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Listed cos takeover: SEBI concern over FDI thru automatic route

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Such takeovers can also lead to asset stripping of cash rich Indian companies: SEBI

New Delhi , Nov. 22

The Securities and Exchange Board of India (SEBI) has expressed concern over the issue of allowing foreign direct investment (FDI) through acquisition of shares in listed companies on the automatic route.

In a communiqué to the Finance Ministry, SEBI has made certain observations on cases wherein some Mauritius-based companies have sought to acquire substantial stake and control over the listed company and made open offers in terms of takeover regulations.

It has been highlighted that these acquirers — Mauritius-based companies are newly formed companies with very low capital base and holding GBL licence and on the face of it are just front entities.

Funds for takeover

The funds for the purpose of such takeovers flow in from some foreign-based private equity funds and the control over the Indian target company is being acquired through the secondary market route.

SEBI has said there is no initial/real infusion of funds by the acquirers in the target company. Moreover, pursuant to such takeovers, the identity of the person in control/management of Indian company is not ascertainable.

"Such takeovers can also lead to asset stripping of cash rich Indian companies and thereby affecting shareholders wealth at large", says the SEBI letter.

The capital market regulator has said that its concern is limited to compliance with takeover regulations. "There is no screening of the entities proposing to takeover the company. The current management too may not be concerned as they are selling their stake and exiting the company", the letter added.

SEBI has now sought guidance as to whether the takeover of Indian companies in such a manner meets with the intent of the Government while rationalising the FDI policy as per press note 4 in 2006. The FDI route was made automatic through this press note.

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