Minority shareholders have alleged that Bharti Airtel got away by avoiding open offer of Rs30,000 crore thanks to SEBI’s flexible application of takeover norms
A few minority shareholders of Bharti Airtel Ltd have approached the Securities Appellate Tribunal (SAT) for taking action against the company for what they call violating takeover regulations of the Securities and Exchange Board of India (SEBI).
According to an appeal filed with the SAT, the minority shareholders allege that during June 2007 and September 2008, Bharti promoters, Pastel Ltd (a unit of SingTel), Bharti Telecom Ltd and Indian Continent Investment Ltd (ICIL) increased their stake to 67.03% from 60.91%, which violates takeover regulations.
As per SEBI's Regulation 11(2) (the takeover code), any acquisition of shares or voting rights by an acquirer already holding 55% or more but less than 75% of the shares or voting rights in a target company mandates a compulsory open offer.
Though this increase in stake-holding triggered an open offer requirement under SEBI Regulation 11(1) of the Takeover Code (as it stood at the time of the buyback in 2008-09 which allowed an acquirer, holding between 15% and 75% of shares or voting rights, to increase the shareholding by 5% in one financial year without trigger of an open offer), the promoters failed to make an open offer to acquire at least 20% of the voting capital of Bharti Airtel from its then existing public shareholders, mandatory under the Takeover Code, the minority shareholders said in their appeal.
According to the appeal filed before the SAT, the open offer would have been a bonanza for minority shareholders as promoters of Bharti Airtel will have to buy 20% additional stake at Rs400 to Rs500 per share (adjusted to stock split - the price during the relevant period was about Rs800-Rs900 per share). The open offer would cost about Rs30,000 crore to the promoters of Bharti Airtel, the minority shareholders estimate.
Earlier in April 2009, SEBI had sought clarification from Bharti Airtel, the country's largest telecom company, on alleged violations of its regulations by not publically announcing increase in promoter stake holding in the company. According to media reports, Bharti Airtel, at that time had said that ICIL bought these shares in two tranches of 4.99% and 1.28% and did not violate SEBI's takeover norms.
PROMOTERS OF BHARTI AIRTEL
As of September 2010, four companies, Bharti Telecom, Pastel, ICIL and Viridian Ltd, belong to 'promoter and promoter group' category and together hold 67.87% stake in Bharti Airtel.
Bharti Telecom, which holds 45.44% stake in Bharti Airtel, was delisted from the Bombay Stock Exchange in October 1999 by offering to buy back its shares at Rs95 per share, which was increased by one rupee subsequently. Bharti Enterprises, erstwhile Bharti Overseas Trading Co, is the holding firm of the Bharti group and holds majority stake in Bharti Telecom.
Pastel is an investment arm of Singapore Telecommunications (SingTel) and holds 15.57% stake in Bharti Airtel, as of end-September 2010. Earlier in July, SingTel's other unit Viridian bought 0.04% stake in Bharti Airtel from the open market for about Rs42.28 crore.
ICIL is a Bharti group company and holds 6.82% stake in Bharti Airtel. It is the same company, which is supposed to have brought the additional stake between 2007 and 2008.
SEBI RULINGS IN SIMILAR CASES
In a similar case, the promoters of OCL India Ltd effected a buyback of 11.84 lakh shares in 2003, subsequently increasing their stake to 75% from 62.56%, an increase of 12.44%. SEBI, on 17 June 2007, issued a show cause notice to the promoters of OCL inter alia alleging that they are liable for penal action under the Takeover Code and the SEBI Act, 1992. OCL promoters took the defence that the increase in shareholding or voting right pursuant to a buyback was not an 'acquisition' of shares or voting rights through an act of the shareholder, but was merely incidental to the buyback and that such an increase in shareholding or voting rights without an actual acquisition of shares will not trigger Regulation 11(1).
SEBI concluded that the promoters of OCL had acted in contravention of the Takeover Code by not making an open offer to provide exit opportunity to the public shareholders, however since the open offer price calculated as per the earlier share price was much lower than the prevailing share price at that time, the market regulator directed adjudication proceedings against the promoters of OCL.
In another case where there was alleged violation of the Takeover Code, the market regulator took a flexible approach and granted specific exemption to Ajanta Pharma Ltd. The promoters of Ajanta Pharma increased their stake in the company to 73.92% from 66.82%, an increase of 7.1% that would have triggered Regulation 11(2) of the Takeover Code mandating the promoters to make an open offer. However, Ajanta Pharma, on behalf of the buyers, filed an exemption application before SEBI seeking exemption from the open offer obligation.
SEBI, while concluding that the passive increase in shareholding and voting rights triggers the open offer, clarified that the entire increase by 7.1% does not constitute the trigger event.
According to the second proviso to Regulation 11(2) which came into effect on 30 October 2008, an acquirer is exempted from open offer obligation under Regulation 11(2) in case of an increase in shareholding or voting rights up to 5% if such increase is pursuant to a buyback of shares by the target company.
Further, SEBI, vide circular dated 6 August 2009, clarified that the 5% limit under proviso to Regulation 11(2) can be availed only once in the lifetime of the company and is not renewed each financial year as in the case of Regulation 11(1).
The rulings in above cases reflect that SEBI has been flexible enough to grant exemption to the acquirers on exemption applications when the acquisition is incidental to the buyback and there is no change in control of the company. In light of this trend, there is a need to consolidate the law on trigger of Takeover Code pursuant to buyback and specifically incorporate it in the Takeover Code rather than keeping it discretionary at SEBI's volition. On its part, the market regulator had appointed a Takeover Regulation Advisory Committee with C Achuthan, the former presiding officer of SAT, as its chairman. However, there is not much information available about the working of the committee on the SEBI website.
Global cues indicate a soft-to-flat opening for the local markets today. Markets in the US ended steady with a positive bias on Tuesday as the dollar regained its strength on concerns about the quantum of the stimulus that will be announced by the Federal Reserve next week. Markets in Asia were mostly higher in early trade as the Japanese yen weakened against the dollar, a positive indicator for exporters. The SGX Nifty was down seven points to 6,102 against its previous close of 6,109.
The local market opened in the green on Tuesday despite the Asian pack trading mixed. The indices were seen on both sides of the neutral side amid choppy trade. However, profit-booking after recent gains pulled the indices into the red in noon trade. Attempts to recover were thwarted by selling pressure, keeping the market in the negative terrain till the end of the session.
The Sensex ended 81.73 points (0.40%) lower at 20,221. The Nifty settled at 6,082, down 23.80 points (0.39%).
The US markets ended flat on Tuesday as the dollar regained its strength on concerns about the quantum of stimulus that the Federal Reserve will announced in its two-day meeting next week. Investors ignored the higher-than-expected consumer confidence but pondered over weak earnings reports. The Federal Housing Finance Agency said in a separate report that home prices climbed 0.4% in August, beating analysts’ forecasts.
The Dow rose 5.41 points (0.05%) to 11,169. The S&P 500 added 0.02 points to 1,185. The Nasdaq surged 6.44 points (0.26%) to 2,497.
The Asian pack was mostly higher in early trade as the Japanese yen weakened against the dollar, a positive indicator for exporters. Asian leaders are meeting in Hanoi this week to urge China to accelerate yuan gains. China has kept the yuan’s rise to about 2% since a June pledge to introduce more flexibility into its currency.
The Shanghai Composite was up 0.28%, the Hang Seng gained 0.44%, Jakarta Composite rose 0.27%, KLSE Composite was up 0.21%, Nikkei 225 advanced 0.69% and Straits Times added 0.03%. On the other hand Seoul Composite and the Taiwan Weighted were down 0.14% each in early trade.
The telecom ministry is understood to have written to the home ministry about operators' compliance with a rule on upgradation of systems to intercept data sent using Blackberry messenger and e-mail services.
Leading operators including Airtel, Vodafone, state-run BSNL, Idea and Reliance Communications (RCom) are believed to have informed the Department of Telecommunications (DoT) that their systems are ready to lawfully intercept Blackberry messenger services, telecom ministry sources said on Tuesday.
The government had on 16th September asked operators to upgrade their systems to monitor data sent via Blackberry messenger and enterprise e-mail services, as it feels the encrypted services could be used by terror elements to organise attacks.
The brokerage firm has made contrasting calls on the same scrip on the same day to its retail and institutional clients. The firm washes its hands of the matter citing a ‘Chinese wall’
Brokerage firms worldwide are notorious for making dubious recommendations to their clients. It is well known that when the stock markets are on a roll, most brokerages flow along with the mass market euphoria.
Recommendations to buy outstrip those to sell by a huge margin. The same happens when the markets are in a mess - 'sell' recommendations suddenly become the norm - after stocks have fallen off the cliff. But when they start offering contrasting advice to different sets of clients for the same scrip, it is bewildering, to say the least. And when they attempt to justify their action by waving the archaic and spurious 'Chinese wall' concept, investors should be a worried lot.
Kotak Securities, one such brokerage firm, has come out with two contrasting reports on Container Corporation of India on the same day. The two reports make diametrically opposite recommendations for the private clients on the one hand and institutional clients on the other. But before anyone can stand up and question its analysis, Kotak Securities has washed its hands of the matter. In clear terms, the private client report has mentioned, "Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited."
In essence, what the disclaimer means is that one hand does not know what the other is doing - the two research teams are separated by Chinese walls. Of course, this is not the first time a brokerage firm is making contrasting recommendations and putting its hands up.
Moneylife has previously reported (see: http://www.moneylife.in/article/8/5949.html) on how India Infoline had flashed the Chinese wall concept to explain its contrasting calls on the same scrip (Punj Lloyd) on the same day. As we had said then, this notion of existence of Chinese walls in today's financial system is highly dubious and ironic.
The Chinese wall concept is most commonly utilised in financial institutions with interests in both investment banking and brokerage operations. Its purpose is to provide a separation between the two, while allowing the company to engage in both activities without creating a conflict of interest. This wall is not a physical boundary, but rather an ethical one that financial institutions are expected to observe. But this Chinese wall is very porous, as was proved during the recent crisis in Wall Street, when investment banks went belly up one after the other. Kotak itself has brought this to the fore, a large number of PMS investors of Kotak Securities have suffered severe losses due to gross bungling by Kotak's portfolio managers (see: http://www.moneylife.in/article/8/5372.html).
In the effort to generate brokerage income, the managers eroded the wealth of these investors.
Both the reports, whose copies are with Moneylife, were published on 21 October 2010. In one report, Kotak Securities wanted institutional investors to 'reduce' holdings in Container Corp. It also gave a 12-month target price of Rs1,250 or 3% lower than the then trading price of Rs1,287 as on 26th October. According to Kotak's ratings definitions mentioned in this report, a 'reduce' meant that they expected the stock to underperform the BSE Sensex by 0-10% over the next 12 months.
On the other hand, Kotak's second report, issued on the same date and on the same company for its private client group made a recommendation to 'accumulate' shares of Container Corp with a target price of Rs1,360 as against the then trading price of Rs1,270, translating into an upside potential of 7%. The report fails to mention the time horizon, but it is assumed that all brokerages use 12 months as a standard period for target price.
What is even more shocking is the stark difference in earnings estimates reported for the two groups. The private client report maintains FY11 earnings as is and has introduced FY12 estimates. Meanwhile, the institutional equities report reduced earnings estimate for FY11 as well as for FY12!
Our query to Uday Kotak of the Kotak Mahindra group as to the rationale behind the contrarian calls remained unanswered till the time of writing this report.