The universal popularity of sports, most of which embody this combination of hostility and restraint, indicates how successful an innovation this reconciliation has been. Likewise, markets also work best when, within a generally accepted framework of rules, the profit motive is unashamedly unleashed. The recent controversy over Arun Bajoria's acquisition of large blocks of shares in Bombay Dyeing and Ballarpur Industries indicates that, as a system, we are still to fully grasp this fundamental truth.

The episode raises three types of questions. The first relates to whether any rules were violated. This is a relatively easy issue. We have an elaborate takeover code. It is there to protect the interests of the entire body of shareholders in the target company. The potential acquirer is expected to comply with it and Sebi, the regulator and referee, is expected to monitor and enforce this compliance. If these two things did not happen then the necessary punitive and remedial action should be taken, but the episode does not provide any basis for the condemnation of takeovers per se.

The second issue is whether the takeover code provides adequate protection to vulnerable parties. The requirements of the code in terms of the timing of disclosure, the thresholds of holding that triggers disclosure, the limits to the open offer and so on could be debated. However, the one inviolable principle for a takeover code is that inefficient incumbent managements must not be protected. On paper, the Indian takeover code certainly meets this requirement. The current episode and others that follow will test whether this is so in practice.

The third issue is that of the motivation for the takeover. Should there be a distinction between takeovers motivated by a change of control with the objective of better utilisation of the assets and those driven purely by the short-term profit potential? Absolutely not. As long as the rules are followed, the referee should not be concerned with the motivations of the fighters. If a company is undervalued, it is a legitimate target for a takeover. There are lots of such companies around, and therefore, takeover attempts, hostile or not, will become more and more frequent. From the viewpoint of improvements in efficiency, and within constraints of shareholder protection, this is a welcome trend. Misplaced sentiments should not stand in its way.

-- Editorial in Business Standard