THE BYPASS ROUTE TO SEBI TAKEOVER CODE GAINS POPULARITY

Orchid chemicals – a company with a market cap of about 1500 Crs. (as on close of business on 15th December 2009) was taken over for $400 Million Roughly Rs. 1860 crs.) yet no Open offer is triggered.

Incidentally this is not first such case. Orchid management has just followed other such deals. Notable amongst them is Eicher Mootrs (December 2007 deal valued at USD 350 Million) and Gwalior Chemicals (June 2009, Deal valued at Euro 82.4 Million) Such deals valued at hundreds of crores were all able to BYPASS the SEBI Takeover Rules which were promulgated to protect the interest of small shareholders.

Some small shareholder who keep an eagle’s eye on such M & A activities designed by the corporates to short change the small shareholders, did complain to SEBI but it seems that no action has been taken by SEBI resulting in encouraging more and more management to resort to such BY PASS.
Lets examine what the SEBI Takeover code says :
SEBI TAKE OVER CODE REG 12 STATES:
Acquisition of control over a company
12. Irrespective of whether or not there has been any acquisition of shares or voting rights in a company, no acquirer shall acquire control over the target company, unless such person makes a public announcement to acquire shares and acquires such shares in accordance with the Regulations.

It defies any logic in all such cases. Just examine Orchid case


1. A company with a market cap of Rs.1500 Crs. Is being taken over at more than its Market cap –Rs.1860 Crs. and it does not amount to TAKEOVER?
2. If 15% of the shares were bought of the same co.—amounting to Rs. 225 Crs. –it will be take over.
3. Regulation 12 says Acquisition of control over a company—how then acquisition of control over substantial parts or whole of the company’s assets is not “ Acquisition of control” ?
4. A basic question that comes up is what is a Company? Is the BOARD ROOM a company? Or the place where the real business is done, is the company ? Sale of the business earning in hundreds of crores with about 450 employees at a price of Rs. 1860 crs. Is not a sale/ transfer of control over the company?

SEBI needs to wake up to such deals and Block the By-pass by taking immediate & firm action and directing the parties concerned to follow the Takeover code in letter and spirit. If this loophole is not plugged, soon we will have many dud or KHOKA companies listed on our exchanges.

Why would a Mylan takeover a company like Matrix and come out with an Open Offer & later delisting offer? When an easy escape route is available in the present format with SEBI not making any effort to block the BY PASS, it will be foolish not to exploit it. 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

GREAT OFFSHORE

http://www.youtube.com/watch?v=2TDGoYErCTk
http://profit.ndtv.com/2009/12/05002531/Sebi-summons-ABG-Shipyard.html

4 December 2009
Ref. Open Offer of Great Offshore Limited by ABG Shipyard Ltd.
Sub: Recent sale of shares of Great Offshore by ABG

It was quite shocking to learn from the press that ABG Shipyard has sold its entire holding in Great Offshore on 2nd December, 2009. This is highly objectionable. Some of the grounds are as follows:

1)As per regulation 25(3) of Regulations, the competitive bidder has to make an offer for as many shares as would make his total holding equal to the holding of the first bidder after taking into account the shares already held by them together with shares proposed to be acquired in the Open offer. Based on ABG’s holding of 7.89 lacs their Open offer for 125.71 lacs shares was cleared.
Para 3 of the Letter of Offer (LOO) states as follows:

“This Offer is a competitive bid. Therefore, in compliance with regulation 25(3) of Regulations, the
Acquirer proposes to acquire 1,25,71,072 Shares of the Target Company (32.12% of Diluted
Share Capital of the Target Company and 33.85% of current share capital of the Target
Company), being together with Shares already held by the Acquirer and the PAC at least equal to
the holding of the First Bidder including the number of Shares for which the offer has been made
by the First Bidder, as of the date of the PA. The Acquirer proposes to acquire the Shares validly
tendered in accordance with the terms of the Offer at Rs.520 for each Share of the Target
Company, to be paid in cash in accordance with the Regulations in accordance with the schedule
of activities contained herein. As on the date of the PA, the Acquirer and the PAC collectively held
7,89,502 Shares of the Target Company (2.02% of the Diluted Share Capital of the Target
Company). Since the date of the PA, the PAC has further purchased 22,89,069 Shares through
open market purchases in compliance with the Regulations. Therefore, as of the date of this
Letter of Offer, the Acquirer and the PAC collectively hold 30,78,571 Shares of the Target
Company (7.87% of the Diluted Share Capital). The Offer is subject to the receipt of certain
approvals as set forth below in the section “Statutory Approvals and Other Approvals required for
the Offer”. The Acquirer will acquire all the Shares that are validly tendered in accordance with
the terms of the Offer. The maximum consideration payable under the Offer is Rs.653,69,57,440/-
(Rupees Six Hundred and Fifty Three Crores Sixty Nine Lacs Fifty Seven Thousand Four Hundred and Forty Only) ("Maximum Consideration").

Therefore the condition based on which the size of the Open offer was determined cannot be belied. After having announced the Open offer determining the size of the offer based on its holding, they cannot be allowed to sell their holding. Even if their Open offer were to be fully subscribed, their holding will not be equal to the first bidder’s initial holding i.e. 1,33,60,574 as mentioned in the LOO para 2.

2) The size of the open offer for 125.71 lacs shares itself is incorrect because as on the date of the letter of the offer, Bharati was holding 8.65 lacs shares and after the offer the holding will go upto 164.76 lacs shares therefore the offer should have been for equivalent quantity of shares. ABG should be asked to revise the offer size to 164.76 lacs shares. Even before selling the shares ABG’s total holding would have been a maximum of 156.49 lacs (page 28 of LOO), i.e. less than the stipulated no. of 164.76 lacs shares.

3) During the Offer period selling the shares of the Target company by the Acquirer is contrary to public stance of The Acquirer. SEBI in the past has come out heavily against persons who recommend buying particular shares and contrary to their recommendation were selling the shares. Rightfully, such market manipulations cannot be allowed. On one hand. ABG is creating artificial demand of the shares by announcing public offer and on the other hand taking advantage of such artificial demand and increase in prices, sells the shares.

4) Takeover Regulations provide the basis of Offer price. It should be higher or the price determined under various formulas. The basic idea is to reward the small shareholders adequately, albeit for a small portion of the capital of the co. Regulation 20(7) states that – in case acquirer buys shares after the date of PA at a price higher than the offer price than highest price paid shall be payable under offer. Similarly the highest price at which the shares has been sold by acquirer should be the offer price, since that is the price established because of the unique position of the acquirer.

5) Such sale is also illegal under insider trading regulations since the seller had the inside knowledge which was not available in the public domain that they are not serious about the open offer. The heavy price fluctuation on 2nd December is a proof of such an adverse impact. The price of Great Offshore plunged to 506 from a high of Rs. 580. ABG illegally made huge profit at the cost of small shareholders.

6) The LOO has taken yet another liberty with the Law. It has changed the definition of the term “Offer Period”.
Regulation 2 (f) "4[offer period’ means the period between the date of entering into Memorandum of Understanding or the public announcement, as the case may be and the date of completion of offer formalities relating to the offer made under these regulations.];
Page 4 of LOO “Offer Period --20 day period from the date of the opening of the Offer on December 3, 2009 to the closing of the Offer on December 22, 2009 (both days inclusive)
Definition of terms legally defined cannot be changed arbitrarily?
7) The wisdom & motive of large brokerage houses who are trustees of public money, is suspect in buying such shares from one of the Competitive bidders. The trigger for price rise in the shares of Great Offshore was clearly the Competitive bid by ABG. The moment ABG was out of the race, the prices crashed from 580 to 506.
In the light of the above I strongly urge you to please investigate and take necessary actions as follows:
a) Ask ABG to revise the offer price to the highest price at which it has sold the shares.
b) Ask ABG to revise the offer size to 164.76 lacs shares.
c) Initiate enquiry against ABG for trying to mislead SEBI by declaring that it was holding a certain no. of shares and was thus obliged to come out for an offer for lesser no. of shares and not holding such shares.
d) Initiate enquiry against ABG Under Insider trading laws for illegally making profit from information not already in public domain—their intention not to proceed seriously with their Open offer.
e) The role of the Merchant Banker in allowing such an action by the Acquirer.