The Securities and Exchange Board of India, the capital market regulator, has made key changes to the existing takeover regulations. Sebi was acting upon the report of the Takeover Regulations Advisory Committee, which had submitted its recommendations in July 2010. In the interim, there was a change of guard at Sebi, which may have delayed the decision-making process.
Here are the main changes and impact:
The threshold shareholding limit, after which an open offer is compulsory has been increased from 15% to 25%.
- This brings it in line with limits existing abroad, especially in developed markets. This will help acquirers buy just under 25% stake, without making an open offer.
- Friendly takeovers will become simpler. In companies, where promoter shareholding is relatively low, strategic partners can be inducted with significant holdings and without an open offer.
- In theory, hostile takeovers become viable. But till the government views hostile takeovers, especially by foreign companies, with less hostility, this will remain on paper.
Open offer size has increased to 26% from 20%.
- In theory, this means that a company that has acquired 25% and makes an open offer can buy 26% more and take its stake up to 51%.
- In practice, an open offer’s success depends on the pricing, which in turn depends on the acquirer’s intent. If the acquirer really wants the offer to succeed, it will be priced at a premium.
- But the acceptance levels will go up; in a 20% open offer, if shares representing 40% stake was submitted, then only 50% of the shares will be accepted. Now the proportion will go up.
Non-compete goes out of the window
- Both promoters and minority shareholders will get the same price. It levels the playing field.
- One can argue that promoters have built the company from scratch and deserve an extra something for their efforts. Shareholders only forked out money for the shares, the sweat is all the promoters.
- The counter-argument: they are the majority shareholders, have been getting majority dividends, salary and now a windfall for their stake. What’s more, there’s nothing stopping the company from paying a one-time golden handshake to the promoter-employees, or giving them generous stock option plans.
- No details have been mentioned in the Sebi press release. But this is important as it pertains to existing promoters hiking their stake. The Takeover Committee report had recommended that promoters holding between 25%-75% in a company, can take their stake up to 75%, that is the maximum permissible non-public shareholding. It is strange that Sebi has not clarified what changes are proposed to voluntary regulations.
- Board recommendation mandatory
- The Board of a company will have to submit its recommendation whenever a public offer is made. This will allow the board to present its views, which is relevant when a hostile takeover offer is being made.