Stock market regulator Securities and Exchange Board of India (Sebi) recently amended
the Substantial Acquisition of Shares and Takeovers Regulations, 1997. The amendment has
given leeway to promoters holding between 55% to 75% equity stake in the company to
increase their shareholding by 5% through creeping acquisition without making the
mandatory open offer.
The change in the regulation would certainly benefit promoters looking at increasing
their stake in the company. It is an opportunity for promoters to hike their stake in the
company at lower valuation as the market meltdown has led to a massive correction. In some
stocks, the slide is nearly 80%. The amendment would also help promoters to thwart any bid
for hostile takeover. However, this is not a valid argument as promoters holding more than
55% equity stake have enough voting rights to prevent any kind of hostile takeover bid.
Short-term virtues should not prevail over long-term goals of a healthy stock market.
For instance, limited liquidity or lack of depth is one of the major concerns of investors
in Indian equities. Now, by increasing the creeping acquisition limit to 75%, liquidity
could be further curtailed, adversely impacting the price-discovery mechanism. If
promoters of small- and mid-cap companies opt for creeping acquisition, the market depth
of these stocks, which is already shallow, would be hit.
Market depth is extremely critical not only for better price discovery but also to
ensure abnormal movement in the stock. This is one of the lessons to be drawn from the
market meltdown owing to the exit of foreign institutional investors (FIIs). One of the
reasons for the mayhem is lack of adequate investor participation, leading to sharp price
movement either side. In fact, many institutional investors do not track and invest in
good quality stocks just because of lack of sufficient liquidity on the counter.
Ensuring sufficient volumes also becomes pertinent in the current bear market scenario,
with volumes taking a major hit. Natco Pharma is a case in point. The promoters of the
company have opted for the creeping acquisition route to shore up their equity stake in
the company. The average trading volume stood at around 9,850 shares in November 2008,
while it was over 21,000 shares in October 2008, and over 27,000 shares in January 2008.
The creeping acquisition amendment could also mean offering an easy way out for
promoters to delist their stock. The amendment also beats the very objective of the
takeover regulation adopted by the regulator.
Promoters can also take advantage of depressed prices and de-list their stock and
subsequently re-list after market sentiments improve.
Though buying by promoters signify confidence of promoters in their own company and its
future prospects, such measures could be counter-productive. Let the market participants
decide whether the market is overvalued or undervalued and what should be the right price
for the stock. Policy makers and the regulator need to ensure that the market is free from
scams run by the rule book. Measures such as easing creeping acquisition limits could do
the trick to limit the market slide in the short term. Ideally, however, such measures
should not disturb the fundamentals of the market.