Popular wisdom has made out the likes of Gordon Gekko—the antagonist in Oliver Stone’s Wall Street (1987)—to be such bad guys that no corporate raider has since stood a chance in public view. The prejudice runs deep: According to it, these investors buy unsuspecting firms, and then sell them (or, worse, ruin them) to make a fast buck. With such ruthless values, these barbarians must be shunned.
That prejudice is now part of India’s official wisdom, if it wasn’t so already. The draft takeover norms released by a Securities and Exchange Board of India (Sebi) panel on Monday continues to load the dice in favour of incumbents, against the long persecuted tribe of raiders.
Under the old code, once a potential acquirer got 15% stake—the threshold—he had to make an open offer to purchase 20% more stock. Now when he crosses the open offer threshold, revised to 25%, he has to purchase 100% stock. That’s expensive enough a proposition to keep raiders at bay.
Yet, if an incumbent—say, the promoter—already holds stock higher than the 25% threshold, he only needs to purchase a minimum of 10% more to consolidate his holdings.
Why the contradiction? Sebi’s panel notes that it ensures “equality of opportunity and fair treatment of all shareholders, big and small”. That’s true. So far acquirers—who usually acquire by paying a premium— bought only 20% more stock, giving only the holders of that 20% stake the premium that the acquisition came with. Now that the acquirer has to buy all outstanding shares, the inequity disappears.
But this is adding a new inequity, which we view along with the existing ones in our system.
Indian company law has always created two classes of investors. On the one side, there are the promoters. They have preferential equity and warrants, and the ability to subscribe to a rights issue’s unsold shares. They get to purchase 5% more stock every year without triggering an open offer, on top of which Sebi hands them a new lollipop. On the other side, there’s the rest of us, voiceless.
Yes, with the increase in threshold, institutional investors can hold more stake without worrying about whether they’ll have to initiate takeovers. We hope, then, that they make their voice heard to managements.
But we can think of no better way to check managements than the threat of a hostile takeover, something India sees too rarely. Facing the threat of a buyout, a complacent promoter otherwise resting on his majority holdings can either shape up or perish. Without the chance of this creative destruction, the market for corporate control isn’t free.
Regulators prohibiting this chance are probably under the prejudice that they’re preserving their civilization by keeping the barbarians out. But they’re only allowing it to ossify.
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