The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (“Takeover Regulations”) were amended last week to empower SEBI to grant exemptions from the strict operation of various operative provisions of the Takeover Regulations – initial comments on this blog were posted here.
I wrote the following comment in the Economic Times, edition dated February 16, 2009:-
The Securities and Exchange Board of India had said earlier this month that it would amend the Takeover Regulations in a general context to exempt strict application of the law to listed companies that are victims of fraud, as opposed to providing special exemptions to specific cases.
The Takeover Regulations already provided SEBI with discretion to exempt specific cases from making of an open offer. Therefore, one expected SEBI to lay down a clear-cut principle that would permit regulatory intervention by way of exemption from various provisions when fraud in listed companies rendering financial statements unreliable, is discovered. However, the actual amendments fall short of the standard.
SEBI has armed itself with powers to grant exemption from any or all the operative provisions of the Takeover Regulations, but there is no reference to discovery of fraud. Instead, any listed company in which a government or regulatory authority has appointed new persons to act as directors “for the orderly conduct of affairs” would qualify for exemptions at SEBI’s discretion.
Such an amendment is extremely wide from one perspective, and extremely narrow from another. The government replacing the board (without any reference to even alleged fraud) being a trigger for SEBI to exempt the operation of the Takeover Regulations lets the state qualify public sector companies for exemption from the Takeover Regulations. The scope of state-sponsored abuse is therefore huge.
From the standpoint of discovery of fraud, the amendment is too narrow and therefore unfair. Without government being involved, shareholders could discover management fraud and themselves change the board of directors without involving government.
Fraud vitiates all solemn acts. When financial statements of a listed company are discovered to be fraudulent, the price at which its shares were traded would be rendered unreliable –without the government playing a role, such cases would be equally fit for exemptions from application of many operative provisions of the Takeover Regulations.
The exemption power of SEBI is ultimately discretionary. Therefore, the scope for abuse is as wide or as narrow as SEBI permits. The amendments ought to have been linked to the principle of discovery of fraud rather than change of the board of directors by a government agency.
Some linkage to mismanagement or oppression would have been useful. Under current SEBI dispensation, there may be no abuse, but since law is written for all times to come, there is a danger of governmental abuse even while leaving out meritorious cases involving private action by shareholders.