Managing Principal Gaurav Jetley Publishes on Creeping Acquisitions in India

May 29, 2015

The Securities and Exchange Board of India (SEBI), under its Takeover Code, mandates firm disclosures and open offers following a stake increase in a firm, above a defined threshold, by a principal owner, or promoter. This is, in large part, to protect minority shareholder rights. However, in "Rights Issues and Creeping Acquisitions in India" (Emerging Markets Review, June 2015), Managing Principal Gaurav Jetley and coauthor Shamim S. Mondal of Alliance University find that SEBI's policies related to rights issues - "seasoned equity offering[s] in which the issuing firm solicits investments from existing shareholders of a company via short-lived warrants issued on a pro rata basis" - offer a workaround that allows creeping acquisition by promoters in excess of the normal limit. 

In this first-of its-kind research to explore the connection between rights issues and promoter shareholding, the authors analyze data from 2002 through 2008 to demonstrate that rights-issuing firms are more likely than similar non-rights-issuing firms to see an increase in promoter shareholding in the year following the rights issue. They also find that rights issues lacking a specific stated objective, such as an upcoming project for which additional cash is required, correlate highly with such an increase. Additionally, the authors show that rights issues resulting in promoter share gains are likely to take place in years following a relatively large reduction in promoter ownership, displaying a possible motive. "Our findings should concern policy makers like SEBI," the authors note, "because the ability of promoters to increase their stakes in firms, especially at prices below the market value of the stock of the rights-issuing company, is detrimental to the interests of minority shareholders, the very constituency that SEBI intends to protect."

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