Needed: An Expiry Date for Bailouts (MONEY LIFE, Issue 4th Dec 08)
November 18, 2008
We are in the middle of a global financial crisis and Indian regulators and policy-makers must, indeed, initiate quick regulatory and policy changes to minimise systemic shocks that could hamper economic growth. But it is important to ensure that emergency measures introduced during a crisis come with an expiry date so that they are not misused, once the tide has turned. Any concession must be time-bound and introduced only after a public discussion.
The point becomes clearer if we consider just one issue. In October 2008, the Securities and Exchange Board of India’s (SEBI) relaxed creeping acquisition norms and permitted promoters to increase their stake to 75% through open market purchases (up from 55% earlier) without seeking approval under the takeover code. However, a promoter can acquire only up to 5% of equity every year and that too only through open market purchases (not block or bulk deals). Insider information published by stock exchanges shows that several promoters are already using this opportunity to shore up their shareholding. Yet, industrialists want more. They want SEBI to permit them to increase their holding by 10%-15% annually while prices remain at the current lows. This demand is not new.
Let’s go back to the dotcom debacle of 2000 when the Bharatiya Janata Party (BJP)-led coalition was in charge. Industrialists of the stature of Ratan Tata and Keshub Mahindra had made the same demand then. In fact, they wanted creeping acquisitions without any ceilings. If permitted, it would have ended the possibility of hostile takeovers in India. Tata and Mahindra had approached SEBI after corporate India had already succeeded in lobbying for an increase in the creeping acquisition limit from 2% to 5%. After the dotcom bubble burst, it was further doubled to 10%. Yet, few companies had the money or the inclination to increase their shareholding during the worst phase of the slump. They were keen on using the concession only after a recovery was already under way. This wasn’t the only concession that corporate India had lobbied for either. In 2001, industrialists had wanted bank finance to fund creeping acquisitions and share buyback programmes. They also wanted the buyback to be permitted through treasury operations. In September 2002, India Inc again lobbied for the 10% creeping acquisition limit to be extended to 2004. Fortunately, they were ignored and SEBI rolled back the limit to 5%.
How did the markets behave during that period? From the dotcom peak of 6,150 in February 2000, the Sensex had dropped to a low of 2,594 in September 2001. But in September 2002, when industry wanted the 10% limit to continue, the Sensex had recovered to around 3,758. After another sharp correction, when it hit a low of 2,904 (in April 2003), the Sensex rose vertically to a high of 6,249 in January 2004. Surely, industrialists were the first to sense that the slump was over and a recovery was under way. They also had cash to spare to increase their shareholding at what turned out to be the beginning of a monster five-year bull run of the kind that India had never seen before. In recent times, SEBI has introduced two sets of regulations with the clear understanding that it will watch and review the implications after six months. Accordingly, it reviewed curbs on the issuance of participatory notes (PNs) and controversially scrapped the restrictions this September. It did the same with IPO gradings, which were introduced after persistent lobbying by investor groups. In this case, SEBI seemed to be in a hurry to scrap gradings instead of addressing ways to sharpen the process and make it more independent. The creeping acquisition rule, including the 75% limit, needs to be similarly reviewed and rolled-back when it has served its purpose. After all, isn’t it SEBI’s stated intention to work towards a minimum floating stock of 25% for listed companies?
Emergency measures introduced during a crisis need to have an expiry date to avoid their misuse