Markets regulator Securities and Exchange Board of India (Sebi) is planning to introduce a set of takeover rules for the government that will be different from what private companies follow.
The proposal, on the drawing board, intends to exempt the government from making the mandatory open offer to buy an additional 26 per cent from minority shareholders if its stake in a company crosses 25 per cent.
The move comes in the wake of a recent instance where the government was exempted from making an open offer in financial institution IFCI Ltd, after its holding in the firm jumped from a marginal 0.0000011 per cent to 55.57 per cent, following conversion of warrants into shares in September.
Instances when market regulator Securities and Exchange Board of India (Sebi) had to exempt the government from open offer obligation
- IFCI (September 24, 2012): The conversion of debentures worth Rs 923 crore had led to the government’s stake going up from 0.0000011% to 55.57%, resulting in acquiring control of IFCI
- IDBI Bank (March 26, 2012): Conversion of Tier-I bonds increased the government’s shareholding from 65.13% to 70.73%, breaching the creeping acquisition limit of 5%
- Hindustan Copper (October 1, 2004): Issuances of equity shares worth Rs 365 crore to the government had led to an increase in government’s shareholding from 98.95% to 99.48%
“Although IFCI was a genuine case for exemption, we are looking whether we can have specific exemptions for the government under the (Takeover Code) Regulations,” said a senior Sebi official, requesting anonymity. He said the proposal was at a nascent stage and the contours of the rules were being discussed.
Sebi might also tweak rules for the government in cases of creeping acquisition, where buyers have to make an open offer it they purchase more than five per cent in a company in a financial year
In March, the regulator had exempted the government from making an open offer for IDBI Bank Ltd, when a proposed capital infusion into the bank crossed the creeping acquisition limit of five per cent.
Sebi had introduced the new takeover code last year, increasing the open offer trigger limit from 15 per cent to 25 per cent. Also, it raised the minimum open offer required to be made by the acquirer to 26 per cent from 20 per cent.
Securities lawyers said a different set of laws for government companies would be detrimental to the interests of minority shareholders, though rules allow Sebi to do so.
“One objective of governance through regulators is to provide a level-playing field to both government participants and non-government participants. Preferential treatment to the government as acquirers under the takeover code would distort the level-playing field, which is already distorted on many other counts,” said M S Sahoo, a former whole-time member of Sebi and a lawyer.
The rationale behind the open offer obligation, which in some countries is as high as 100 per cent, is to give an opportunity to the minority shareholders to exit if they don't wish to continue with the new management in case of change in control.
Pavan Vijay, founder of corporate services provider Corporate Professionals, said: “In my view, giving automatic exemption to the government will not be justified from the point of view of minority shareholders. They should be given the opportunity to exit whenever there is an acquisition of shares of a listed company beyond the specific threshold, whether the said acquisition is by the government or by private parties.”
Lawyers said securities laws in the country are already partly distorted in certain cases. One is that the minimum public shareholding requirement for a public sector undertaking is much lower at 10 per cent than that for private sector companies, which is 25 per cent.