Somasekhar Sundaresan: Govt is above the law in capital market
It was 2002, the highest point ever in the Government of India’s privatisation programme. Public sector disinvestment was being pursued in right earnest by the National Democratic Alliance government, then in power at the Centre. Arun Shourie, a powerfully articulate minister, was in charge of disinvestment.
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Mr Shourie piloted a strategic disinvestment programme, and invited bids from all over the world to pick up stakes in various identified public sector companies. Many of these companies had been listed on stock exchanges in the past when the government had wanted to sell small parts of the family silver to cover its costs and bridge its deficits.
For these companies to list, they had to play by the rules of the game applicable to listed companies. Their promoter and patron, the government, too had to play by the rules of the game – at least, substantially. Of course some corners would be cut here and there, like a discounted charge of listing fees, but on substantial issues, there had to be compliance, by and large.
One of the most substantive regulatory requirements applicable to listed companies is the takeover regulations. India boasts of a statutory regime for takeovers with regulatory prescription mandating an obligation to make an open offer to protect public shareholders. If one were to take over a company whose shares are listed, one would have to provide an exit opportunity to the public shareholders.
When the disinvestment programme was conceptualised, various forces leaned very heavily on the Securities and Exchange Board of India (SEBI) to waive this requirement for takeovers of public sector companies. The Government of India is said to have weighed in quite strongly to amend the takeover regulations waiving the mandatory open offer for public sector disinvestments. A private investor who does not have to earmark money to pay for the potential exit opportunity of the public shareholder could be made to pay that much more to the government – a classic argument that could purport to be in “public interest".
The regulator had then stood its ground. The takeover regulations were indeed amended but only to remove procedural difficulties arising out of the timing of making an open offer, which would have an impact on the pricing of the open offer. Specifically, an open offer had to be publicly announced when an agreement to acquire was reached. The minimum price payable was linked to the historical price movement culminating with the date of such announcement.
In the disinvestment programme, since the deal would get announced when the bids invited by the government were opened, it would have been unfair to let any upward price movement resulting from the market factoring in that very news, to influence the computation of the minimum offer price. Therefore, the regulations were amended merely to align the timing and procedure with the government’s disinvestment process timeline.
Against all odds, SEBI stood by its constituency – the investors in the securities market. It was argued that while the government may want to raise funds by disinvestment, the public shareholders ought not to suffer, and they should get a right to an exit. In fact, a generic provision granting an exemption to government companies acquiring listed shares was amended with a proviso to ensure that if a government company were participating in a public sector disinvestment auction, it would not get such an exemption. It was perhaps convenient to take such a seemingly noble stand because such an amendment was also necessary to ensure that the disinvestment process did not present a non-level playing field to the non-government companies that were competing in bidding with government companies.
The grand stand was fantastic, but this was all in the case of control over listed companies changing from the government to private hands. Now, when government is increasing its stake in listed companies, the Government of India is successfully making SEBI bend over backwards to grant exemptions when the government raises stakes in listed companies. In the case of IFCI Ltd, a beleaguered financial institution, the Government of India was permitted to brazenly increase its stake from 0.0000011 per cent to 55.57 per cent without making any open offer, extolling the virtues of how the government was bailing out the company in public interest. However, there not even a whisper in SEBI’s exemption order about why depriving public shareholders of an open offer would be in the interests of investors in the securities market.
This was a clear case of a complete takeover of a listed company, and yet, public shareholders who had been saddled with a non-performing company for years, were denied an exit opportunity. Very helpfully, an external panel of experts had unanimously endorsed granting the exemption and the regulator, of course, only accepted the panel’s recommendations. Not even in the case of Satyam Computers, where India’s largest alleged corporate fraud was discovered, and a bidding process resulted in a private sector acquirer bailing out the company, had the regulator thought it fit to grant such an exemption.
Surely the adage “be you ever so high, the law is above you" does not apply to the government when it comes to SEBI regulations. This impropriety will not find mention in any report of the Comptroller and Auditor General – the exemption saves money for the government. The only voice of a protector of investors’ interest could be that of the regulator. That voice speaks a different language when it comes to a conflict of investors’ interests and the government’s interests.
(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.)