Retail investors should be allowed to tag along when promoters exit at high prices.

For public shareholders, the takeover code has to deliver on two key promises: price that is better than what is available in the stock market and/or a full exit, which may not be possible due to poor liquidity in the stock market. As the Takeover Regulatory Advisory Committee (Trac) addressed both these issues, the Trac recommendations were widely welcomed by the financial community. Investors have been disappointed by the delay in implementation of Trac recommendations, but it now appears that there is light at the end of the tunnel.

According to the Trac report, about 80% of the 395 open offers during 2006-10 were only for the mandatory minimum 20% of the company's equity. Over 40% of these open offers were in companies where the shares were poorly traded: i.e., where public shareholders were stuck and could not have exited easily. However, only in 42 transactions was there over-acceptance, i.e., public shareholders were rushing to exit. In all other transactions, public shareholders found the offer price unattractive or wanted to stay invested.

Data is not available on how many open offers were the result of preferential allotment to private equity (PE) funds. Often, when PE funds acquire significant shareholding through preferential allotment to finance growth projects, stock prices climb significantly above the mandatory offer price after the company announces the transaction.

In most takeover regimes, when the mandatory offer price is below market price, it would be possible to call a shareholder meeting that would waive the open offer (whitewash waiver). However, domestic takeover regulation does not allow whitewash waivers, and the funds have no choice but to make offers, incurring significant expenses to buy a few thousand shares from uninformed investors who should have known better.

The primary purpose of the takeover code is to promote the interests of public shareholders during takeovers. However, under the pretext of promoting takeover activity, the Indian takeover regime has compromised public shareholder interests and benefited the promoters. Allowing promoters to cut sweetheart deals where they get a 100% exit while minority investors get neither the same price nor 100% exit undermines the integrity of fair market.

The purpose of the code isbest served by providing a tag-along right enabling minority investors access promoters' sweetheart deals to sell all at prices available to promoters. As the Trac points out, the current code has led to a large number of unattractive open offers. Mandating open offers that would have secured whitewash waivers is a waste of time and money.

Unlike the US, where shareholding is dispersed, shareholding is concentrated in India, similar to the way it is in Europe. Given that promoter families owning significant 'control' blocks is a situation similar to that in European companies, Indian regulation is evolving in the direction of European rules. Trac proposals are modelled on European regime: open offer threshold to increase from 15% to 25% and minority investors to have 100% access to promoters' sweetheart deals.

While the proposals are far-reaching, Trac recommendation to raise the open offer to 100% without providing for whitewash waivers has turned out to be unfortunate. The promoter lobby that was unable to persuade the Trac has now got sympathy from North Block officials. There are two points of contention: financing requirement for 100% open offers and whether public should get price parity with promoters.


Source:http://economictimes.indiatimes.com/policy/retail-investors-should-be-allowed-to-tag-along-when-promoters-exit-at-high-prices/articleshow/9045684.cms

Thanks & Regards,
Monindro Saha
Summer Intern @ Denip Consultants Pvt Ltd.