Revised takeover regulations – pragmatic and balanced approach

July 29, 2011

(The views expressed in this column are the authors’ own and do not represent those of Reuters)

Considering the fast growing Indian economy and level of M&A activity in India, a need was felt to review the current Takeover Regulations of 1997.

Towards this end, in September 2009, a Takeover Regulations Advisory Committee (TRAC) under the chairmanship of C. Achuthan was constituted to examine and review the Takeover Regulations and suggest suitable amendments thereto.

The SEBI Board in its meeting on July 28 considered the report of TRAC and accepted many recommendations. We discuss below some of the key changes to the Takeover Regulations as approved by the SEBI Board.

Trigger Threshold – Enhanced to 25 pct

The initial threshold limit for trigger of Takeover Regulations has been increased to 25 pct from current 15 pct. This would certainly assist companies in attracting strategic/financial investors up to the 25 pct limit, without triggering the open offer.

The increase in threshold limit is based on the global practices wherein the threshold is around 30 pct.

In India, considering that a minimum of 25 pct shareholding is required to veto special resolutions and therefore, exercise control to some extent, the limit is sought to be capped at 25 pct instead of 30 pct.

This is a welcome change as the existing 15 pct limit did not provide sufficient leeway for fund raising by the Indian company, especially under the Private Equity Investor route.

Public offer for 26 pct shareholding

One of the key changes proposed by TRAC was to raise the offer size under the open offer from existing 20 pct to the entire 100 pct. This was with an objective to provide every shareholder an option of complete exit as against the current law where only 20 pct shareholders can eventually exercise the exit option.

The SEBI Board increased the offer size to 26 pct (from current 20 pct) and did not accept the recommendation for 100 pct offer. This would certainly help the acquirer, as a 100 pct offer would have created practical difficulty for the acquirer to raise the required finances to fund such an offer. This seems like a pragmatic and calibrated middle-path approach especially keeping in the mind the basic limitation for Indian acquirers to raise finance domestically to fund a large acquisition.

Now, considering the trigger limit of 25 pct and the offer size of 26 pct, the acquirer would be able to get 51 pct control in the target company. Thus, the management of the target company would now vest with the acquirer company.

Non-compete Fee payments

The current Takeover Regulations permit a window for payment of 25 pct of consideration as ‘non-compete fee’ to the exiting promoter shareholders. With an objective to promote parity in treatment to the minority shareholders, the TRAC had recommended the removal of 25 pct differential on account of ‘non-compete fee’.

SEBI Board has accepted the recommendation of TRAC that all shareholders shall be given exit at the same price.

Recommendation by board of target company

SEBI Board has made recommendation on the offer to be given by the Board of the Target Company as mandatory. The public shareholders would thus be aware of the recommendations of the Board of Target Company and would assist them in the decision making.

Competitive Offers

In cases of competitive offers, the successful bidder can acquire shares of other bidder(s) after the offer period without attracting the open offer obligations.

‘Control’ criterion

Under the current law, another qualitative measure for trigger of Takeover is acquisition of ‘control’ over a target company, regardless of the percentage change in shareholding of Target Company.

The definition of ‘control’ under the current Takeover Regulations is an inclusive definition and includes the ‘right’ to appoint the majority of directors or to control the management or policy decisions. The definition of ‘control’ was sought to be modified by TRAC to include ‘ability’ in addition to the ‘right’ to appoint the majority of directors or to control the management or policy decisions.

The proposed change has not been accepted by the SEBI Code and the current definition of ‘control’ would continue.

De-listing window

Another interesting proposal made by TRAC was to provide a single window for de-listing if the acquirer discloses his intent of de-listing upfront and the shareholding acquired in open offer crosses the maximum permissible non-public shareholding limit. This proposal has not been accepted by the SEBI Board.

Summing up

SEBI’s decision to change the provisions of Takeover Regulations keeping in mind the recent change in business environment and M&A activities in India is a progressive and welcome step. SEBI seems to have taken a pragmatic and middle-path approach, keeping in mind the interest of all key stakeholders – the Acquirer, Target Company and the Minority shareholders.

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