The Securities and Exchange Board of India (Sebi) has continued the process of tightening the norms for preferential allotment. The capital market regulator has said that promoters will not be eligible for preferential allotments if they have sold shares in the previous six months, and that if a promoter has failed to exercise warrants that he has previously subscribed to, he would not be eligible for the issue of equity shares or convertible securities or warrants for one year.
The intention is to stop the misuse of preferential allotments, which has been a very contentious issue. During the last downturn, promoters walked away from exercising their preferential warrants in droves, hastening instead to issue new issues at lower prices. Or, during the boom, some of them sold their existing shares in the market, buying their stake back at a lower price by exercising warrants issued earlier. These abuses will now be checked.
The larger issue, though, is whether there is a justification for the clear distinction between the two classes of investors in the Indian markets—promoters on the one side and ordinary investors, presumably a lesser breed, on the other. The simple question is: why should promoters have access to preferential allotment? Why should they not, if they wish to increase their stake in their companies, go in for open offers? And after so many years during which they could have gone in for creeping acquisitions of 5% annually, surely they should have increased their stakes to a high enough level by now?
It has been argued that preferential allotments are an avenue of ensuring quick access to funding for companies. That is true. The way forward would probably lie in ensuring that all classes of investors are allowed to participate in new issues, but the trouble is that rights issues take an inordinately long time. Sebi, therefore, needs to crunch the time for rights issues further, which would get rid of the last excuse for preferential allotments.
A similar concern with ensuring a level playing field for all investors is also behind the proposal that an acquirer would need to make an open offer for 100% of the shares in a target company. True, this would make open offers more expensive and would, therefore, benefit incumbent managements in the short run. What is needed is corporate finance for takeovers and it’s possible that the 100% open offer rule would force banks to start providing the funding. Sebi could also decide to make the 100% rule effective from a future date, giving time to put the financing arrangements in place.
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