View: Time for some ‘Atmanirbhar’ regulations

By any reckoning, transformative mergers ought to be the jewel in the crown of Atmanirbhar. They create champions with global heft and valuation. The proposed merger of ZEE and Sony is a case in point: it is good for our creative industry, good for our global soft power, good for India.

Which makes the conduct of US-based Invesco, a loyalist-turned-renegade shareholder with a 17.88 per cent stake in ZEE, perplexing. Amid the twists and turns that have made its assault on ZEE both cunning and defining, a question emerges: is India’s regulation of listed companies and their foreign investors appropriate for the era of Atmanirbhar.

I ask because the sudden destabilization engineered by Invesco at ZEE is enough to force managements permanently on the defensive, monitoring their big investors in case they have secretly and unilaterally opened talks with a rival to take over the very company in which they have been a decade long-shareholder. That’s what Invesco has done. This is why regulators must ask of themselves: can Atmanirbhar really tolerate assaults on its national champions?

The short answer is no. Here’s a longer answer: there are enough safeguards for protection of investor and shareholder rights and for holding management accountable under the Company’s Act. All of these rules have been in play in the ZEE-Invesco matter. What we should also be asking is whether those provisions have also been cynically misused?

For example, can a financial investor holding a substantial stake in a given Company, unilaterally and secretly initiate merger discussions with a rival, while publicly demanding the sacking of its CEO? It is bewildering and baffling, yet this is the nub of the ZEE-Invesco contretemps, and an illustration of how foreign funds can blithely abuse their influence.

For answers, let us shift our gaze from The Company’s Act to the policy actions of the Indian government over the last seven years. The directional focus has been unambiguous: to underpin Indian business and entrepreneurship. In contrast, The Company’s Act, and the regulatory regime that SEBI oversees, have not been updated to keep pace with the philosophical anchor in the government’s policy reforms for business. The regulatory regime has moved incrementally, the government fundamentally. Only as recently as 2018 did SEBI raise the trigger for an open offer under the Takeover Code from 15% to 25% – a significant threshold in the light of Invesco raising its stake in ZEE to 17.88%, just over 20 odd months earlier.

What, then, are the contours of Indian regulation that would be consistent with Atmanirbhar?

The goal is surely to create conglomerates rooted in the Indian economy that are of global scale and competitiveness, innovative and with financial the muscle to break into new markets, rather like South Korea’s Chaebols. ZEE’s proposed merger with Sony would create such a behemoth, bringing together a global content giant with India’s leading entertainment player.

That surely is the way for Indian companies to take on the world. These champions would be rooted in their ‘Indianness’ yet global in their aspirations.

What about foreign capital? It must be said that India, a capital constrained economy, has been well served by foreign investors. But is the mouth-watering lure of Indian assets – now large, mature and with a humongous market at their disposal – seducing some foreign funds into giddy and reckless pursuit? How do we ensure that foreign shareholders remain true to their mandated roles, which does not include brokering hush-hush strategic realignments?

The India of Atmanirbhar requires a flexible, robust and forward-looking regulatory regime capable of dealing with the myriad situations confronting listed companies, and foremost is the very real threat of takeover by foreign predators. For example, a passive foreign financial investor should be required to issue a public notice stating that it wants to change its status to that of a strategic investor in a company. There should be mechanisms to red flag an investor who fails to notify its intention to the regulator. We should stipulate a complaint and redressal system flagging both minor and egregious actions by an investor. The regime must build in mechanisms for swift course corrections, nipping in the bud destructive predators. The proxy advisors should include the international investors to their scrutiny test.

I believe more big-ticket deals will happen in India; but first we require an oversight regime that is appropriate for the India growth story – for Atmanirbhar. The Insolvency and Bankruptcy Code (IBC) is one recent example of new and appropriate rules for an India growth story, in this instance reviving insolvent assets. The IBC needed multiple amendments, and still needs more, to ensure it is a fitting template for a resurgent Indian economy.`

Similarly, there is in my judgement an unarguable case for a new or significantly amended regulatory regime for listed entities to ensure that strategic decisions are not the work of off-shore stealth, a fait accompli by fund managers sitting in far-away corners or the world.

That is why we require new regulations to guard against aggressive activism masquerading as benevolent value creation. This type of shareholder shenanigan is destined for the courts, an inevitable outcome if foreign funds are allowed a free run at our national champions. If New India gets the regulatory regime it merits, we may yet come to thank Invesco.


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