Stuck in a rut

How’s this for an open offer? Buy a stock for ₹22 from the open market and sell it for ₹340. Sounds like a no-brainer but the only hitch is that we are talking of a hypothetical situation. The stock in question is that of ports major Marg, which is trading at ₹22 and is liable to make an mandatory open offer at ₹340. However, whether the offer will fructify or not is in question, given that the promoters and the regulator are at loggerheads over the offer.

In October 2011, the promoters had made a voluntary open offer to acquire up to 76.5 lakh shares, or 20% of diluted capital, at ₹ 91 a share. However, on inspection of the documents, Sebi detected two instances of violations of the Takeover Code that bars promoters from acquiring shares in excess of 5% in a year. In February 2007, Marg had issued 27 lakh GDRs to non-promoters, in turn paring the promoter’s stake to 36%. A month later, the promoters raised their stake to 50% by converting 37 lakh warrants. Again, in March 2011, promoter holding rose to 49.84% against 42.48% in the previous quarter.

As a result, Sebi directed the promoters to make an mandatory open offer based on the then-prevailing price of around ₹216. Together with interest of ₹214 a share, the price worked out to ₹340 a share. But the management’s contention was that the increase in holding was not due to secondary market share purchase. The case is now with the Securities Appellate Tribunal (SAT). While the promoter has also put in a plea to withdraw the open offer, Sebi has ruled that takeover regulations do not permit withdrawal of a mandatory open offer. In case the SAT upholds the ruling, Marg could move the Supreme Court (SC), feel market observers. In such a case it will be a long-drawn affair and the situation could get tricky for investors. Sanjay Arora, CIO, Escorts Mutual Fund, who in the past has successfully played the arbitrage game available in open offers, is wary of buying into Marg. “Several cases of open offers are still being heard in the SC. These cases can drag on for years, so there is no point holding a stock under these circumstances,” he says. 

A case in point is that of Nirma which wants to withdraw its open offer made for Shree Rama Multi-tech in 2006, alleging governance violations. Nirma had then harped on Sec 27 (1) (d) of the Takeover Code, which allows withdrawal of the offer under “special circumstances”. But Sebi refused to accept that the argument and pointed out that Nirma should have done its due diligence before acquiring the company. Nirma had in 2008 moved the SC, which is yet to give its final judgement.

However, investors looking for a quick gain still have an opportunity. Shriram EPC has made an open offer for Orient Green Power at ₹ 15 while its current price is ₹14. “Investors can still make a return of 7% on the trade,” sums up Escorts Mutual Fund’s Arora.