October 03, 2009

life in financial markets: takeover norms' double whammy for investors

It is is not the first time that I have come across an incidence of a clever twisting of logic, or a cunning interpretation of law, by an appellate authority that hears appeals to orders passed by a enforcement authority. To make it worse, the law enforcement authority itself attempts to keep specific provisions of the law ambiguous enough to allow for discretion by their officials.

I noticed this recently in the financial marketplace with regard to Indian securities market regulator, Securities and Exchange Board of India (Sebi) and the securities market appellate body, Securities Appellate Tribunal (SAT). SAT was hearing an appeal (among many it hears every day/week/month) by Tata Tea against a July 2007 Sebi order, invoking its Sebi (Substantial Acquisition of Shares and Takeovers), in the matter of Tata Tea's acquistion of a company called 'Mount Everest Mineral Water.'

SAT ruled in favour of Tata Tea on 15 September. You can read the order uploaded here [it is not possible to link to the order on Sebi's user-unfriendly (deliberately, in my view, to deter easy research into its activities) website].

SAT gave the benefit of doubt to Tata Tea thereby ruling against investors' interest. At the same time, it upheld Sebi's right of discretion in the matter under dispute. Giving discretionary powers to Sebi, particularly where a concise elaboration of conditions can take out the need for such discretion, is not healthy.

Anyway, I recently wrote about the matter in the magazine I presently work for. Here is what I wrote:


Even as the Securities and Exchange Board of India (Sebi) has set up a committee to entirely review its takeover norms, pending tussles between companies and Sebi's norms continue.

Problem areas in Sebi's takeover norms were yet again highlighted in a recent verdict by Securities Appellate Tribunal (SAT) on an appeal by Tata Tea against a Sebi order that it add Rs 9.64 to the Rs 140 per share 20% stake-acquiring open offer made to shareholders of Mount Everest Mineral Water (MMEM) in July 2007. This was due to non-compete payment by Tata Tea to MMEM's promoters.

SAT accepted that Sebi had discretionary powers to decide on the genuinesness of all contentions of non-compete payments and, if not, add it to the offer price in an open offer. But it ruled in favour of Tata Tea stating its non-compete payment was proper.

Discretionary powers need to be replaced with objective criteria. For instance, Sebi can fix a lower than the presently-allowed limit of 25% of non-compete fee to the acquisition amount above which acquiring company has to pay the same to target company's shareholders.

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