But if an exemption is granted, it will set an undesirable precedent. The point is, if an exemption can be granted to a government company, there is no reason not to extend the benefit to other companies. Open offers will be a thing of past.

The ostensible reason advanced is that the takeover is friendly and not hostile. But there is no logic of exempting non-hostile takeovers from the purview of Sebi (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. It is, after all, the job of the Government to implement the law of the land and not to seek exemptions which suit its convenience.

It is claimed that the acquirer will have management control and hence an open offer is not required. What this means is that if a promoter(s) with controlling stake can be bought out, other shareholders do not matter. The logical extension could then be that shareholders' approval should not be required for any transaction whatsoever.

But perhaps the Government can do whatever it pleases within the existing rules. The first option is to opt for a preferential allotment to change management control as was done by Paper Products. However, for a company with a large equity, this route is not desirable. GoI/prospective bidders can instead learn their lessons from the Ambuja-ACC deal. Regulation 12 of the Code provides that change in control of a company does not require an open offer if it is approved by the shareholders through an ordinary resolution. In other words, a resolution has to be approved by a majority of shareholders present and voting. The safest course of option is to seek a poll as it will mean that the Government's majority stake will result in a positive outcome.

But this option could prove embarrassing, as the Government may be seen as bullying minority shareholders, Regulation 12 provides another option-one which was exercised by GACL.

Regulation 12(ii) provides that where any person or persons are given joint control, such control shall not be deemed to be a change in control so long as the control given is equal to or less than the control exercised by person(s) presently having control over the company. As was done in ACC-GACL deal, the government should offer a stake of say 5 per cent at slightly higher than the ruling market price to the selected bidder.

Regulation 12(i) provides that where there are two or more persons in control over the target company, the cessation of any one such person from such control shall not be deemed to be a change in control of management nor shall any change in the nature and quantum of control amongst them constitute change in control of management. No minimum lock-in period is prescribed before control is transferred. It could be within a week or the next day. So once the government gives joint control, it can then go ahead and give up its entire stake to the co-manager, without attracting an open offer.

The transfer has to be at least at the market price because if the transfer is at a lower than the ruling market price, an approval of shareholders through a special resolution is required to determine the mode of disposal of shares of the outgoing shareholder to the existing shareholders in control and the price has to be as prescribed in Regulation 20. The irony is that shareholders have no power to block the deal. All that can be done is that the price can be hiked. Who benefits in that case? The outgoing shareholder.

Clearly, the takeover code, as it stands today, provides enough loopholes for not making an open offer.

HDFC Bank
HDFC Bank has much to commend it. Its focus on technology, on fee-based and treasury income, and its strategy of targeting high-end customers have paid both it and its shareholders excellent dividends. Its recent acquisition of Times Bank has also been a feather in the management's cap.

At first glance, the bank's third quarter results continue the stunning growth story, with a 70 per cent growth in turnover and a 55 per cent growth in the bottomline, year-on-year. However, some worries have surfaced. For example, compared to the second quarter, net profit has been flat. It was Rs 28 crore in the second quarter, and is Rs 28.17 crore in the third quarter.

The reason lies in the growth of "other expenditure", which at Rs 48.85 crore for the quarter is a huge 59 per cent of "other expenditure" for all of 1998-99. According to HDFC sources, for the nine-month period to December 31, 1999, provisions amounted to Rs 20 crore, compared to only Rs 9 crore for the corresponding period last year. Gross NPAs have remained at a little lower than 2 per cent, while net NPAs have fallen in percentage terms, because of the higher provisions.

The question is, will this be a one-time hit? The bank's expansion programme and technology focus have also been partly responsible for the huge increase in expenditure. Apart from increased provisions impacting the bottomline, there are two other areas of concern. The first is the possibility of lower interest rates, which will hit spreads. The second is the slowdown in topline growth exhibited in the third quarter. Interest income increased by Rs 2379 crore in Q2 compared to Q1. This increase was muted to Rs 1622 crore in Q3 compared to Q1. However, the robust growth in non-fund-based income is encouraging. Based on the nine-month results, current PE works out to 31.7 on an annualised basis. Bottomline growth has been 11.3 per cent for the last six months. That works out to a PEG of 2.8, which is high.

Emcee (with contributions from Urmik Chhaya)