Should Government Companies Be Exempt From the Takeover Regulations?

Today’s
Business Standard carries a report
indicating that SEBI is in the process of considering a general exemption to the Government
from making a mandatory open offer under SEBI’s Takeover Regulations 2011. This
comes in the wake of two specific exemptions granted by SEBI this year in the case of IDBI
Bank
and IFCI
whereby the Government was given special dispensation from making an open offer
when it increased its stake in the companies due to conversion of securities
into equity shares.
Currently,
under the 2011 Regulations, SEBI has the power to grant exemptions on a
case-by-case basis, which it has exercised in the two cases mentioned above.
But, any grant of blanket exemptions to the Government would be a retrograde
step. There is no compelling reason for the Government to be treated on a
special footing compared to private acquirers because the Regulations are in
the end analysis concerned with the protection of minority shareholders in a
listed company. By creating such an exemption, SEBI would be discriminating
against shareholders of government companies, as they would lack an exit opportunity
through an open offer that is available to shareholders in non-government
companies.
Moreover,
the grant of such dispensation to the Government does not augur well in terms
of ensuring compliance with securities regulation in the interest of investors.
The Government ought to be setting an example by undertaking the obligations
under securities regulation such as the Takeover Regulations and paving the way
for ensuring compliance by private acquirers, thereby protecting the interests
of minority shareholders in public listed companies. This method of carving out
special provisions for government companies, that began with the lower minimum
shareholding of 10% rather than the larger 25% limit for other companies, stands
no reason when judged against the purpose of the Takeover Regulations, which is
to provide an equal exit opportunity to minority shareholders when there is a
change in control of the company.

Such moves could give rise to governance implications in a broader sense. For example, there is already a dispute over the governance matters in Coal India Limited between the Government, which is the controlling shareholder, and a minority shareholder, which has also resulted in litigation that is pending before the Indian courts. Such matters could also be significant in the context of the government disinvestment programme where the limitation of protection to minority shareholders in listed companies substantially owned by the Government could impact the success (or otherwise) of such programme.
It would therefore be preferable for SEBI to exercise the power of exemption on a case-by-case
basis as per the current practice. That would not only provide the flexibility
to deal with specific circumstances such as those that arose in the IFCI and
IDBI Bank cases, but at the same time it would require SEBI to apply its mind
to individual cases rather than to deal with them on an overall basis as
proposed.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

  • Why only government companies, SEBI even recently exempted further acquisition of shares by existing promoters of Trent (passive reduction in past because of QIB placement). Even by creating such an exemption, SEBI would be discriminating against non-Tata companies.

    By that logic, for example – an open offers triggered pursuant to a preferential allotment which has been approved by shareholders u/s 81(1A) and the regulations compel the acquirer to make open offer to same shareholders who have approved the acquisition, should also be exempted, if an exemption is sought from SEBI.

    It will be interesting to see, if say, promoter(s) of some B group company or a Z group company would have also received such an exemption.

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