One difficulty that a typical company seeking to carry out an MBO faces is that it gets poor response initially. This is particularly true when there has been a record of profits or other clear cut advantages. An MBO attracts the attention of shareholders, analysts, press, etc. Often, it happens that the market price of the shares zoom up to reach the price offered by the company. The response to the public offer is, thus, dull. The company is then forced to make another open offer and then, perhaps, yet another. Finally, it may happen that the average cost of acquisition of the shares may be far higher. The peculiarities of Sebi take-over regulations do not make matters any easier. The firm has to, in the normal course, acquire all the shares offered. Further, the offer has to be time-bound. Revisions in prices are permitted only subject to compliance of conditions.

Another problem that MBOs involving open offers mayentail is that there could be competitive bids like a hostile take-over. Clearly, if the existing management sees the hidden value, there could be others who also do so and may wish to take advantage by offering a competitive price. In such a situation, the existing management faces the prospect of not only their attempt failing, but worse, they may lose control over the company. In any case, the acquisition price of the shares may be far higher. One should also not rule out potential "greenmailers". This term is referred to in the west to describe those persons who acquire shares of a company with an outward intent to make a hostile bid but whose real intention is to frighten the management enough to require them to buy the shares of such group at a high price. "Greenmailing" is, of course, a high risk game since such person always faces the chance of having no person to buy the shares because of either the MBO having been called off or the existing management choosing not to entertain the nuisance. Therehave been several relaxations in law permitting such activities. The restrictions on inter-corporate loans and investments have been substantially relaxed in view of the recent amendments as per the Companies (Amendment) Ordinance 1999.

Provisions in the Sebi (substantial acquisition of shares and take-overs) regulations of 1997 are very favourable to the carrying out of such MBOs. These regulations permit making of an open offer of even up to 100 per cent of the public shareholding, ie, where the public shareholding may be reduced to nil. As explained earlier, if required, repeated offers can be made at varying prices so as to ensure ultimate success. It is not necessary though to acquire all 100 per cent shares of the public. Often it happens that despite the advantages of the offer and the disadvantages of not accepting the offer, there may be a few shareholders holding a few thousand shares who may not come forward and offer their shares. While acquisition of all shares may remove any outsideinvolvement, it is not mandatory that all the shares of the public should be acquired.

Unfortunately, though the said Sebi take-over regulations permit acquisition of more than 90 per cent holding in a company and provide for application to the stock exchanges for consequent delisting, stock exchange regulations and listing requirements are far from clear or transparent as to how the delisting would be permitted. The delisting would thus not be assured and may be permitted on a case to case basis.

One would also be interested in the tax aspects of such MBOs. The tax aspects may arise in several ways. First would be the tax treatment in the hands of the shareholders who sell the shares. Clearly, they would earn capital gains (unless they hold the shares as business assets in which case there would be business income), assuming they get a price higher than their cost. They would also get the benefits of indexation of cost and lower tax rates, where the shares have been held for a period of more than oneyear. If, however, the acquisition is carried out by the company through buy-back of shares, the recent amendments made vide the Finance Act 1999 provide that the company shall not pay dividend tax on the amount paid to the shareholders through the buy-back of shares. The shareholders would have to pay tax, if applicable, on the profits made through the sale of the shares to the public. Such profits would be deemed to be capital gains.

The acquirers may incur expenses for carrying out of the MBO. The question that would arise is how such expenses would be treated - whether they would be treated as not eligible for any direct or indirect deduction, or whether they would be deductible as a loss or whether added to the cost of the assets.

While the law in this respect is not settled and much would depend on the facts of each case, there is a good case for such expenses to be allowable either as a direct deduction or by adding to the cost of the shares. Where the acquirers have taken loans to finance theacquisition, the question that may arise is whether the interest on such loans would be deductible. It would seem that in most cases the interest would be deductible.

Clearly, MBOs represent an opportunity in waiting for Indian corporates. While there are some bottlenecks which in some individual cases may present problems, generally the liberalisation measures has made MBOs speedy and cost-effective and, above all, possible.

The author is a Mumbai-based chartered accountant