SEBI’s regulatory clauses for acquisition of business are being repeatedly waivered for government deals.
This could erode the credibility of SEBI and also affect investor sentiment.
What is the SEBI regulation for takeovers?
Recently, the central government has sealed a series of deals involving listed Public Sector Companies (PSCs), where it has given up its majority stake.
These have precipitated a change in management, and were carried out to meet disinvestment targets and free up budgetary resources.
Whenever there is a stake sale that results in a “change in management” of a listed entity, the acquirer entity will have to follow “SEBI’s Takeover Code”.
The SEBI code states that “the acquirer must make an open offer to public shareholders of the entity, to give them a fair exit”.
In this context, the centre has been actively lobbying for its deals to be exempted from these requirements.
What are the recent takeovers that have been exempted?
In 2017, ONGC was persuaded to buy Centre’s 51.1% equity in HPCL for over Rs. 36,000 crore in order to meet the shortfall in disinvestment proceeds.
Discussions are now on to offload the government’s 73.4% stake in listed “Dredging Corporation of India” to three central Port Trusts.
The centre had managed to secured exemptions from “SEBI’s Takeover Code” for both the above mentioned deals.
These are clear cases of a change in management control for the listed companies, with the equity stake changing hands well above 25%.
Therefore, it is unclear on what grounds the acquirers have been exempted from open offer requirements.
Further, exemption has also been sought for LIC’s proposed acquisition of IDBI Bank, but the case is yet to be decided by the SEBI.
Do the exemptions stand up to scrutiny?
The government’s argument is that as the sale is to ‘government’ entities, there is no trigger for an open offer.
But this argument is hollow, as the Centre showcases the very same deals as successes of its public sector ‘disinvestment’ programme.
SEBI is indeed empowered to grant open offer exemptions in special cases to safeguard the interests of minority investors in securities markets.
But in the above cases, interests of investors in the acquired firms are best served by insisting on open offers rather than waiving them.
Further, in the LIC-IDBI case, the whole objective of the deal is to anoint LIC as the new ‘promoter’ to infuse necessary capital into the ailing bank.
Hence, exempting that deal from open offers would be a sham.
What are the risks?
The multiple instances of securities market laws being bent for the government, reflect poorly both on the Centre and the markets regulator.
The government is also proving to be a poor role model on corporate governance for the promoters of India Inc.
The government needs to recognise that it is repeatedly mistreating market investors in listed PSUs, by seeking exemptions from SEBI.
Meting out high-handed treatment to shareholders can put them off government-owned entities and thereby starve PSUs of funds for development.
Notably, given the persisting budgetary constraints, Centre will have to lean heavily on market investors in the next few years for capital investments.
