FALCON & DUNLOP TYRES

Lptp/mydoc/takeover/falcon

May 30, 2009

To,

Shri C.B. Bhave,
The Chairman
SEBI
SEBI Bhavan, 3rd Floor, B Wing,
Plot No. C-4A, G Block
Bandra Kurla Complex
Mumbai: 400051


Dear Sir,

Reg.:- Open offer – Falcon Tyres


I am aghast and greatly aggrieved as an investor in the Indian Capital market. I earnestly request you to stop this malpractice immediately since this will have a cascading effect in so many other cases & the very foundation of investment in shares will be destroyed. Interest of a very large no. of share holders will suffer with consequent further loss of Public confidence in the Capital market.

It is quite unfortunate that inspite of the fact that SEBI & me are both working for the common objective –INVESTOR PROTECTION, yet we often find ourselves at cross-roads. In the recent case of TTML I brought out the non-compliance from the SAST to your knowledge and when I failed to get a proper response, I had to go to the High Court & now I am preparing for Supreme Court.

In the case of Falcon tyres the way the Acquirers are allowed many benefit illegally gives an impression that SEBI has got a benevolent disposition towards the defaulter.

Before SEBI (Substantial Acquisition of Shares and Takeovers) (SecondAmendment) Regulations, 2002 dated 9th September,2002 , the provision for payment of interest was not there in the regulation yet SEBI had asked the defaulting Acquirers for cos like-CASTROL, COLOUR CHEM & RAYBAN to pay interest @ 15% to all the shareholders for the period of delay. These directions of SEBI were challenged by the Acquirers. It was a major victory for SEBI that without there being any provision for payment of interest in the regulations, SEBI was able to get interest @ 15% for the investors .While in the case of CASTROL interest was paid to all the shareholders, in other cases the Acquirers were allowed to make some adjustment. SEBI in the meanwhile amended the regulations and specifically provided for payment of interest. The relevant provision stands as follows:
44 (i) directing the person concerned, who has failed to make a public offer or delayed the making of a public offer in terms of these Regulations, to pay to the shareholders, whose shares have been accepted in the public offer made after the delay, the consideration amount along with interest at the rate not less than the applicable rate of interest payable by banks on fixed deposits.

However in the present case of takeover of Falcon tyres, an attempt is being made to reverse the above progress. At the cost of small shareholders, the Acquirers are being doled out a bounty of Rs.4.79 lacs, for delaying & defaulting to announce the Open offer for more than 3 years.

Not being satisfied with the bounty of illegal benefits, the Acquirers keep on asking for more. In the corrigendum dated May 13, 2009 they are trying to further rob the investors of the meager interest at the rate of 10% (without compounding). They have now announced that dividend paid during the period will be adjusted. from the interest. This was not announced in the initial PA dated 01.02.2007. The shareholders like me who were holding on to their shares having faith on the law enforcement agency of the country that at least a nominal interest will be given, feel cheated.
a) First they are giving the lowest rate of interest ever allowed under the Regulations. The reasonable rate should be 15%. By their own admission, the Acquirers are paying 14% interest. The regulation says “at the rate not less than the applicable rate of interest payable by banks on fixed deposits.” This is not justified on any of the parameters:
Ø What is provided in the regulation
Ø what the shareholder would have earned if he was not deprived off the money and
Ø what the acquirer has earned/ saved by deploying/using that money.
b) Second, they are denying even this low interest to (by their own admission) more than 30% of the shareholders.
c) Third they want to further reduce such payment by adjusting dividend from the interest.

POINTS TO PONDER AGAINST ALLOWING THE ACQUIRER OPPORTUNITY TO DENY THE INVESTORS INTEREST:

When the law & practice being followed after September 2002 is that interest shall be paid “to the shareholders, whose shares have been accepted in the public offer”, why the Acquirers are allowed to short change the investors?
The interest allowed in the case of Open offer is not compounded whereas in the case of Banks it is compounded at periodic intervals—monthly, quarterly, half yearly or yearly.
In case of Bank FD the depositor willingly deposits his money because he may not find a better use of it at that time, but in the case of delay he is forcefully deprived of the use of his own funds and may be missing out on more rewarding opportunities.
Earlier the rate of interest payable was generally 4-5% higher than the FD rate. In the case of Castrol it was allowed@ 15% when the FD rate was around 8%. Only when the FD rate came down to 4-6% , the rate allowed under the Takeover code was lowered to 10%
When the offer is delayed for many years and the law provides for “interest at the rate not less than the applicable rate of interest payable by banks on fixed deposits”. Is it right to allow the defaulter the benefit of the lowest rate ever allowed under the regulations? Especially when for sometime during this period the prevalent rate was as high as 17% . Indian Overseas Bank, a PSU bank was offering 10.25% , Tamilnad Mercantile Bank Ltd. Was offering 10.75% NABARD( fully owned by Govt. of India and RBI) 12.82%
When no defaulting Acquirer after the regulations were amended, allowed any smart trick of denying interest to the investors by such mechanism as period of continued holding or payment of dividend, why the present Acquirers are allowed to do so.
Is it not the basic tenets of Stock exchange that 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.
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.
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. Why the defaulter be rewarded with the booty?
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.
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.
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 the Acquirer 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 Acquirer may save crores of Rupees of its liability on account of interest payment.
Even if for any unfathomable reason, you find that it is fair to allow the Acquirer deviate from the Regulations and not pay interest to all the shareholders, why they should not 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.
Why the defaulters be allowed to enrich themselves at the cost of small shareholders? They should be asked to deposit the amount of interest denied to the shareholders in the Investor’s protection fund.
This may lead to a new kind of Malpractice of hiring out names/folios. Persons who were shareholders before the cut-off date June 2, 2006, may get a premium for using their name to tender shares in the open offer for third parties.
Such practice will restrict the liberty of the investor. The person who is holding the shares continuously from June 2, 2006 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 such benevolent attitude towards defaulters, 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 and fulfills his legal obligation. 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
It is impractical to enforce it truthfully. 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 June 2, 2006 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 June 2, 2006 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 is to allow interest to all those who were holding shares as on June 2, 2006 , 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 stated intention of the Acquirer. This again proves that it is against the small shareholders.
k. Since there was no “Record Date” as on June 2, 2006 some investors although holding the shares did not get them transferred in their name, such investors will lose for no fault of theirs.
l.

I have written 2 mails to the Merchant Banker & the registrar, they failed to tell me on how many shares I will get the interest.

I would request you to please intervene now, it is never too late; and direct the acquirer to pay interest as per the regulation to all those shareholders who tender their shares and whose shares are accepted.

Shall be obliged to hear from you at the earliest.

Yours truly,

Arun Goenka