The requirement of 20per cent offer is a substantial additional cost for the acquirer. In case of takeover battles and, more so, when there are competitive bids, parties would use all weapons, including legal ones, to further their ends. Several cases have raised controversies - to name a few, Sterlite-Indal, Sterling Computers-Bharati Telecom, India Cements-Raasi Cement, etc.

At present, the attitude seems to be that the code should be interpreted in its spirit and one shouldlook at what is the intention and apply it even if the literal wording is different. However, takeovers are rarely without controversy.

One sees conflicts between the acquirer and the target.

In the near future, it is possible that other interested parties like shareholders, consumers, workers, etc, may join in. The merchant bankers, who are given heavy responsibilities under the code, and are often hauled up by Sebi, will also look closely at the law. In view of all this, the takeover code will face severe tests, and unless the code is infallible (which, for any law, is only a theoretical ideal), it will result in consequences which could be unjust for many parties.

Though the code was drafted heavily borrowing from the UK Takeover Code, the major difference is that while the UK Takeover Code is not a law (though having great practical enforceability), the Indian code is. Para 1(c) of the UK Code clearly admits, "The code has not, and does not seek to have, the force of law." The Indian law isquite explicitly the opposite it is a law and has all powers of enforcement and punishment. A violation would result in fine and even imprisonment. Thus, while the UK Takeover Code is interpreted in its spirit, the Indian code faces far stricter interpretation. Examples of this are already being seen, but a recent glaring example brings this problem to the forefront for serious consideration. This is the decision of the Securities Appellate Tribunal in the Fascinating Leasing's case ((1998) 17 SCL 204).

In this case ,under the 1994 code, the acquirers had acquired 67 per cent shares of the company without making a public offer. An important fact (which is often common in other takeovers) was that the acquirer held no shares before this acquisition. Penal action was initiated against the acquirers. The acquirers said that the definition which read that when an acquirer acquires "further" shares which together with shares held exceed 10 per cent, then only the public offer was required. The tribunalaccepted this, declining the counter-argument that the words "10 per cent or less" could include zero holding also. Thus, if the acquirer did not hold any shares to start with, the requirements were simply not applicable, but if he held even a single share, it was applicable!

Clearly, seen in the light of the spirit of the code, this would lead to absurd consequences. The tribunal, nevertheless, freed the acquirer from therequirements of public offer and penal action.

More important, however, is the observations of the tribunal as to the approach one should adopt while interpreting the code. It relied on the remarks of the Supreme Court that "when the words of the statute are clear, plain or unambiguous, the courts are bound to give effect from that meaning irrespective of consequences."

As far as upholding the spirit of the code was concerned, it quoted another decision of the Supreme Court that "The spirit of law may well be an elusive and unsafe guide and the supposed spirit can certainly not begiven effect to in opposition to the plain language of the sections of the act." The tribunal also held that "One cannot overlook the fact that the takeover regulations are meant for compliance by persons acquiring shares. Their understanding of the statutory requirements would normally be based on a plain reading of the provisions giving plain meaning to the words used therein as is commonly understood."

In short, the tribunal took a view that a strict and literal approach should be taken while interpreting the code irrespective of consequences. While one may differ at least partially to the approach, it is an eye-opener and a pointer of shape of things to come. The 1997 code, though a major improvement, still has several anomalies and ambiguities and the recent controversies listed earlier are just the leading cases brought to light. The sad thing is that it is usually the shareholders or the target company who suffer. The shareholders, as what happened in the case discussed, lost the opportunity of apublic offer. In a hostile bid, the target company may suffer and face a bid which is not transparent. In other cases, the target company may defeat attempts to acquire control even through the democratic process, thus defeating the very purpose of the law.

The solution, unfortunately, is not easy. Ideally, the judiciary should take a far more liberal approach towards a law such as the code, which is not only developing, but is practiced by sophisticated and legally savvy operators who may be able to be one step ahead of the law. Faster and stricter enforcement will also curb adventurism.

(The author is a Mumbai-based chartered accountant)