New norms could raise financing cost of acquisitions

The Sebi-appointed panel’s proposal to end the practice of paying any non-compete fee to promoters would raise the financing cost of acquisitions and could reduce the number of deals.

The panel wants the fee to be part of the negotiated share price. Currently, non-compete fee or control premium is paid to large-selling shareholders outside the share price.

?Minority shareholders will get an opportunity to exit, but acquisition costs can go up by three-fold. Acquirers would have to reconsider their financing arrangements,? said Rohit Berry, partner and leader of M&A practice, BMR Advisors.

?It will force reworking on some planned deals and we can expect strong opposition from corporate India,? he added.

?The Committee felt that there was strong merit in the view that non-compete fee, if any, should accrue to the company and not to one group of shareholders (such as the large-selling shareholders) as this is in the nature of compensation for loss of potential value on account of opportunity sacrificed,? the report said. ?The Committee also recommends that the clause relating to non-compete fee be deleted from the Takeover Regulations, and any consideration paid in any form inclusive of all ancillary and collateral agreements shall form part of the negotiated price,? the TRAC said.

This recommendation is largely in line with the committee’s intention to offer equitable terms to minority shareholders in the event of a takeover.

?The suggestion that there should not be any non-compete fees paid to the promoters by the acquirers is commendable. It will bring-in transparency in structuring of M&As and PE deals, and align interests of promoters and the minority shareholders,? said Jagannadham Thunuguntla, equity head, SMC Capitals.

The panel has also proposed that regardless of the level of shareholding and acquisition of shares, control over a target company would require the acquirer to make an open offer.

?The proposed changes will benefit investors who want to make a sizeable investment in a target company but do not want to control it or run its daily operations? said Anil Saxena, Group CFO, Religare Enterprises.