Industry was doing fine till the Takeover Regulations turned a blind eye to ADRs and GDRs carrying

voting rights. The exception for depository receipts carrying voting rights was worded in a manner that the code was attracted only upon conversion of the depository receipts into equity shares. However, while the receipt existed, i.e. prior to conversion, a voting right could easily be exercised. This indirect exercise of voting rights was viewed by small investor groups as a subversion of the code, particularly in cases where the depositories and/or receipt holders had to vote in accordance with the Board of the issuing company (this was a concern in cases where Promoters already controlled the board of the issuer company and the ADR/GDR issue was further used to increase board representation. The same concern had been highlighted by SAT in the past). The conservative view taken by many experts on the matter is that any voting rights attached to depository receipts basically subvert the Takeover Regulations and the exception makes no sense as upon conversion the ADR/GDR extinguishes anyway. Prior to amending the code in a manner that disallows ADRs and GDRs with voting rights from benefitting from the exceptions earlier allowed, SEBIs approach was quite liberal. It did not intend to micromanage such issues unlike RBIs approach in regulating ADRs and GDRs issued by banks where RBI scrutinises voting rights of associated enterprises holding the depository receipts. In the Bharti-MTN share swap case the more liberal approach was taken, hence the favourable informal guidance was issued. As expected small investor groups cashed in on the big players deal and challenged the voting rights attached to the depository receipts in SAT. SAT too gave a clearance and did not upset the depository receipt market by striking down the informal guidance. Within weeks however, SEBI itself amended the Takeover Regulations to undo its own interpretative letter in favour of the Bharti-MTN share swap. This was unexpected in light of the fact that SEBI had argued against the investor groups and had stood by its liberal approach in the forum of SAT. The loop hole in the Takeover regulations had been well debated in the past, The market practice of attaching voting rights was also well established. Thus, the sudden back tracking by SEBI, that too right after it got a SAT ruling in its favour was not warranted, particularly in light of the Bharti-MTN deal not nearing completion. Of course, its another matter altogether that the deal eventually failed on the dual listing aspect. SEBI may also tie up its regulations more with the Companies Act, 1956. Most/ many of the cases that come to SEBI concerning violations of the Regulations can be struck down at the level of non-compliance with the procedures provided in the companies Act. For instance contractual variations to classes of shares (seen in many share swaps and well as Depository receipt issues) which do not comply with Section 106 of the Companies Act. All in all, the amendment as it stands today is well worded and clearly spells out the Regulators intent, which is in line with well debated legal arguments and discussions. The language may further be tied up with Regulation 14 of the code to make it clearer. A thorough rethink of the code will certainly avoid untimely hiccups as in the Bharti-MTN case.