Game changers

The outcome of the ONGC FPO, the Sebi-MC-SX tussle, and interpretation of ‘control’ will offer clues to future

By Mohan Sule

Numbers do not always make the market go round. Market optimism factors in honesty of the promoters, track record of executing projects, vision going ahead, and also non-promoter holding. Of late, the government’s response to crises, barriers to trade and foreign capital, and political stability are impacting investor sentiments. The decision of Standard and Poor’s to lower US’s sovereign rating was not merely on fears of debt default but also stemmed from the ugly partisanship of the political parties in raising the debt ceiling at the eleventh hour, keeping world markets at the edge. Companies and governments may follow the law to the letter but violate the spirit, thereby losing out in the battle for perception. Take three recent cases. Timing an issue is the prerogative of the issuer, who would want the best possible price for his offering. Alas, the premium depends not only on past financial performance and outlook for the company but also on an intangible variable called market sentiment, which could be influenced by factors beyond the control of the company. Yet many companies patiently wait out for the right time. This they do quietly because of the cooling off period enforced by the market regulator before any important financial event. Yet, on 15 September, a day before the pricing of ONGC’s FPO, the government raised the price of petrol. The stock shot up to close over 5.6% the next day in the belief that the oil explorer’s subsidy burden would come down. Despite the boost, the issue was postponed for the third time this fiscal as the issuer, that is the government, and the investment banks failed to agree on the pricing.

The market regulator’s silence could perhaps be attributed to its preoccupation in reaching a compromise with the promoters of MCX-SX. By end September, Sebi would have decided if Financial Technologies and MCX, both promoted by Jignesh Shah, are ‘persons acting in concert’ and their joint stake of 10% breaches the cap of 5% shareholding by an individual or entity in an equity trading stock exchange. The “business-like” option, according to the Bombay High Court, was to address the concerns of the promoters of MCX-SX and seek guarantees and undertakings or issue fresh show-cause notice and put forth new arguments to promote “a competitive scenario and not monopolistic situations”. Without ruling if the regulator’s interpretation of non-compliance by the promoters of MCX-SX with the Manner of Increasing and Maintaining Public Shareholding in Recognised Stock Exchanges Regulations was correct or rigid, the court wants Sebi to show flexibility as more players would benefit consumers. Yet the stand taken by the promoters of MCX, while hauling the National Stock Exchange to the Competition Commission of India for not imposing transaction fees in its currency derivatives segment, has resulted in increase transaction costs for investors. A dissent note by two members to the ruling by the CCI against the NSE said the intervention would only hurt the consumer, which is against the spirit of the competition regulation.

The issue of shareholding and what constitutes control is also occupying centre stage in the second-generation telecom spectrum allotment scandal. The CBI says Swan Telecom is an associate of Reliance Telecom and Loop Telecom of the Essar group, thereby violating regulations that prohibit mobile phone companies from holding more than 10% stake in two different service providers in the same area. But the law ministry has told the department of telecom that two firms can be associates of each other if a parent company owns more than 50% stake in both and concept such as ‘control’ has to be ignored’. Sebi’s new takeover code defines ‘control’ mainly in terms of a person or a group of persons exercising the right to appoint the majority of directors. The Companies Bill of 2009, refers to controlling interest enabling a member or group exercising the largest voting power in a general meeting of the company. In fact, the ministry of corporate affairs is planning to incorporate the definition of ‘control’ in the Companies (Amendment) Bill of 2011 based on what is contained in the Sebi’s latest takeover code. These three examples give rise to several questions. How does the regulator resolve the conflict of interest between the government’s role as a maker of policies with macro economic implications and as the largest shareholder in the beneficiary of the policy? Can the need for competition override other concerns including existing regulations and is it to benefit the players or the consumers? Can two departments of the government interpret a law differently? How the government, the regulator and the courts answer these concerns will determine the sanctity of the markets.

Mohan Sule