In the unforgiving realm of the financial markets, it is the Goliaths that have things their way as opposed to the Davids. The ones that possess the means of production, end up on top, more often than not. They get to ride the waves and sometimes even control the currents. But does that mean that the smaller fish do not have a say?
The retail investor and minority shareholders, no matter how miniscule, are afterall a major part of the market. And to safeguard their interests is often in the best interest of the market itself. But sometimes safeguarding the interest of these smaller fish, means putting a hook on the bigger ones.
Such is the story of Securities and Exchange Commission of Pakistan’s (SECP) latest notification dated 18th August, 2023.
Through this notification SECP has informed that it plans to make some major amendments to its takeover regulations. These regulations, called the Listed Companies (Substantial Acquisition of Voting Shares and Takeovers) Regulations, 2017, in simple English, relate to the requirements when someone wants to become a substantial shareholder or acquire majority shares in a company that is listed on the stock exchange. The main change: it will be compulsory for in kind securities, offered as an acquisition settlement, to be highly liquid and for the acquirer to also offer a wholly cash alternative when offering securities to take over a company.
But why was there a sudden change of heart on the SECP’s part? Afterall, it was the same SECP that made completely opposite amendments less than a year ago in September, 2022. To understand this, first some background.
What prompted the change?
In its essence, the SECP is supposed to do its best to protect minority shareholders. That is one of the reasons why the SECP had mandated, anyone who wished to acquire majority stock in a company to make at least a market price offer to the minority shareholders of a company so that they could exit the stock, if they wished to do so.
This compulsion is not always in the best interest of the acquirer because it may land them with a more than required share of a company. Afterall one only requires 51% of a company’s equity to have controlling stake. Anything above that would just mean tying up their own money, unless that is what the acquirer wants.
But when the SECP in September last year, by the means of an amendment, allowed this settlement to be made with securities such as shares and bonds, that compulsion got complicated and created some loopholes which if exploited could lead to the acquirers not having to purchase more shares than they wanted, leaving the minority shareholders at a disadvantage. The JS group was apparently the first to pounce on these loopholes in its bid to acquire BankIslami.
The BankIslami acquisition
In its attempt to acquire controlling stake in what would be the second commercial bank under Jahangir Siddiqui, the JS Bank had already struck deals with some big shareholders to cross the required 51% shares it needed to control BankIslami. But as explained above, according to the regulations JS Bank had to make a fair offer to the remaining 49% shareholders of BankIslami as well. And with the recent changes in the regulations it could now make this offer in kind, and that is exactly what JS Bank tried to do. So instead of offering cash to these remaining shareholders, JS Bank offered shares of its two group companies, JS Global and JS Investments, to the other half of the minority shareholders.
Immediately after this announcement, a number of voices in the financial industry alleged Jahangir Siddiqui and his JS Group of trying to shortchange the minority shareholders of BankIslami. According to them, there were at least three problems with the two shares being offered that made this offer a non-starter for BankIslami shareholders.
Firstly, the shares of both JS Global and JS Investments were largely illiquid, meaning it would not have been easy to sell them later in the market. Secondly, both these companies were not Shariah compliant, meaning offering such shares against shares that are Shariah compliant would have been a non-starter for many shareholders of BankIslami for religious reasons. Lastly, and probably most importantly, the price of JS Global shares had increased by an astonishing 4 times , while the price of JS investments shares had also increased substantially just months before they were offered to BankIslami shareholders. This meant that in an exchange, as shares of both these companies would have a higher value than usual, shareholders of BankIslami would have gotten fewer shares of JS Global and JS Investment now, had they opted for the exchange.
Profit covered the development as its cover story, highlighting the inefficiency and injustice this deal would apparently entail.
Following that story and strong advocacy by other minority shareholders, the JS Bank finally succumbed on the 26th of April 2023, and agreed to pay cash instead of in kind payments to the minority shareholders of the BankIslami.
While the episode ended on a positive note for the minority shareholders, the saga brought to the fore regulatory inadequacies and potential pitfalls within the existing framework. As previously highlighted in in-depth reports by Profit in March and April 2023, the JS Bank deal unveiled vulnerabilities that it seems has prompted SECP’s proactive engagement.
The JS Group- BankIslami saga initially centred on JS Bank’s ambitious bid to establish a commanding presence in Pakistan’s banking sector by acquiring a controlling stake in another bank. However, this endeavour has been overshadowed by reservations over potential conflicts of interest, stock price manipulations, and the exploitation of regulatory gaps, particularly to the detriment of minority shareholders.
A central concern that came to the forefront is the ability of acquiring companies, like JS, to offer minority shareholders compensation in the form of shares from other group entities, as opposed to cash. This mechanism raised alarm bells over the fairness and transparency of such transactions, as it could potentially lead to minority shareholders receiving less favorable terms or even coerced outcomes.
Amid mounting concerns, both market observers and regulatory bodies advocated for a comprehensive reassessment of the regulatory framework governing takeover transactions. It would not be unfair to say that the latest development came about as a direct response to the ongoing discourse surrounding the JS Bank deal and similar transactions.
What are the Changes made by the SECP?
The SECP has taken the initiative to launch a public consultation phase aimed at amending the Listed Companies Regulations. These proposed amendments, conceived with the input of diverse stakeholders, aspire to augment transparency, safeguard minority shareholder rights, and champion equitable practices.
Addressing the first problem pertaining to liquidity in the BankIslami transaction, the SECP proposes that only highly liquid securities would be deemed acceptable to be provided by the acquiring entity for meeting obligations under the public offer. To categorise any shares as highly liquid, the SECP has provided certain parameters.
These parameters state that the stock should have been listed at least 2 years prior to the offer. Moreover, it has to be a frequently traded share for at least 180 days prior to the offer. As per amended definitions, a frequently traded share is one which has been traded for at least 80% of the trading days during any given time period. And during those 80% days, the average daily trading volume should not be less than 0.5% of its free float or 100,000 shares, whichever is higher.
The other major issue in the Bank Islami transaction was the shariah compliance and unwillingness to accept the JS Global and JS Investments stock. Addressing this issue, a very salient innovation of the proposed amendments is the provision for minority shareholders to opt for compensation in either cash or, if preferred, securities. In cases where the acquirer offers securities as compensation, and securities are chosen, an all-cash alternative must be presented alongside the proposition.
Previously, the provision of a wholly cash alternative was absent. It is important to note here that this provision also provides the minority shareholder, to readily exit the trade making the process of acquisition more democratic.
The third, and possibly the biggest concern in the aforementioned example was the changes in price of the offered shares. To remove the possibility of price manipulation, the new draft proposes that the shares of listed company may be valued at the weighted average share price during 180 days preceding the date of the announcement of public offer.
For government securities the value is proposed to be calculated on the basis of applicable PKRV rates at the end of the day preceding the date of public announcement of public offer. PKRV rate is the average yield-to-maturity on government securities, on any given day, traded in the secondary market.
Apart from these changes, the SECP has also revamped the criteria governing acceptable securities during public takeover offers. The refined criteria restricts eligible securities to shares of listed companies, listed debt instruments, and government securities with a remaining maturity of up to 364 days.
Additionally, SECP has also taken measures to articulate clear definitions for terms that were previously left ambiguous, cultivating a coherent and transparent regulatory environment. This includes definitions such as weighted average price of shares, and frequently traded shares, clearing up ambiguities about prices and liquidity of shares.
What is the process and how can you contribute?
Many would be wondering why the SECP needs a public consultation to make a change? Therefore it is important to note here that the issuance of this Consultation Paper is to seek stakeholders’ feedback as required under section 169 of the Securities Act, 2015 on the draft amendments in the Listed Companies (Substantial Acquisition of Voting Shares & Takeovers) Regulations, 2017. The drafted amendments are also separately published in the official Gazette, and on the SECP website.
These changes will nevertheless come into effect after taking into consideration the objections and suggestions within 14 days of the posting of these draft amendments.
Those eager to delve deeper into the specifics of the proposed amendments, and wishful of proposing suggestions and amendments to this draft resolution, can head over to SECP’s website. SECP has published an all-encompassing consultation paper elucidating the key considerations underpinning these changes. This document, complemented by the draft amendments, is readily accessible on the official SECP website.
After the publication of Profit’s news feature Jahangir Siddiqui will soon own two banks. Not everyone is happy.
JS Bank has filed a case of criminal defamation at a session court in Thatta, Sindh against us. Criminal defamation cases, as discerning readers might already know, require the accused to be physically present during hearings and investigations, making them a more calculatedly tedious affair than the civil defamation laws.
At a time when civilized societies are doing away with criminal defamation laws and making the matter entirely a civil matter, we are still stuck with laws that are clearly a tool to suppress independent journalism.
Would we have liked for the legal system not to be gamed against us, that too, more than a thousand miles away from our office in Lahore? Yes.
Would we do it all over again? Yes.