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THE P.N. BHAGWATI panel's proposals on changes to the SEBI's Takeover Code are welcome reform. Especially the proposal making an `open offer' mandatory where a preferential offer of shares has been made to any class of investor in excess of 15 per cent. This is one of the more notorious ways employed by promoters to rope in equity partners without the obligation on the acquirer to make an "open offer". This has happened even in cases where a new foreign investor has picked up a stake. Often enough such cases have resulted in "a change in management control" and should logically have led to a public offer. Similarly, another anomaly will be corrected by the panel's proposal mandating an `open offer' in the case of inter-se transfers among promoters at a 25 per cent premium to the market price. If the acquirer is willing to pay a sizeable premium, it means there is hidden value that could be unlocked. If that is the case, there is no reason why the other shareholders should not partake of it.

A suggestion that should make for more transparency is the one to allow inter-group transfers beyond the creeping acquisition limit without triggering an open offer only if the group companies are well defined and indicated. Inter-group transfers have in the past escaped the open offer requirement because the transaction was passed off as an intra-group one. Currently there is no requirement that companies identify in advance the entities that constitute the promoter group. The panel's recommedation that companies do so to be eligible for exemption from open offer should improve the operation of the Takeover Code. However, one glaring omission in the changes outlined pertains to `change in control'. In quite a few cases there has been an effective change in control without the acquirer taking more than 15 per cent equity. In one case, SEBI, in an affidavit to the court, said that open offer was not triggered under the `change of control' clause though the market and every one else knew the reality was otherwise. This has become a precedent for more such deals. The sooner the concept of `change in control' is well defined, and SEBI acts on it to insist on an open offer, the better it would be for the market for corporate control as a whole.

Similarly, the panel could have laid down the criterion for dealing with mergers or acquisitions overseas that bear upon control of companies in India. The question is whether such changes trigger an open offer in the Indian company. The object of reform must be to open up further the market for corporate control. In this context, asking acquirers to disclose information of purchases of 5, 10 and 14 per cent stake, or when they sell 2 per cent stake is a step that will hurt the development of a vibrant market for corporate control. Markets overheat when they smell a takeover and that will make the acquisition more expensive and difficult even as it provides incumbent owners/managements adequate warning to ready their defence.

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