1.
Objective
It should be a stated objective that small shareholders must be treated at par in all respect at least to the extent of Open offer.
The Acquirer & Seller at times enter into some innovative agreement. The benefit of such agreements is denied to small share holders. In the case of Takeover of Mount Everest Mineral Water Ltd. by
Tata Tea Ltd. The Sellers were given Put Options but the same benefit was not extended to minority shareholders.
2.
Definition of Control
The definition should be made broad based and include a physical control/takeover/purchase of substantial undertaking of the company. It should be made clear that
Recently there has been a case of Takeover of Gwalior Chemicals Ltd. This was designed as per the earlier case of
Eicher Motors Ltd.
The entire manufacturing facility-plants &
machineries together with 400 odd employees was sold without making an open offer.
A company with a market cap of Rs.266
Crs.—Gwalior Chemicals, Is being taken over at double the amount –Rs.536
Crs. and it does not amount to TAKEOVER?
1. If 15% of the shares were bought of the same co.—amounting to Rs. 40
Crs. –it will be take over.
2. Why would
Mylan etc takeover cos like Matrix and come out with an Open Offer & later
delisting offer? When an escape route is available in the present format it will be foolish not to exploit it.
3. By buying just the assets the Acquirers takes care of 2 steps at one go—avoids making an Open offer and also subsequent
delisting exercise
4. If this loophole is not plucked soon we will have many dud or
KHOKA companies listed on our exchanges.
3.
Definition of Company
A company should be defined inter-
alia to include the manufacturing facilities-factories, workshop, offices, research laboratories etc. owned or operated either directly or through a subsidiary.
Regulation 2(b) while defining “Acquirer” states … ‘any person who, …. acquires or agrees to acquire control over the target company.’ but in the absence of such a definition, company is assigned a very narrow definition of a Board Room. People with vested interest argue that if the acquirer has not acquired control over the Board of Directors, he has not acquired control although functionally he may have acquired the control over the entire company—its factory and entire work force, as in the case of Gwalior Chemicals.
4.
Definition of "person acting in concert"(PAC)
It should be
expressedly provided that there are 2 contra parties in any deal – a seller & a buyer. They cannot become PAC of each other
simillary PAC of Seller/ buyer cannot become PAC of the opposite party.
In the Open Offer of
Tata Teleservices (Maharashtra) Ltd.
Tata Sons Ltd. (
TSL) was named as PAC (person acting in concert) with the acquirer
NTT DOCOMO INC although
TSL was a seller.
5.
Definition of “Public Announcement”
Public Announcement should be defined to include any announcement made as per these regulations or any information released in any form to the Public regarding the change in ownership/management/control of the company
In the recent case of takeover of
DISA, investors/
SEBI lost a justified case in the absence of this definition.
6.
Regulation 7(1A) explanation-- Financial Institution
Either define “ Financial Institution” or replace it with “Public Financial Institution”
At other places instead of financial institution the term used is ‘public financial institution’which has been defined u/r 2 (i). But financial institution has not been defined. As per the RBI act even
NBFCs are termed “financial institution”. Would this mean that
NBFCs are exempt?
7.
Reg 11(1)
Suitably change Reg 11(1) which reads “No acquirer who, together with persons acting in concert
withhim, has acquired, in accordance with the provisions of law,
38*[15per cent or more but less than
38afiftyfive per cent.(55%) ] of the shares or voting rights in a company,
shallacquire, either by himself or through or with persons acting in
concertwith him, additional shares or voting rights entitling him to
exercisemore than
39*[
40[
5%]]of the voting rights,
41[
inany financial year ending on 31st March], unless such acquirer makes a public announcement to acquire shares in accordance with the Regulations.”
A plain reading of the Regulation 11(1) means that in case the holding is say 54.9% than the person can acquire another 5% but if it is already 55% then he cannot buy any further shares.
8.
Reg 11(2) & 11(2A)
These 2 provisions should be merged
The way it stands today, a disciplined person stands at a disadvantage. There is very little difference between 11(2) & 11(2A) the use of the word ‘desirous’ seems to be the key. meaning 11(2) is triggered on acquiring shares in excess of limits whereas 11(2A) is planned.
It is beneficial to trigger rather than plan an open offer u/r 11(2A) because u/r 11(2A) is more stringent and the acquirer will not be allowed to acquire share during the offer period
9.
Reg 14(4)
Time allowed of 3 months after consummation should be changed to 4 working days
3 months time allowed here as against 4 days in Reg 14 (1) is absolutely unjustified. As it is the Acquirer has already got a lot of time till consummation why give him another 3 months?
10.
Reg 16
Specify that a separate PA will need to be issued for each target company
In case of takeover of
Dunlop & Falcon one common
pA was issued creating a lot of confusion in reading and understanding the information. A shareholder of One co. should not be forced to read information of another co. unrelated to him.
11.
Reg 17
Add the word UNRELATED as below:
The public announcement of the offer or any other advertisement,circular, brochure, publicity material or letter of offer issued in relation to the acquisition of shares shall not contain any misleading or unrelated information.
Same as above
12.
Reg 18
A) Add a rider by inserting sub clauses that it will be construed that the Acquirer has failed to comply with the provisions of Reg. 14 --
(i) in case Letter of Offer is not submitted within the specified time, or
(ii) the document submitted do not carry correct/complete and adequate information,
B) It should be made mandatory to include & publish in the Letter of Offer the observations received by
SEBI & the Merchant Bankers against the provisions contained in the PA
C) change in shareholding /trades done beyond a specified limit—say Rs.5 lacs, during the last 6 months should be given
D) Clarify if the names of the persons appearing as part of the promoter group are entitled to and intend to participate in the Open offer or not
A) It has been observed that the Merchant Bankers / Acquirers submit incomplete & inadequate details/documents resulting in long time taken by
SEBI in clearing the same. Since they had come out with a PA, in token compliance of Reg.14 they are able to avoid interest &
penality.
B) At times investors/ market observers / investor protection organizations make some very valid observations. It is advisable for such an observation and to be made public .
C) Insider trading is a big menace. It has been observed that in almost all cases of Open offer, 2 weeks price average price is substantially higher than the 6 months price. This is certainly a pointer towards Insider trading. A disclosure on the suggested lines will discourage people from indulging in insider trading.
D) In case of Bayer Diagnostic,
Zandu etc. one party although a part of the promoter group may not be party to the agreement. Since they hold a major chunk of share capital their position needs to be to enable the small shareholders to take a well informed decision.
13.
Reg 20 (8)
Payment of Non-compete fees should be deleted
This provision has been much abused. This has been used as a tool to pay a differential & lower price to small shareholders. Extra payments have been made to promoters under the garb of Non- compete fees only to deny the same to the other shareholders. In case of Mysore Cement, Mount Everest Mineral water etc. very inefficiently run cos. With no expertise assignable to the promoters extra payment was made in the garb of Non compete fees. In case of Spice
Telecom which is under a licensed regime, there is no question of any competition, yet non compete fees was paid. My observation sent in the case of Mount Everest Mineral water is quite relevant here and are reproduced below:
Payment of non-compete fees
a) Why the mighty House of
TATAs are scared of competition from The Sellers of a company whose performance has been very dismal and disappointing in its whole of more than 15 years of existence. For the year ended 31st March 2006 it could achieve net sales of only Rs. 16.38
crores and an
EPS of Rs. 0.38.
b) The non-compete fees is payable to persons not because they are having any particular expertise but because of their selling the shares that they own. Clause 6C of the PA states “the acquirer has agreed to pay to the seller non compete fees of RS. 30 million”.
c) Since the basis of payment of Non-compete fees is based on the ownership of shares, it does not necessarily mean the capability of the person to compete. Such ownership may rest even with artificial persons or minors.
d) The Managing Director Mr. Salim
Govani is not getting any non compete fees, although the so called expertise must be resting with him
e) The sellers will continue to be part of promoters with right to appoint 2 Directors on the board and 50% of their current share holding intact even after the takeover, as such they are obliged to work for the betterment of the company and not compete with it.
f) The Corporate Governance should take care of any conflict of interest that the Directors and /or Promoters may have with the company. Any consideration paid to ensure their good conduct may amount to bribery and corruption.
g) There are further general arguments against the payment of Non- Compete fees:
I. In case of takeover, be it hostile or friendly, there is no need or justification for the payment of such a fees.
II. if the takeover is hostile –where is the need to honour a loser?
III. in case of a friendly takeover, it can clearly be a part of the agreement since the seller might not be interested in the business for one reason or the other.
IV. The amount being paid as “non Compete fees” is paid for the concern and not for the individual. As a co owner, why should the small shareholders be denied the benefit?
V. When the acquirer is acquiring the concern, where is the need for paying such a fee?
VI. The expertise that the seller is supposed to have acquired is during the tenure of serving the company as an ED or MD for which a very rich reward is paid to them.
VII. If the individual expertise is so great it can be retained by the new acquirer for future use, on a more attractive salary
VIII. It is a NATIONAL WASTE to debar such a great expertise from being used for the greater good of the nation.
14.
Reg 44(i)
A) Payment of interest should be made mandatory in all cases where the payment is made after more than 3 months regardless of the fact whether PA was issued in time or not.
B) Rate of interest shall be
PLR of State Bank Of India—in case of delay over a prolonged period during which the
PLR has changed more than once- the highest rate during the period shall be applicable.
C) In case of delay beyond a Year such rate should be made cumulative.
D) There cannot be any adjustment for any dividends etc. paid by the co.
A) There have been many cases the Acquirers have after issuing PA, delayed the final Offer by one means or the other.
B) Since the Acquirers are Business houses who are likely to borrow at a rate of
PLR.
C) It is only logical that in case of long delay, the rate is made cumulative.
D) (i) Dividends are paid by the co. whereas the obligation for payment of interest is that of the Acquirer. (ii) It curbs the liberty of the shareholders to liquidate his holding without losing out on interest. (iii) For more points on this kindly refer to
Annexure—my letter February 25, 2003 written in the context of Colour Chem.
ANNEXURE :
Pc_1\D\my doc
wiprodata\AG.doc February 25, 2003
To,
Shri G.N.
Bajpai,
Chairman
Securities And Exchange Board Of India
Mittal Court, ‘B’ Wing,
1st Floor,
Nariman Point,
Mumbai– 400 021
Dear Sir,
Reg.:- SAT Order ---
Clariant on Colour Chem open offer
I am aghast and greatly aggrieved as an investor in Colour Chem Ltd. by the above order of SAT. I request you to Kindly note the following points and make suitable Appeal :
1) The Hon’
ble Presiding Officer Grossly failed to appreciate the basic tenets of Stock exchange. All the shares are at par—
pari-
passu and whoever buys the share at any point of time does so with all the right and obligation of his predecessor shareholder. A common example which will make this point very clear is the case of dividend payment. A person may be holding the share for the whole year, lets say from 1st April to 31st March but when he sells the share even after the year end the purchaser gets the dividend. Such purchaser may have held the share only for a couple of days as against the whole year by the seller. Although the profit that is being sought to be distributed was earned during the period when the seller was the shareholder and was rightfully entitled to such dividend. This is because the buyer steps into the shoes of the seller immediately on his purchase with all the rights and obligation attached to it. Taking it conversely, if the company has incurred losses in the past, the new incoming shareholder will have to bear the loss of his entire capital in case the company goes into liquidation. No doubt the risks and rewards should go together.
2) The Hon’
ble Presiding Officer Grossly failed to understand that the Capital Market is one of the most matured market. All the past and future happenings are fully reflected in the current market price of a share. The price at which the shares are bought gives to the buyer all the rights that the seller had. That is to say all the expectations are completely discounted in the market Every development / event is immediately factored into the prevailing market price. Hence the Investors who bought the shares at high price taking into account the likely Open offer by the Plaintiff and receipt of interest will have to bear an unjustifiable loss. It was observed in the order :
“It is impossible to believe that anyone would have though of such an order and factored in the interest when he purchased shares before the said date. Further the said order was challenged by filing an appeal on 6.12.2002 and in the appeal relief was sought against the direction to pay interest and also on the eligibility of the shareholders entitled to be compensated. Since the matter was under dispute in a litigation no prudent person would factor in such an uncertain factor to the purchase price of the shares.”
But how incorrect is such a view need no proof. The movement of price of the shares of the target co. on Monday 24
th February 25, 2003 , the first day of trading when SAT’s such view denying the benefit of interest to those persons who bought the
shrares after 22.3.98 was known, the price of the target company—Colour Chem crashed on
NSE from Rs.241.45(the previous closing price as on Friday 21.02.03) to Rs.195.15 a fall of about 19% or Rs. 46.30 in one single trading session.
3) However, in case the above point is not found to be acceptable than this would mean that the shareholder who sold shares earlier had to bear the loss i.e. the loss of interest that he would have earned. Justice will than demand that all such shareholders should be found out and paid the interest and duly compensated.
4) The Hon’
ble Presiding Officer Grossly failed to appreciate that if the impugned order has to be implemented, the rules of trading in stock exchange will have to be re-written, as there will be two class of shares with different rights attached to them since all the shares being traded will not be
pari-
passu. the person who has purchased the shares as per the prevailing Stock Exchange/
SEBI guidelines has done so with the knowledge that he is purchasing them with all the rights attached to them, will have to suffer irreparable loss.
5) The Hon’
ble Presiding Officer Grossly failed to appreciate that this will be against the laws of natural justice and will be
discriminating between (i) shareholder who continue to hold the shares and Tender it in the open offer and who do not tender (ii) between those who continue to hold the shares & tender them and those who have sold them (iii) in the hands of the same shareholder who was continuously holding the share and have tendered them yet part of it was only accepted –(which is the most likely scenario), between the holding which was accepted and will earn interest & part of his holding that will not earn the interest.
6) The Hon’ble Presiding Officer Grossly failed to appreciate that this is a ploy by the Plaintiff to unduly enrich itself at the cost of the share holders. This should never be allowed. By this method Clariant is trying to save its payout on account of interest significantly, since majority of the shareholders would have already sold the shares. List of shareholders is not constant and the same set of shareholders who were the members of the company on the relevant date may not be the persons who have tendered the shares against the Open Offer. As everyone related to the capital market is aware The register of members / shareholders is a dynamic one and keeps on changing everyday. This is the very reason why there is a record date for any material benefit to be given to the shareholders. The Plaintiff may save about 75% of its liability on account of interest payment.
7) In case the plea of all the shareholders who tender their shares should be paid the interest is not found acceptable, the Plaintiff should be asked to pay such interest to the shareholders who were holding shares as on that date regardless of the fact that they have tendered their shares or not. In the alternative they should be asked to deposit this amount in the Investor’s protection fund.
8) This may lead to a new kind of Malpractice of hiring out names/folios. Persons who were shareholders as on 22.3.98 may get a premium for using their name to tender shares in the open offer for third parties.
9) The impunged order restricts the liberty of the investor. The person who is holding the shares continuously from 22.3.98 cannot sell it now without incurring heavy losses because the benefit of interest will be lost and the mechanism of Stock exchange of factoring all such benefits has been derailed. It is common knowledge that small investors put their meager savings in shares for rainy days—unfortunate illness or daughters marriage. But because of the impunged order they will have to postpone the treatment of their illness or marriage etc. till such time as the Plaintiff comes out with an open offer. The small investor will hence forth be completely at the mercy of some scrupulous people who try all kind of tricks to avoid their legal liability and deprive of poor investors
10)The Hon’ble Presiding Officer Grossly failed to appreciate that this will be against the spirit of the legislation which has been admitted in the very recent WIMCO case to be a “ beneficial legislation” .
11) The Hon’ble Presiding Officer Grossly failed to appreciate that the amount of interest payable by the Plaintiff is very large at Rs.250(approx) per share on 23,29,828 no. of shares will come to Rs 5824.57 lacs. . Non payment of approx.75% of this will result in a substantial loss to the Exchequer. The loss of Tax Deducted At Source (TDS) only will be about Rs. 447.75 lacs.
12) If the impugned order is implemented there will be a substantial cash flow loss to the Nation who will be deprived of valuable Foreign Currency.
13)The Hon’ble Presiding Officer Grossly failed to appreciate that it is impractical to enforce it. Shares are fungible commodity and mostly not being maintained in the physical form. It cannot be fully determined who were the shareholders as on that date. The following points will illustrate the matter further:
a) Some persons might be holding the shares in the physical form as on 21st November, 1997 and got them subsequently dematerialsed and tendered it in the electronic form.
b) In some cases transfers would have taken place due to process of law, transmission without there being an actual change in the beneficial interest.
c) Consolidation of family holding when various folios were consolidated. This has actually happened in large nos. after Demat was introduced.
d) In some cases transposition of the names would have taken place resulting in the change of folio numbers.
e) Since shares held in the Demat form do not have any distinctive nos. how it can be determined that the shares tendered against the open offers are the very same shares that were held as on the relevant date. Some Shareholder would have been holding the shares on the relevant date but subsequently sold them and bought again before the tendering date.
f) Shares can be rematerialsed also, but in this case the folio no. will change and will have a current date.
g) How the interest will be calculated in case of someone who was a shareholder as on 21.3.98 but bought additional shares and tendered them against the open offer, part of which were only accepted.
h) In cases where there is a shift in the DP by the investor how it can be determined what was the actual date of holding.
i) How will the Original Shareholder be compensated for loss of interest on those shares which were not accepted because of participation by new shareholders and consequent over-subscription on the Open offer. For example the intention of the impugned order is to allow interest to all those who were holding shares as on March 22, 1998 , but if a such a person holding share tenders it only about 40% of it is likely to be accepted because others will also participate in the offer. Thus he will not be able to earn interest on that part of his holding which has not been accepted.
j) In case of takeover of Investment companies although the beneficial interest would have transferred, yet the new shareholder will be able to get the benefit of interest payment contrary to the directions in the impugned order.
k) Since there was no “Record Date” as on 21.3.98 some investors although holding the shares did not get them transferred in their name, such investors will lose for no fault of theirs.
I earnestly request you to take up these points in the most forceful way if need be up to the Supreme Court since this will have a cascading effect in so many other cases & the very foundation of investment in shares will be destroyed and interest of a very large no. of share holders will suffer with consequent further loss of Public confidence in the Capital market.
I personally offer my services free of cost to SEBI and its advocates in preparing appeal against this impugned order. Kindly feel free to contact me on any of the numbers given above.
Shall be obliged to hear from you at the earliest.
Thanking you,
Yours truly,
Arun Goenka
P.S
One very important suggestion escaped my mind earlier--Kindly make all the OPEN OFFERS appealable at SAT. This can be done by simply making the process of clearance of Offer document as an ORDER.
SAT has often taken a view that it is a forum for redressal of grievances against an order of SEBI and since clearance of an offer document is not an order, it cannot be heard.
Kindly make the process of clearance of an offer document by means of an appealable order by SEBI .
