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New takeover rules: loud cheers, muted jeers

Corporate takeovers are not a rarity in India, averaging 99 a year between 2006 and 2009. Even then, the reluctance of the companies to allow takeovers has been the Achilles’ hill of the Indian market. A Sebi (Securities and Exchange Board of India’s) panel has now recommended a complete rewrite of regulations, scrapping the existing ones, which if implemented in total could alter the face of mergers and acquisitions in publicly listed companies in India.

The market regulator will take a decision on implementing the suggestions after receiving comments from public till end-August. As of now, the panel report has been greeted by loud cheers from investors and muted jeers from domestic companies.

Essentially, the suggestions aim to put all shareholders on par and let investors who do not want management control of a company own more of it without an obligation to buy out minority holders.

Two proposals are most significant of all. Under the present rules, anyone who acquires 15 per cent in a listed company has to make a public offer to buy at least 20 per cent more. Now, threshold limit for a public offer is sought to be increased to 25 per cent, but the acquirer of 25 per cent must make a public offer to buy out 100 per cent of the target company’s equity, and not just 20 per cent as now. The exemption of non-compete fee from the offer price is sought to be withdrawn, and every shareholder must be offered the same price as received by the promoters.

Small shareholders will certainly benefit as they will be able to sell all their shares rather than just some. Large investors also have a reason to cheer. Strategic investors such as foreign institutional investors (FIIs), private equity and even Indian investors will now get enough room to increase their shareholding without triggering open offer.

Conversely, promoters may also benefit from the proposed increase in the open offer threshold. A higher limit will give companies a little more headroom to access capital from financial institutions, private equity funds or FIIs without the latter having to make an open offer. In times when the capital market may not be supportive, promoters may want to offload stakes to other investors. A higher threshold will assist them in raising capital.

On the flip side, the recommendations could mean that cost of an M&A transaction may significantly increase, particularly in case of widely-held companies.

Domestic acquirers would be at a disadvantage to overseas investors because there are no restrictions overseas on bank lending for acquisition of shares unlike in India.

The Reserve Bank of India (RBI) discourages lending for takeovers and leveraged buyouts which keeps the acquisitions low. RBI could certainly allow more flexible norms for funding open offers for takeover. However, Sebi cannot ask it to do so.

In other suggestions, exemptions from making offer have been made simpler, the timeline for the offers has been reduced and the offer price calculations would hopefully become more practical. The code introduces the concept of the ‘ability’ to control and has improved the definition of indirect control of companies. These measures should help in reducing the cost of takeovers and market uncertainties.

It remains to be seen how many of these recommendations are in fact implemented and in what form. However, there is no doubt that the committee has done a great job and even if only its major suggestions are implemented, the M&A landscape in India would be changed for ever.

Views expressed by the author are his own and do not reflect the newspaper’s policy.