With increased complexities and challenges facing corporates world-over, the regulatory environment across jurisdictions has been facing ?catch up? especially over the past few decades. Regulators, the world over, are concerned about transparency and corporate governance while at the same time working overtime for providing laws that facilitate competition and encourage investment.

Regulators in India are no exception and have also felt the need to be up-to-speed to meet the growing and diverse needs of corporates while at the same time have ?teeth? for malpractices. That explains the current plethora of new legislation spanning a proposed new company law, a new direct tax code, introduction of GST, competition (anti-trust) law, amongst others. Including a new Takeover Code which has been debated over more than two years.

Constituted in September 2009, the Achuthan Committee was set up by Sebi to review the Takeover Code regulation. The committee submitted its report to Sebi in July 2010 and after incorporating public comments Sebi has notified the new Takeover regulations on September 23, 2011.

The new regulation is indeed a path breaking legislation which is likely to change the landscape of corporate India in the near future. Some of the key amendments in the new code are as under:

New thresholds for attracting public offer (15% to 25%) ?a game changer

The Initial threshold limit for triggering open offer has been increased from 15% to 25% of voting rights of the Target Company. This is a significant development and is clearly a liberalization exercise. The impact of the above amendment can be quite significant:

With the increased limit, the level of activity in listed companies by PE?s/ strategic investors will increase to more material stakes (up to 24.99%). Also, ?head room? for foreign technical collaborators / minority foreign partners to increase their shareholding without triggering cumbersome and costly takeover regulations will increase. Companies would be able to raise expansion capital in a more cost effective manner (ie without triggering open offer till 25% stake);

For the economy, more investment from PE/ foreign partners should be expected in the coming months, which should give a fillip to FDI numbers which have been languishing in the recent past;

With a 24.99% threshold limit, the acquirers would be able to block special resolutions in target companies with relative ease. Let us assume a promoter who holds 45% stake in the target company. If a hostile acquirer were to reach 24.99%, such acquirer can effectively have ~ 35% voting right (24.99/(24.99+45)) and therefore can easily block special resolutions (assuming that the participation by minority public shareholders either in physical meeting or postal ballot is negligible (which is invariably the case)).

Further, with the possibility of acquiring 24.99% without triggering open offer, acquirers would practically be able to get a Board position in target-company and therefore having a greater say in the company?s operations.

The role of minority public shareholders holding significant stake (say 1-5%) would also increase. Strategic long-term acquirers can easily acquire up to 24.99% and then negotiate with these significant minority shareholders to consolidate their shareholding / trigger open offer for takeover of the target companies. Expect off-market transactions at higher than market valuations for such strategic buy-outs to rise.

The new threshold of 25% applies from October 22, 2011 ? this provides a small window of opportunity for promoters of companies in which their holding is more than 20% but less than 25% to increase their shareholding to 25% or more by October 22, 2011 (through creeping acquisition of up to 5%) so that they are not forced to make a public offer when their stake increases to 25% subsequently. Even if the promoter has more than 25% stake, they may seek to consolidate their holding by 5% through creeping acquisition route with a view to strengthening their position in the Company.

Similarly, with the market indices/ stock prices pegged low due to the international market scenario and also local factors, strategic/ long term players may be inclined to ramp up shareholding in value stocks with an intention of having a material and influential stake in such companies in the future. Until October 22, they can ramp up to 15% (the old limit) and further increase it to 24.99% post October 22 without triggering open offer requirements.

In light of the above, expect some serious action in stocks of such companies in the coming weeks.

This one step of increasing the open offer threshold limit to 25% is a significant development and changes the landscape for promoters significantly. There is likely to be a war for retaining/ takeover of good companies (especially with the market multiples currently being really attractive) and promoters with low shareholding and high public float should be worried.

Increase of creeping acquisition range from 15-55% to 25-75% ? 5% limit for creeping acquisition remains same

The new regulation on creeping acquisition is simpler as compared to the earlier regulation (which was available in the 15-55% bracket and a ?one-time? increase of 5% only through stock exchanges beyond 55%).

The new regulation will facilitate consolidation of promoter shareholding to the maximum permissible level ie 75% which was a challenge in the earlier regulation.

This would be welcome move for the Promoters who will have more flexibility to bump-up their shareholding. However, the reduction of ?public float? due to this measure and consequential impact on trading volumes/ reflection of real ?market? price of such scrips on bourses would need to be watched.

Facilitating consolidation through increase in Offer Size from 20% to 26% and also introduction of concept of voluntary offer (ie open offer for minimum 10% stake)

n Under the earlier regulation, the open offer requirement was 20% and therefore, simply speaking, on acquisition of 15% stake in the target company, the acquirer could at best reach 35% (well below the simple majority).

Now with the increase in the initial threshold to 25% and the increase in open offer size to 26%, there is a possibility of the acquirer getting simple majority (25% + 26%). This would be welcome for M&A transactions because there is significant comfort that acquirers get when they hold more than 50% stake directly and therefore do not need to depend on other shareholders for passing simple corporate law resolutions.

n With a view to facilitate consolidation of holdings in excess of 5% (creeping acquisition) by substantial shareholders, the concept of voluntary offer for 10% stake has been introduced. This will provide flexibility to substantial shareholders (holding 25% or more) to increase their shareholding (of course by following the process of open offer) without being an obligation to make the offer for additional 26% stake thereby reducing the overall outflow from such consolidation.

Of course, at a practical level, the experience in open offers has been that the public does not fully subscribe to such public offers. Therefore, practically, time will tell in how many cases the 26% limit (or 10% in case of voluntary offer) would be reached. However, the fact that the regulatory mechanism has been enabled is commendable.

In case the public offer results in public shareholding falling below 25%, then the acquirer is obligated to reduce his shareholding so that the minimum 25% public float is maintained.

The writer is partner, BMR Advisors