The single-most important regulation in India, governing the acquisition of shares or control in an Indian listed company is the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997, or the Takeover Code. In the backdrop of changing needs of a dynamic Indian economy surging at a growth pace of more than 7 per cent over the last few years, this code has been tested during many a corporate takeover battle in India, observes Girish Vanvari, Executive Director, M&A Tax Head and Member of the Tax Executive Committee, KPMG India, Mumbai.

Responding to the changing times, the SEBI (Securities and Exchange Board of India) has acted quite proactively making necessary amendments or providing key clarifications to the various facets of the Takeover Code, he adds, during the course of a recent year-end email interaction with Business Line.

“As a sequel to these amendments, the SEBI has constituted the Takeover Regulations Advisory Committee (TRAC) to review the Takeover Code and to recommend suitable amendments to it. To make this significant piece of legislation free from controversy, the TRAC has also decided to seek inputs and suggestions from the public on any aspect of the Takeover Code.”

Excerpts from the interview, in which Girish looks at certain areas in the Takeover Code meriting a re-look.

On the limits

Under the current Takeover Code, with the acquisition of 15 per cent or more of the voting rights of the target company, open offer for additional 20 per cent shares is mandatory.

This restricts the acquirer to make large investments in the company, where controlling the company is not an objective, limiting the acquirer to below 15 per cent so as to avoid an open offer. This is especially a big hindrance in private equity deals wherein private equity many a time intends to acquire more than 15 per cent without any intention of running the companies.

An option may be considered wherein this limit could be raised to 25 per cent which will ease fund raising for India Inc. Also, this limit of 15 per cent does not converge with the limits followed globally by countries such as Hong Kong (35 per cent), the UK (30 per cent), Malaysia (33 per cent), and Singapore (30 per cent).

However, in the context of the Indian environment, an interesting point to note is that there are many listed companies where the promoter shareholding is less than 40 per cent. Hence, even if the limits are raised, adequate protection should be provided (differential limits) in the case of companies with low promoter shareholdings.

Another interesting point which should be considered is as to the minimum level of acceptance which should be mandated in an open offer. At present, the minimum level of acceptance is 20 per cent. This is a serious impediment to many minority shareholders who in many cases prefer complete exits as they may not want to continue with the new ownership/ management.

Whilst from a corporate M&A activity perspective there is a serious case to argue that any such move would make takeovers unattractive as it would lead to higher cash outflows, a midway path can be explored wherein shareholders below a particular limit should be mandatorily bought out completely.

On buybacks

The past few years have seen many buybacks by companies. These buybacks normally lead to indirect increase in shareholding of the promoters. The Takeover Code is silent where the promoter holding increases on account of such buyback of shares.

In the absence of a specific exemption, the SEBI has in the past granted exemption to promoters of various companies from making an open offer where an application is made.

Under the current process, making an application and obtaining approval requires considerable amount of time and administrative force. It may be prudent to amend the Takeover Code to specifically include “buyback of shares” amongst the various exemptions so as to save on time and attached costs.

Another thought that comes to mind is that buyback can be easily used as a device by the promoters to increase their holding in the company by utilising shareholders’ funds. The SEBI should critically review the Takeover Code vis-à-vis buyback of shares.

In a recent takeover battle for a target company, the price war between the two bidders went on for several months. Just before the opening of the open offer, one of the bidders sold its entire stake in the target company and exited the race. The current Takeover Code is silent on such stake sale by a bidder ahead of the opening of the open offer. Such an act by the bidder may raise questions on the ethics. Globally, countries such as Hong Kong have restrictions on such sales.

It’s never an easy task to manage conflicting objectives, viz., to support the predator instincts of corporates facilitating the takeover of inefficient management, thereby unlocking value, and at the same time protecting the minority shareholders in a fair and equitable manner. It will be interesting to see how the SEBI walks this tightrope.

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