The Hindu Business Line : An unacceptable `offer' argument

QUAINT are the ways of the securities market regulator. It is reported that the Securities and Exchange Board of India (SEBI) has informed the Central Government that it has no guidelines under which the proposed pubic sector disinvestment issues can be regulated.

And made it clear that the documents which will be made to the public for the offering will only be called a `sales', and not an `offer', document or prospectus as is the case with other issues.

Alas, this is taking an escapist route rather than a pragmatic approach to the problem. SEBI's contention is untenable for the following reasons.

The so-called "guidelines" which SEBI is relying upon is after all its own product. Let us see the framework of the Act and the powers delegated to the regulator thereunder:

The preamble of the Securities and Exchange Board of India (SEBI) Act enjoins that the legislation was enacted to provide for the establishment of a Board "to protect the interests of investors in securities and to promote the development of and to regulate the securities market and for matters connected therewith or incidental thereto."

The securities have been assigned the meaning as defined under the Securities Contracts (Regulations) Act.

SCRA gives an inclusive definition of securities which, inter alia, includes shares, scrips, stocks, bonds, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate and includes even government securities and such other instruments as may be declared by the Central Government to be securities. Shares issued by public sector undertakings (PSUs) definitely fall under the term securities

Pursuant to Section 11 read with Section 30 of the SEBI Act, the regulator, from time to time, has been issuing rules, regulations and guidelines to regulate the business of stock exchanges or any other securities market.

A number of guidelines has been issued pursuant to this power. One such guideline relates to SEBI Disclosure and Investor Protection (DIP), which pertains to "offer of securities by existing shareholders of a company to public for subscription through an offer document."

There is no gainsaying the fact that offer for sale is nothing but an offer document in the sense it is normally understood. Even the definition of `prospectus' according to Section 2 (36) of the Companies Act 1956 (CA) includes a deemed prospectus. Amplifying this Section 64 of CA mandates "any document by which the offer for sale to the public is made shall, for all purposes, be deemed to be a prospectus."

Interestingly, guidelines as to general conditions for issue of securities by SEBI defines "offer for sale" to mean "offer of securities by existing shareholders of a company to the public for subscription through an offer document". (Clause 1.2 (xxi).

It cannot be denied if there is a sale there should be a purchase. In an issue the issuer is the seller and the buyer is the purchaser, a norm accepted by all regulations.

The judiciary has so far been upholding all the decisions of SEBI in the context of the spirit of law rather than the latter and has always given a broader view that any measures "to protect the interest of investors" is within the domain of SEBI.

Contrary to this, it is surprising that SEBI is taking an attitude that offer for sale is different from an offer document. This is a double standard and inconsistent with the established practice. What the "acquirer" issues to the existing shareholders is nothing but an offer for purchase.

If an offer for purchase can be regulated by SEBI one fails to understand why SEBI cannot regulate an offer for sale.

All documents issued to the public either for the purchase or sale of securities is commonly known as "offer document" irrespective of the nomenclature.

Guidelines are the product of SEBI and it is for SEBI to issue guidelines to cover offer for sale of securities by PSUs.

In any case this is not asking for too much given that the regulator has always been vetting the offer document issued by PSUs for sale of shares either through prospectus or otherwise. SEBI will, therefore, be well advised to take a pragmatic view rather than a concocted approach.

It may be recalled that SEBI took the same stand with regard to units issued by plantation companies under the plea that "units" are not securities, leading to the government issuing the necessary notifications.

SEBI, it is hoped, would not like history to be repeated.

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