It?s been some time in the making, but the new takeover code holds some promise; promoters can no longer hope to sleep too well at night if they have too small a holding in their businesses. Moreover, they would be forced to consistently look for ways to create value and, to that extent, the new regulations augur well for minority shareholders. For sure, the code cannot really catalyse M&A activity because that would be driven more by the state of finances of prospective buyers and sellers and their views on valuations as also the dynamics in a particular industry.
However, it?s possible that investors would pick up a stake just short of 25% and not make an open offer, since by raising the threshold for making a mandatory open offer to 25% from the earlier 15%, Sebi has made it possible for someone to acquire de facto negative control with a 25% stake. Although these investors cannot block a resolution, they will play a crucial role if all other shareholders do not vote.
Indeed, there could be several transactions where investors pick up a stake but do not make an open offer and, in such cases, minority shareholders will not benefit. However, managements will be kept on their toes. Nonetheless, the new rules have paved the way for companies to access funds more easily. They can now tap private equity (PE) players, many of whom have the resources but have not been able to invest as much as they may have wanted to, especially in mid-sized and small firms.
Equally important, the new code can help improve corporate governance, something that?s missing across a large swathe of Indian companies. Larger shareholders, especially PE players, who can now pick up to 25% of the equity of a company without triggering an open offer, will be able to assert themselves and can make life difficult for errant promoters. It?s not that Indian companies haven?t had institutional shareholders on their boards in the past?investors like LIC and UTI have been around for decades but they haven?t really been vigilant enough despite the enormous clout that they wielded. More often than not, they have been loathe to disturb the existing management and have played a passive role. Moreover, we haven?t seen any shareholder activism from mutual funds who, although they hold relatively small stakes, could have drawn attention to any misbehaviour. With the new rules in place, a clutch of investors could together keep managements from indulging in any undesirable activity.
However, it shouldn?t happen that larger investors pursue their own interests and end up being in cahoots with managements rather than acting against the interests of smaller shareholders. There are several companies?some of them among India?s largest and most valuable firms?where promoter holdings are below the average of 40% and Sebi must watch out for mischief makers because we can do without them harassing sincere managements.
One disturbing trend that has surfaced of late is one in which promoters are selling off businesses, rather than their controlling interests, so that the buyer is not compelled to make an open offer. JB Chemicals & Pharmaceuticals, for instance, sold its OTC business in Russia to Johnson & Johnson for about R1,170 crore while Smartlink Network sold its ?Digilink? business to Schneider for R503 crore in cash. In mid-April, Kanoria Chemicals sold its chloro chemicals division, including 900 acres of leasehold land, to a subsidiary of Hindalco for R830 crore. The businesses sold contributed a fairly large chunk to the total revenues of the companies and so were material to the balance sheet. So, although there is a code in place, the capital markets regulator cannot let its guard down.
In fact, although there are those who feel otherwise, Sebi has done the right thing in disregarding the Takeover Regulation Advisory Committee?s recommendation on the mandatory 100% open offer because it?s a fact that companies don?t have easy access to funding for mergers and acquisitions (M&A) just yet.
Making a 100% open offer compulsory for the acquirer would only have protected inefficient promoters and given foreign companies an advantage over Indian firms. M&A activity creates value for shareholders and lawmakers need to create an environment for it. Moreover, a 100% mandatory offer would also have come in the way of genuine M&A activity; for instance, there could be a case where a promoter, for some reason, wants to sell out but is not able to find a buyer who has the financial wherewithal to make a 100% offer. There could also be smaller companies that are available for sale, which may not be large enough to interest a foreign buyer, but would have been unaffordable for a local buyer too if a 100% open offer had been mandatory. In any case, empirical evidence doesn?t support a 100% open offer?of the 400-odd takeovers, in the last five years, only 40 saw a response of over 10%. Once banks start financing M&A deals, the rules could be reframed gradually, increasing the quantum of the open offer to 100%, in line with international practices.
Sebi has chosen to do away with the non-compete fee so that small shareholders will now be entitled to the same price that has been paid to the promoters. It?s possible this could lead to a drop in the reported value of the transaction so that minority shareholders end up getting a lower price for their shares and the promoters are compensated by some other means. That is clearly not desirable and hopefully both buyers and sellers will desist from doing deals at lower than the fair value.
shobhana.subramanian@expressindia.com
