There are times when financial regulators are reactive and there are times when they are proactive, noted Securities and Exchange Board of India (Sebi) chairman C.B. Bhave in a Mumbai forum on Friday. Which of these will Sebi be as India’s growing business climate throws challenges for regulators?
That question took centre stage last week when Sebi amended its takeover code that governs mergers and acquisitions. Now, global depository receipts (GDR)—securities available abroad with underlying Indian shares—that hold voting rights will count as part of the 15% that triggers a tender offer. If one party acquires this 15% stake, it must make an open offer to purchase 20% more stock.
Illustration: Jayachandran / Mint
This amendment is sure to affect Bharti Airtel’s complex $23 billion deal with MTN, where the South African company gets some stake in Bharti through GDRs. It also corrects Sebi’s earlier opinion that GDRs can only trigger the open offer if they are converted into shares. From a technical angle, this is good: Sebi stops treating GDRs like convertible bonds, which they aren’t.
From a regulatory angle, too, one can view this as a good proactive move. It clears up previous confusion that could have easily resulted in one shareholder litigating against another.
What’s more, Sebi appears to implicitly acknowledge that the more Indian companies get involved in cross-border deals, the more complex they will get, with instruments such as GDRs coming into play. Companies aren’t going to stop innovating; the failure of regulators in the West to catch up with financial innovations is too evident by now. So, if not Bharti-MTN, another deal later may have forced Sebi to rethink its rules.
But that raises another viewpoint: Sebi seems to be reacting to this particular deal. And this isn’t the first time this year that it has amended the takeover code in reaction to a business situation: In February, when Tech Mahindra was attempting to acquire a beleaguered Satyam, Sebi relaxed rules.
Sebi shouldn’t be rushing to react. It often releases draft amendments to elicit public comments; this wasn’t the case this time. This amendment also comes during the same month Sebi already announced an overhaul of the takeover code by January. Satyam was an aberration, but if Sebi continues to move goalposts with its ad hoc reactions, how are companies expected to score goals?
All this makes it imperative to proactively take a hard look at the code. Sebi can’t be expected to anticipate all such situations, but it should try to simplify rules to avoid more ambiguities.
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