Today’s Business Standard carries a report indicating that SEBI is in the process of considering a general exemption to the Government from making a mandatory open offer under SEBI’s Takeover Regulations 2011. This comes in the wake of two specific exemptions granted by SEBI this year in the case of IDBI Bank and IFCI whereby the Government was given special dispensation from making an open offer when it increased its stake in the companies due to conversion of securities into equity shares.
Currently, under the 2011 Regulations, SEBI has the power to grant exemptions on a case-by-case basis, which it has exercised in the two cases mentioned above. But, any grant of blanket exemptions to the Government would be a retrograde step. There is no compelling reason for the Government to be treated on a special footing compared to private acquirers because the Regulations are in the end analysis concerned with the protection of minority shareholders in a listed company. By creating such an exemption, SEBI would be discriminating against shareholders of government companies, as they would lack an exit opportunity through an open offer that is available to shareholders in non-government companies.
Moreover, the grant of such dispensation to the Government does not augur well in terms of ensuring compliance with securities regulation in the interest of investors. The Government ought to be setting an example by undertaking the obligations under securities regulation such as the Takeover Regulations and paving the way for ensuring compliance by private acquirers, thereby protecting the interests of minority shareholders in public listed companies. This method of carving out special provisions for government companies, that began with the lower minimum shareholding of 10% rather than the larger 25% limit for other companies, stands no reason when judged against the purpose of the Takeover Regulations, which is to provide an equal exit opportunity to minority shareholders when there is a change in control of the company.
Such moves could give rise to governance implications in a broader sense. For example, there is already a dispute over the governance matters in Coal India Limited between the Government, which is the controlling shareholder, and a minority shareholder, which has also resulted in litigation that is pending before the Indian courts. Such matters could also be significant in the context of the government disinvestment programme where the limitation of protection to minority shareholders in listed companies substantially owned by the Government could impact the success (or otherwise) of such programme.
It would therefore be preferable for SEBI to exercise the power of exemption on a case-by-case basis as per the current practice. That would not only provide the flexibility to deal with specific circumstances such as those that arose in the IFCI and IDBI Bank cases, but at the same time it would require SEBI to apply its mind to individual cases rather than to deal with them on an overall basis as proposed.