Succumbing to pressure from the private sector players like the RPG group, the government has finally delicensed the remaining five bulk drugs-vitaminB1, vitamin B2, tetracycline, oxytetracycline and folic acid. The intention of freeing bulk drugs is to encourage domestic production and cut down on imports. However, in the current scenario there are very few domestic players who will be able to take advantage of the announcement. This is because import prices for these drugs is currently much below the DPCO prices. Take the example of vitamin B1 mono, whose landed price works out to around Rs 1,085 per kg while the DPCO price is Rs 1,160.

For the vitamin B2 ripoflame grade, though the DPCO price is Rs 2,800 per kg industry sources say that companies are selling at higher prices. They have been able to do this because of the unavailability of material. Freeing these drugs will help to put an end to such malpractices. According to the president of the Indian Drug Manufacturers Association(IDMA), Dr G Nair, the biggest advantage will be increased availability.

Vitamin B1 and Vitamin B2 have a huge demand potential. Till recently, import licences were granted to formulators of the drugs directly and not to traders. Delicencing will mean that these can now be imported by traders, which should increase their availability. Prices of the drugs are also likely to go down in the future as more material is imported into the country. In the near future, there is little scope of new capacities coming up considering the low prices as well as access to latest and cheapest technologies.

As far as tetracycline and oxytetracycline is concerned, Dr Nair said that these drugs are outdated and there is little scope of new capacities coming up in the country. Folic Acid is currently manufactured by a sole manufacturer, Shree Krishna Drugs and there is limited scope that new plants will be set up as the product is very technology intensive and requires a huge capital base.

Corporate finance

Thefinal day of the "Indian Corporate Finance Convention" organised by Invest India highlighted some important issues which would facilitate M&As and buyback of shares. An example of which was the question mark over the triggering of the takeover code, if the stake of a non-management shareholder exceeded 15 per cent as a result of buyback. Logically, this should not trigger the code quite like a preferential allotment, as in either case the permission of shareholders through a special resolution is required and the buyback would not amount to acquisition of shares. However, a specific exemption to that extent would have to be included in the code.Also given the allowance that a stake can be hiked via market operations by the 5 per cent creeping acquisition route if the holding is 15 per cent or more but less than 75 per cent, would the code be triggered if the stake was hiked from 12 per cent to 14 per cent? Investment bankers were of the view that at least some grace period should have been allowed for hikingthe stake upto 15 per cent. More importantly, while technically the need for grace period is fine, how many creeping acquisitions have actually taken place?

The proceedings also highlighted an inconsistency between the Income-Tax Act and Stamp Act. If the buyback of shares was to be treated as a transfer, (without which capital gains tax cannot be levied) the transaction would attract stamp duty. But bought back shares have to be extinguished and hence can stamp duty actually be levied?

Another aspect discussed was what would happen if as a result of buyback, the stake of the FIIs exceed 30 per cent? The proposed solution was that it would have to be decided on a case-by-case basis, as similar logic as in the case of the FDI ceiling being breached applies (if only 51 per cent holding through an automatic approval route is permitted, what happens if as a result of the buyback, the stake exceeds the ceiling prescribed?). As regards takeovers, the view was that due to the poor quality of disclosures, ahostile bid would only emanate from competitors, as only they would be able to judge the performance accurately.

The reply to another question, which dealt with the need for an open offer for acquiring only 20 per cent stake and not the 100 per cent, was that since in India a majority of the companies are family promoted, the only viable option to buy the promoters out is to offer cash, as the family is not interested in shares of another company. If offer is to be made for the entire capital, takeovers will be impossible. Incidentally, in India, any bid for a company with substantial cross holding has invariably resulted in total buy-out. Thus common sense is taking care of what is not required by the regulations.

The most important issues however relate to the period for defence in case of a takeover attempt. Logically, the defence period should be hiked to 60 days instead of 21 days (the notice period required for a general meeting). There is a desperate need for a target company board appointedindependent advisor to advice the shareholders of the target company on the offer price. Though the market normally takes care of the shareholders of the target company, an advisor would be needed for shareholders of the acquirer. The data provided by the management and the assumptions of the advisor to arrive at a value will have to be made public. This will have to be made mandatory by law, as otherwise legal opinions will ensure that no such data is made available to shareholders as was the case in the ITC Classic deal. Since the courts are yet to take the lead in making offer letters more meaningful, one will have to wait until the likes of Infosys, GE Shipping, Essel Packaging or Crompton Greaves take over a company.

(With contributions from Shishir Asthana and Urmik Chhaya)