C. Achuthan: Take-Over Talk

C. Achuthan
Age: 68
Title: Chairman, Takeover Regulations Advisory Committee
Career: Former legal advisor to government of India. Presiding officer of the Securities Appellate Tribunal
Education: Masters in economics and degree in law
Interests: Reading and playing with his grandchild

While releasing your report on corporate control to Securities and Exchange Board of India (Sebi), you hoped that it will serve its purpose for the next five to 10 years. Isn’t it too short a life for such an important regulation?
I did not say five years. I said 10. The capital markets are very dynamic. New things are happening every day. Depending on the requirements, the law has to change. We have created a solid framework. However, it will need to be tweaked continuously according to the needs of the market.

You have stressed a lot on `control’ in your report. Could you explain how you went about defining the concept of control?
Every aspect of the regulation is framed with the idea of control in mind. That is the key in any takeover or merger. Control is not properly reflected if you go only by the right — and right is the keyword here — to appoint directors or statutory support, which means only when someone has 51 percent holding. Nobody will give it in writing. There are subtle ways in which people manage it. What we have tried to do is to see if someone has the ability to control. I know it is very difficult. We cannot give a laboratory formula to define ability. It is not there in any jurisdiction in the world either. However, that needs to be addressed for the regulation to be effective. Here de facto control or backseat driving, which often happens, is not taken into consideration.

Which issue was debated the most by the panel?
Pricing. We knew that the existing pricing formula was not the appropriate one. We were looking to find a way to reach a reasonably good open offer price. Since the previous formula relied on the market price, there was always a possibility of it getting ‘managed’ in some way. We wanted to totally move away from it but at the same time it would have been difficult to remove it at one go. That is why we came up with volume-weighted price determination. The formula that we have suggested moves one step closer to finding a fair open offer price.

How did you arrive at the trigger threshold for takeover regulation at 25 percent?
In a sense whoever is holding, say, a block of 25-30 percent can be called a promoter. The issue arises only when a family is holding such large blocks. However, the point is that in India, substantial acquisition is not defined at all. The presumption of the 1994 regulation was that at 10 percent stake, the holder was in a position to exert some amount of control. The 25 percent has another rationale. At 25 percent there is enough tangible control with which the holder can veto resolutions. Otherwise, any number is invalid.

While recommending that control premium or non-compete fees be disallowed, the committee has said that control is an incidental benefit of share ownership. Isn’t it true that the very objective of buying shares is to get that incidental benefit?
It certainly is. The control premium is presumed to be built in when you negotiate the price. If an additional payment is made as control premium, that benefits only the buyer and seller. It works out as a way to pay more to the seller while keeping the total acquisition cost low for the buyer. In the process, the rest of the share holders suffer. The principle here is ‘one price for all’.