The Securities and Exchange Board of India (Sebi) has struck again. It has issued a circular setting out a new regulatory framework for schemes of arrangement involving listed companies, which are approved by a court-supervised process. The circular is indeed a response to provocative practices in the market – some companies have made provisions in schemes that make possible, the impossible, for example, getting unheard-of accounting entries cleared.
However, three clear themes of regulatory mistake are underlined by the circular: paternalism, regulatory competitiveness, and a breakdown in legal process. The contents of Sebi’s circular have serious immediate impact on the members of society. In fact, Sebi has had to make provisions on dealing with the transition necessitated by the sweep of its measures. However, none of the measures involved an emergency. Yet, the circular was not preceded by any public consultation, a grossly erroneous approach to taking regulatory measures, however laudable the intent.
Even a cursory look at the measures would emphasise this theme. Earlier, draft schemes were to be filed with stock exchanges, which would review them for potential circumvention of securities laws and clear them in 30 days, after which the process for court approval would start. Now, Sebi wants stock exchanges to give comments to Sebi in 30 days (surely a failure of stock exchanges in getting Sebi to keep the faith). Sebi would then “endeavour to provide its comments” in another 30 days — regulatory process deadline that is counted in months, not days, in the case of securities offering documents that Sebi has to comment on under other regulations.
Sebi’s comments would then have to be tabled before the company court so that the court can decide how to deal with them when sanctioning the scheme. Even after the court sanctions the scheme, one has to go back to the stock exchange, which would make “recommendations” to Sebi. Sebi would then issue more “comments” (what for, is quite inexplicable, particularly if the scheme does not involve listing of a company newly created by the operation of the scheme).
This central theme of the circular brings out the paternalistic approach: “come to us and we will tell you if you are good for the market”. The framework of “comments” is a wide avenue for bringing in arbitrariness and not be bothered with objective criteria based on which “approvals” have to be granted. Worse, in the process, months of procedure have been added to listed M&A activity. One lists stock to create currency for M&A activity by using securities instead of cash. That just suffered an adverse setback. The sense of paternalism is consistent with the approach of Sebi, saying last year that it would get involved with determining the quality of securities offerings.
There are other issues too with the circular. Sebi has assumed that shareholder approval for schemes is through a resolution at a general meeting, and has therefore prescribed a postal ballot. Sebi has also issued a new norm for a shareholder approval — the public shareholder vote for the scheme should be twice the votes against. Now, resolutions for schemes are governed by rules notified by the Supreme Court under company law made by Parliament. These resolutions are passed at court-convened physical meetings and company law has a specific standard for counting votes to determine success of the resolution.
If Sebi felt that a completely new standard was necessary, it ought to have had a wider engagement to enable amendment of the court rules, to enable better measures. At the very least, it could have avoided a procedural mis-match — companies are now wondering if they have to do a postal ballot process in addition to the company court’s meeting process.
Regulatory one-upmanship is never a great idea — it may lead to a “good” social outcome in some instances, in the very long term, but will surely create near-term chaos and impose severe transaction costs arising out of uncertainty. Listed companies implementing schemes of arrangement will not know what to do in order to be on the right side of the law. The element of a regulatory race is consistent with a consultative paper on corporate governance recently published by Sebi — seeking to get the listing agreement to overtake the new Companies Bill, which in turn seeks to overtake the current listing agreement.
The worst element is the breakdown of the rule of law in law-making. Not only has there been no public consultation, even the post-legislative check and balance has been circumvented. The serious and far-reaching measures proposed in the circular modify the statutory standards laid down by Parliament, but the check and balance of reporting back to Parliament has been violated. A critical feature of law-making and regulatory empowerment is that regulators are empowered to make “regulations” to meet their objectives and discharge their duties.
Regulations made by a regulator are required to be tabled in each House of Parliament so that Parliament can debate the wisdom of the measure, if it so chooses. Tabling the regulations in Parliament would not only enable a review of such regulations, but would in fact give greater strength and credibility to the measure in the regulations. (See Without Contempt edition dated December 10, 2012 on the Parliamentary debate on exchange control regulations governing FDI in retail.). However, by housing the regulatory measures in “circulars”, regulators are able to give this important avenue of scrutiny a complete go-by and to thereby circumvent oversight completely.
The author is partner, JSA, Advocates & Solicitors. Views expressed are his own. Email: firstname.lastname@example.org