Monday, February 2, 2009

Satyam Pricing Relaxation- Does SEBI Have Ex ante Competence "To Consider"?

News Paper reports suggest that the securities regulator is "considering" a proposal to link the open offer price of Satyam Computer Services, to the average price of the stock in a shorter and more recent period. This is apparently been done because potential "white knights" who "d want to acquire Satyam, under the extant take over regulations, face the prospect of coughing up Rs. 270 per share; this is as required by the formula prescribed under regulation 20 that prescribes higher of the average price of the stock for 26 weeks or two weeks.
Basically therefore, The price of Rs.270 is causing a "chilling effect" on potential white knights and so the regulator is contemplating this "regulatory discount"...

There are many issues that arise from this chain of events; But implicit and the more important of these is that of regulatory competence to allow such waivers from the provisions of Chapter III of the Take over Code. SEBI seems to have assumed that such a power is existent ; but thats not entirely clear.

The scheme of the Take over Code is clearly indicative of the fact that Regulation 3 of the same is complete code so far as exemptions go. Now, within the scheme of Regulation 3, we have a residual clause 3(1)(f) that reads as under :

"Other cases as may be exempted from the applicability of Chapter III by the Board under Regulation 4"

Regulation 4 then provides that

"The Board shall for the purposes of this regulation constitute a panel of majority of Independent persons from....."

The later sub clauses of Regulation 4 then carve out the procedure to seek an exemption under the above referred sub clause. The scheme of this procedure is such that the Board is merely a "Conduit" to allow passage of the application from the acquirer to the Panel and it is the Take Over Panel ( Not the SEBI Board) that has the first power to "Recommend" whether the exemption ought to be given or not. It is only after the Panel has communicated its views to the Board, the Board shall..... after considering all the relevant facts including the recommendations, if any, pass a reasoned order on the appplication.

It seems therefore that the powers of the Regulator to "Consider" the exemption are triggered at a stage after and not before the recommendations from the take Over panel are received.

Before the Take Over panel is seised, Its role is merely that of a "conduit" to relay the application from the acquirer.

Also, even this power to decide on the exmption is exercisable by the regulator, only in the specific context of an application from the acquirer. At the present instant, No acquirer has made a formal application for exemption. It seems from the reports that the regulator is contemplating the two week average as a floor price that potential acquirers will have to improve upon. Clearly then, it does seem that the nature of the exemption contemplated by the regulator is blanket in character..

One might rightfully then question the regulator's own "Corporate governance and compliance" when it engages in this exercise of exempting potential white knights from the rigour of the law....?



Jeet said...

from the little I know of the Code, your argument seems spot on. But I HAVE A QUESTION: Is is the case, that once an exemption is sought, the acquirer is under an obligation to run the whole course, whether the exemption is granted or not?
If that be the case, we may have hit a dead-end.

Mandar said...

Thanks Jeet; ( Am answering this query from a general perspective of how the exemption process operates; with respect to the argument presented in this post however, It must be said that the recent amendment ofthe take over Code to "manage" Satyam-like scearios, makes this post rather academic; Mind you however that the amendment came after the post :))

The acquirer who makes an exemption application and "fails" will have to make the PA.Now, it is the discretion of the regulator whether it directs the acquirer to factor the accumalted interest(for the period during which the exemption application was pending) in the price offered; Generally, this coupon should be factored in the price and the prevailing bank rate should be operative for determining the rate of coupon. There could be an odd case where there was manifestly grounds for making the open offer and the exem,ption application is nonetheless made to take a chance; In such case, the regulator could apply the presxcribed penal rate of interest of 15%.

Should the acquirer be successful in getting the exemption, he is not required to "run the whole course".If that were the case, what purpose would the exemption process? The Code specifies the time within which the Panel ought to make the recommendation (15 days). The time between the making of the application and the SEBI order on it is "freeze" time. If the SEBI determines tht the open offer lies, the delay (15+ x days) is factored in as Interest in the price calculated under regulation 20.

I hope this helps.