Taking over companies in India hasn?t been too difficult a task in the past; at around 100 takeovers a year in the last five years, the number isn?t small. But now a potential acquirer will have to pick up the entire quantum of remaining shares, and not just a minimum of 20% of the equity of the company from the other shareholders, once the trigger of 25% kicks in. This will make buying out companies that much more expensive, thus only those with deep pockets will venture to do so. This could also benefit incompetent promoters whose shares may be undervalued because they need not fear a takeover threat as much as they might have earlier. Payments that are ?non-cash? in nature, like share swaps, are being talked about and some are already allowed, but it could be a while before they become popular. Obviously, acquirers would be happier if they had to buy less than 100%; in the last four years, only in less than 15% of the open offers did the acquirer offer to buy more than the mandatory 20%. Globally, the trend has been such that acquirers do agree to buy out all remaining shares.

Small shareholders will certainly benefit as they will be able to sell all their shares rather than just some. The case of Japanese drug major Daiichi Sankyo buying out Ranbaxy, when the promoters managed to cash out big time but small shareholders were able to sell about a third of their shares, is fresh in everyone?s mind. Only, it shouldn?t happen that there are fewer takeovers so that even the few shareholders who were able to cash out lose out. Clearly, banks should be allowed to come forth to help with M&A funding, because otherwise foreign buyers may be at an advantage vis-?-vis their Indian acquirers, given the access to leverage in their home markets. The committee that has revisited the Substantial Acquisition of Shares and Takeovers Regulations, 1997, has done a good job by making delisting seamless if an acquirer is able to access 90% of the target company?s shares, provided he makes clear his intention to delist beforehand.

An increase in the acquisition trigger from the current 15% was always on the cards; before 1997 this limit was 10% but in those days promoters were able to control their companies with smaller stakes. Today, the mean and median of promoter shareholdings in listed companies are at 48.9% and 50.5% of the total equity capital and the number of companies that are controlled by promoters holding 15% or less is less than 8.4%. So the 15% limit has clearly outlived its utility and the committee has come up with a trigger level of 25%, which is in sync with other regulations governing corporates. At this level, the potential acquirer can exercise de facto ?positive control? over a company; this is in keeping with the fact that promoters who own voting rights in excess of 25% can exercise effective control, according to the Companies Act, since they can block a special resolution. The 25% threshold is not too far away from the levels in countries like the UK, for instance, where it is 30%, while for the EU, Singapore and Hong Kong, it is in the range of 30-35%. A higher limit will also give companies a little more headroom to access capital, from say a private equity fund without the latter having to make an open offer. In times when the capital market may not be supportive, promoters may well want to offload stakes to other investors. So, a higher threshold will assist capital raising. While there were expectations that this trigger limit may be higher, what the committee has done is to allow promoters who already have a stake of 25% to continue to make a creeping acquisition of up to 5% a year, without making an open offer up to the maximum permissible non-public shareholding limit or 75%. That gives the promoters the flexibility to beef up their stake in the company, over a period of time.

Ideally, the market price should not form part of the criteria to decide the open offer price since the price negotiated between the buyer and the seller is the best indicator. However, the committee has decided that although the market price may not always be relevant, it should be retained for some more time as one of the criteria used to determine the offer price. The committee has, however, tweaked the rules to try and ensure that the market price of the shares in question cannot be manipulated by suggesting the use of a volume-weighted average price for the last 60 days, instead of the average of the weekly highs and lows for 26 weeks. Clearly, it would be more expensive to tamper with prices because the volume will now be taken into consideration. All in all, any buyout will become more expensive for acquirers now because the open offer will also have to take into account any non-compete fee that they pay to the seller.

shobhana.subramanian@expressindia.com