Major changes in regulatory rules concerning mergers and acquisitions (M&As) have been proposed by an expert committee set up by market regulator Securities and Exchange Board of India. C. Achuthan-led Takeover Regulations Advisory Committee (TRAC) in its 139-page report has proposed sweeping changes in a number of crucial issues.
They include open offer trigger, offer size, indirect acquisitions, exemptions from open offer obligations, calculating the offer price and competing offers.
Mr. Achuthan had been the Presiding Officer of the Securities Appellate Tribunal. Other members of the panel include two leading finance professionals — Tata Steel Chief Financial Officer Koushik Chatterjee and L&T Chief Financial Officer Y. M. Deosthalee.
Faith in gradualism
The Achuthan panel report comes 16 years after the first set of rules relating to takeovers were first framed in India. In 1997, a major review was undertaken. Since then there have been 23 amendments, strongly suggesting the regulator's faith in gradualism. Capital market regulation has proceeded step-by- step. The panel recommendations, if implemented at one go, will mark a major departure from the existing stance.
M&As are here to stay in India. The world over, the M&A channel is by far the most common route of cross-border capital flows, far outstripping direct investment in greenfield ventures. It is noteworthy that many Indian companies have adopted the M&A route while venturing abroad. Some like the Tatas and the A. V. Birla group have made some high-profile acquisitions recently.
The panel recognises M&As as an acceptable method for domestic companies to grow. In fact, in a range of industries, consolidation by the numerous small entities is long overdue. An up-to-date takeover code for India, incorporating some of the best global practices, is obviously useful and necessary in the context of the rapid globalisation taking place. Regulation should act as a fair and neutral umpire, balancing the interests of the corporate sector — both acquiring and target companies and shareholders (large and minority shareholders).
How does the proposed code impact on these constituencies? It will be useful to look at some of the panel's key recommendations:
(a) The open offer trigger limit increased from 15 to 25 per cent;
(b) the open offer size increased from 20 to 100 per cent. These two core recommendations have far reaching implications. The higher trigger point obviously gives considerable leeway to the acquirer. Private equity and other forms of overseas capital would welcome it. The new trigger point for the open offer harmonises the takeover rules with the delisting guidelines. The increase in the offer size to cover all shareholders is a radical move. On the face of it, it gives all shareholders an opportunity to participate. While small shareholders will welcome it, the substantially larger open offer will raise the financing costs significantly.
For the acquirer, the likely gains from a higher trigger point may be nullified by the requirement of a 100 per cent offer.
More transparency
(c) Acquirers cannot be represented on the board of the target company;
(d) independent directors of the target company to give mandatory opinion on offer.
These two recommendations will increase transparency. Acquirers will not be able to directly influence the target company's action. The proposal to make independent directors of the target company give an opinion on the bid is theoretically an excellent idea and in line with the best global practices. However, corporate governance in India, especially the part played by independent directors, is yet to evolve. The question is: Will independent directors of the target company be able to give an unbiased opinion in the case of a hostile takeover?
(e) Non-compete fee/control premium if paid to promoters need to be added to offer. This will ensure equal treatment of all shareholders. Promoters of the target company will not receive special consideration through a private deal and sell out.
(f) Shareholder approval must for material transactions during the offer period. This will improve corporate governance norms in the target company and prevent, say, alienation of a valuable asset during the offer period.
(g) Acquirers to make upfront disclosure of delisting plans.
This provision aims to harmonise the takeover code with the delisting requirements. The 100 per cent open offer requirement could result in an acquirer holding beyond the maximum permissible non-public shareholding.
In fact, as pointed out earlier, the higher trigger for the open offer meshes well with the delisting provisions. The acquirer may be forced to either delist or bring down his holding to meet the continuous listing agreement. He is, therefore, obliged to state his intention upfront.
