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Experts pick holes in takeover code, call for new initiatives

Several deficiencies and anomalies have been found in provisions of the takeover code during its 17 months of working, experts from the finance industry said.

Addressing a seminar organised by Indian Merchants Chamber in Bombay on Thursday, experts threw light on many areas of infirmity in the current takeover code, which came into force in March 1996.

Speakers felt it has become common to achieve corporate growth through taking over old companies, with their established brands, marketing networks and production facilities. That is because the potential to increase market-share by tapping new customers is limited in stagnant markets, and because setting up of new units for getting greater market-share would be very expensive and risky.

Speakers called for new policy initiatives to ensure that takeovers would have a positive impact on the economy. The norms cannot be restrictive, as constraints on foreign capital taking over Indian companies will remove the flexibility that Indian industry sorely needs, they said.

A code should only lay down basic principles governing takeovers consistent with other corporate laws, and should establish an orderly process for takeovers, it was said.

The takeover code has failed to provide any effective guidelines to ensure a fair deal for the small investor, it was said. An investor's main concerns are whether there was any insider trading and the motive for jacking up the price.

Highlighting a loophole, I-Sec's managing director Kishore Chaukar said, "You ask your potential buyer to purchase five per cent from the market now and give management control to him immediately. After three years you sell your stock to him at 3,000 per cent and you will be entirely out of the clutches of the present takeover code. There are many who have made money this way.

"But is it fair to the investor? Is it pari passu? The irony is that if the promoter sells his share at a lower price, the takeover code requires him to make an offer to all shareholders, but if he sells at a higher price, he need not do so."

R A Shaw, senior partner, Crawford Bayley and Company, the wellknown firm of solicitors, said the takeover code proved ineffective in dealing with offshore acquisition cases of Sesa Goa, Shaw Wallace and Dunlop. In these cases, shareholders in India were presented a fait accompli. Even the new code may not be able to exercise much control in certain cases. "How will one compel Glaxo to comply with a 20 per cent option? Do Indian courts or SEBI have the power to enforce the Indian laws on extra-territorial companies abroad?" he asked.

The financial institutions, participants noted, try to ensure that the change in management and control is in tune with the prevailing market economy. The issue of supporting or opposing the existing managements is irrelevant to them.

It was pointed out that financial institutions do not have a common policy for takeover bids; they formulate policies on a case-to-case basis.

Any consultation that may take place between them is not for forging a common strategy, but for widening one's perspective of market realities and sharing information. It is unfair for anyone to ask the institutions what stance they will adopt in case of a specific takeover attempt.

UNI