

Amendments to Takeover Regulations differently wide and narrow

The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (“Takeover Regulations”) were amended last week to empower SEBI to grant exemptions from the strict operation of various operative provisions of the Takeover Regulations – initial comments on this blog were posted here.

I wrote the following comment in the Economic Times, edition dated February 16, 2009:-

The Securities and Exchange Board of India had said earlier this month that it would amend the Takeover Regulations in a general context to exempt strict application of the law to listed companies that are victims of fraud, as opposed to providing special exemptions to specific cases.

The Takeover Regulations already provided SEBI with discretion to exempt specific cases from making of an open offer. Therefore, one expected SEBI to lay down a clear-cut principle that would permit regulatory intervention by way of exemption from various provisions when fraud in listed companies rendering financial statements unreliable, is discovered. However, the actual amendments fall short of the standard.

SEBI has armed itself with powers to grant exemption from any or all the operative provisions of the Takeover Regulations, but there is no reference to discovery of fraud. Instead, any listed company in which a government or regulatory authority has appointed new persons to act as directors “for the orderly conduct of affairs” would qualify for exemptions at SEBI’s discretion.

Such an amendment is extremely wide from one perspective, and extremely narrow from another. The government replacing the board (without any reference to even alleged fraud) being a trigger for SEBI to exempt the operation of the Takeover Regulations lets the state qualify public sector companies for exemption from the Takeover Regulations. The scope of state-sponsored abuse is therefore huge.

From the standpoint of discovery of fraud, the amendment is too narrow and therefore unfair. Without government being involved, shareholders could discover management fraud and themselves change the board of directors without involving government.

Fraud vitiates all solemn acts. When financial statements of a listed company are discovered to be fraudulent, the price at which its shares were traded would be rendered unreliable –without the government playing a role, such cases would be equally fit for exemptions from application of many operative provisions of the Takeover Regulations.

The exemption power of SEBI is ultimately discretionary. Therefore, the scope for abuse is as wide or as narrow as SEBI permits. The amendments ought to have been linked to the principle of discovery of fraud rather than change of the board of directors by a government agency.

Some linkage to mismanagement or oppression would have been useful. Under current SEBI dispensation, there may be no abuse, but since law is written for all times to come, there is a danger of governmental abuse even while leaving out meritorious cases involving private action by shareholders.


Anonymous said...

Dear Somasekhar,

I agree with you.

In my earlier comments on this forum, I have mentioned that the amendments to SEBI Takeover regulations were not at all required.

The provision of exempting an acquirer from provisions of chapter III of SEBI Takeover Regulations was already available by adopting the "Takeover Panel" route.

Additionally an acquirer could have even adopted "Regulation 12" route.

Further, even the provisions of regulation 3(1)(j)(ii) could have been used to acquire control over the target company (or indirectly through promoter companies) by either merger or reverse merger of the acquirer and the target company (or its promoter companies).

Kind regards,
Yogesh Chande

Anonymous said...

Hi Som (sir),

I agree when you say that such an amendment to takeover regulations is extremely wide from one perspective, and narrow from another. Yet, I am trying to bring another dimension of it.

Title of Regulation 29A states: “Relaxation from the strict compliance of provisions of Chapter III in certain cases”. Now, if one has to assume that exemption can be granted only if board of directors of Target Company have been by Central/State govt or any other regulatory authority, then it becomes a mere one type case and leaves no scope of exemption for fraud-hit cases. However, I believe, interpretation may not be so. Since, clause (a) to (e) of Regulation 29A provides various conditions when relaxation may trigger, I believe all of these conditions from (a) to (e) need not be fulfilled before grant of exemption by SEBI is asked. All these clauses have to be read “with a common thread” and “jointly or severally” of each other, depending on the case. All conditions under clauses (a) to (e) may not be required to be present all the times otherwise there may be a situation wherein few conditions are present and few not. Such an interpretation will make this provision futile and there will never be an exemption unless target company demonstrates in application that all the conditions from (a) to (e) are present in their case and not even a single condition is left.

Therefore, in my sincere belief, an interpretation should be taken wherein exemption would be granted when “any or all” clauses of Regulation 29A are triggered. And, if this interpretation is taken then cases of “fraud hit”; “oppression and mismanagement” would be well included under clause (e) of 29A which states that Board may relax any or more of provisions if the provisions of Chapter III are likely to impact as impediment to implementation of the plan of the target company and relaxation from one or more of such provisions is in public interest, the interest of investors and the securities markets. However, when can exemption be grated will depend on regulator’s “judicious discretion”.

S. Agrawal