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Open offer norms in India need a change: JR Varma

Published on Mon, Feb 02, 2009 at 10:50 | Source : CNBC-TV18

Updated at Mon, Feb 02, 2009 at 20:38

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Former Sebi Member JR Varma feels there is a need to change open offer norms. He said that the six-month average price is not fair and that it must not be applicable for liquid stocks.

Varma feels that takeover regulations should be applicable for corporate control and not only for minority shareholders. He added that quarterly disclosures must be as extensive as annual ones. Varma said that open bid process is a sensible thing to do in case of Satyam .

Here is a verbatim transcript of the exclusive interview with JR Varma on CNBC-TV18. Also watch the accompanying video.

Q: What is your sense or stance on that open offer revision that SEBI (Securities and Exchange Board of India) is considering today? Should it be two weeks or will that be a dangerous precedent to set?

A: We need to make changes in the open offer which are not specific to Satyam but general enough to cover all cases. When we are talking about a company which is very liquid; it was one of the top 50-100 stocks. One should assume that what is happening in the market is a fair reflection of its fair value and simply allow people to buy at a price which is dictated by the market.

The whole idea of 26-week average and so on, essentially, reflects a distress of market prices--a belief that market prices can be manipulated. I think that belief is inapplicable when we are talking about a very liquid stock. So, I think the way we should move forward is to say all those 26 weeks average is not required when we are talking about a stock which is reasonably liquid.

We might say top 100 stocks, top 500 stocks or we might go by impact cost or we might say that anything on which the derivatives are allowed to trade where there is a reasonable degree of openness and resilience about the market price there is no need to average anything. The latest price is the measure of what the share is worth.

Q: What about the counter argument that this might set a bad precedent for any future such events or instances?

A: This is not a Satyam-specific relaxation at all. We simply say that the 26-day average is not applicable to any stock which meets a minimum threshold of liquidity in the market. Liquidity is measured in terms of trading volume or it in terms of impact costs. There is an objective measure of whether a stock is liquid or not by market volume, liquidity, trading volume, impact costs and we say that if it isn't the top 100-500 stocks, and by that matter, we simply believe that the market integrity is good enough for us to trust the current market price and that's the best measure of what the stock is worth. It is only where a stock is illiquid where one day's price can be easily manipulated with a small trade. It is only there that one needs to look at all those processes.

Hence, we aren't talking about setting a precedent. We know that the market has tanked so much in the past few months, to say that any acquirer has to pay the average of the last six months is to simply bring the market and corporate control to a halt. The purpose of the takeover regulation is to have an orderly and a good market for corporate control. The purpose of the takeover regulations is not to provide a free lunch to some minority shareholders. We need to get away from the perception that we are in the business of providing a free lunch to small shareholders and that's not the purpose of the takeover regulations at all. The purpose is to have a healthy and a sound market for corporate control. We need such regulations that will make that market as healthy and as sound as possible.

Q: We have just gone through an earnings season and some of the earnings have not looked very pretty and there is a view that, may be, the disclosures or the poor earnings which came through had something to do with Satyam as well where companies choose to come clean with a lot of disclosures. What is your expectation from the regulator on this front on asking for more stringent disclosures on the balance sheet, on income statements of companies from hereon?

A: I have been arguing that quarterly disclosures should be as extensive as annual disclosures. This is what happens in the US and in the US there is very little to choose between quarterly filing and in an annual filing, 8,000-10,000 they look almost as comprehensive as each other. That is what we need; we need full disclosure about the balance sheet, about the schedules, about the cash flow statements. We need everything on a quarterly basis.

Q: Do you think the board would do well to keep any strategic considerations in mind in finding the winner? Or do you think it can be or should be an open auction whether the highest bidder walks away with Satyam because what the board is probably trying to do is not just hand over Satyam to anyone but to see that there is a proper salvage act and the business can continue going forward in the best manner as possible? In that, should there be a subjective element, or do you think the highest bidder walks away with Satyam?

A: In the US law, there are a lot of precedents in this for saying that the board has a responsibility to other stakeholders as well and not just to the shareholders. It is perfectly possible, for the board, to say that given the interest of employees and to other stakeholders, we are willing to make a concession in the price in terms of what we recommend to the shareholders. However, at the end of the day, it is upto the shareholders to choose. So all that the board can do is to tell the shareholders that in our view we recommend acquirer X and not acquirer Y though acquirer X is paying Re 1 less or Rs 2 less--but the decision lies with the shareholders. However, yes under the US law there are certain precedents where the board can look at the interest of other stakeholders as well.

Q: In some senses, is this different from all the other boom and bust episodes we have seen because a lot of the focus has been routed via the stock market and doing this via the open equity market?

A: When a company is in this position, where somebody is trying to buy it, the share holder is obviously at the center of the whole episode because it's the shareholder who has to sell. Thus, the stock market is of necessity at the center of things of any takeover war. It's the shareholder who ultimately calls the shorts, and therefore, the stock market price is the pivot in which everything revolves and that's definitely true.

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