Indian Merchant’s Chamber had a seminar on Investor Protection- Myth or Reality and I was invited to be a speaker on the same topic from an investor’s perspective. Certain issues were raised by me affecting investors and possible suggestions for them.

Independent Directors – People who act or are nominated as independent directors on boards of companies and have a conflict of interest must not call themselves independent directors. In one of the most recent case of conflict of interest was in a company going public Hindustan Media Ventures Limited. Here the Managing Partner Shardul Shroff of the firm M/s Amarchand Magaldas the renowned legal firm is also the legal counsel for the IPO. This certainly is a conflict of interest and needs to be looked into.

Consent Orders by SEBI– Consent order by itself is a very laudable event and it eliminates endless paperwork. The principle behind consent should be threefold. In the first instance any ill-gotten gain or benefit should be recouped, recovered or got back. Secondly there should be a punishment for having done a wrong or committed a crime and finally in the third instance there should be a deterrent so that others would look at this case as an example and would be hesitant in committing a similar crime. It is seen that in these consent orders the magnitude of ill-gotten gain is not being recovered and therefore it pays to do crime. This policy of consent orders needs to be relooked in context of the fines and recovery of ill-gotten gains. There should also be steeper fines for repeated offences by the same person/entity.

Preferential allotments to promoters/persons by way of warrants- Warrants are issued for preferential allotment to promoters and other parties on payment of 25% of the price at which they would be converted. Earlier this amount used to be 10%. This instrument is being used as a tool to speculation as the warrants are not exercised if the price of conversion is not substantially lower than the market price and thereby offers immediate appreciation to the allotted persons. Readers would be aware that if you bought stock futures and rolled it every month for 18 months you would pay much more than 25% because the average cost of carry is significantly higher.

My simple suggestion is that in case preferential allotment is to be made it should be by way of partly paid shares with an option to pay the balance 75% within 18 months at the option of the person allotted the shares. In case the money is not paid then the shares may be forfeited.    

Complaints to SEBI – There are cases where an investor feels that due to a particular action by a company the takeover code has been triggered and XYZ Company needs to make an open offer. SEBI does not act by way of accepting or rejecting the contention.  Until and unless SEBI replies the investor cannot go to the Tribunal or SAT in the matter or proceed any further. We all know that justice delayed is justice denied. I believe that SEBI should reply in say a reasonable time of 45 to 60 days whether the code is applicable or not so that the complainant may take further action.

Takeover Code – In the first quarter of this year there was a takeover and open offer case involving Great Offshore. Readers would recall that the erstwhile promoter of Great Offshore Vijay Sheth had pledged his shares to the promoters of Bharti Shipyard and was unable to pay the mark to market difference of the same and it by default resulted in a sale of shares to Bharti and a resultant open offer as the stake was more than 15%. Bharti made the mandatory open offer and then ABG Shipyard stepped in with a counter offer to acquire shares on the basis of the fact that he was holding a stake in the company acquired from the market. This counter offer could only be made because the shares acquired became part of the offer and that holding plus the open offer quantity would be higher or equal to the quantity that Bharti would hold post the open offer.

Within days of the open offer opening, ABG Shipyard sold its shares in the open market and made money in the bargain. The action seems improper as the open offer could only be made if he held the shares and since this formed part of the process and that property or asset was no longer with him it should have made the open offer from ABG null and void. SEBI has since the case accepted that there are loop holes which need to be plugged, but it needs to be done as quickly as possible.
These were some of the suggestions made by me at the above seminar held in Mumbai recently. Readers comments and suggestions are welcome on the above and any other points that they may have.