The finance ministry is in favour of raising the open offer trigger limit to 25% from the current norm of 15% to help ease capital flows into companies. This is in line with the recommendations of the C Achuthan panel on the takeover code that has proposed sweeping changes in the corporate acquisition norms.
The ministry is expected to soon firm up its views on the takeover code which has received a lot of criticism from India Inc. Seeking more clarity on the draft code, R Gopalan, secretary, department of economic affairs will hold another meeting with all the stakeholders soon.
?There is a general consensus in the ministry that the open offer trigger should be increased to 25% from existing 15%,? a finance ministry official told FE asking not to be named. However, how much additional stake every investor exceeding the new trigger limit would have to pick up is yet to be decided.
As per existing regulations of market regulator SEBI, all entities who pick up 15% stake in a target company have to make an open offer to purchase an additional 20% equity in the company from the shareholders. This proposal is viewed as restrictive by the industry as it affects the ability of several acquirers to pick up larger stake in any target company.
A clarity on the code will benefit companies like Oberoi group?s EIH,a hospitality major in which Mukesh Ambani-led RIL holds 14.8% and tobacco major ITC also owns 14.98%. Oberoi is not in favour of ITC making an open offer once it reaches the trigger.
Experts also believe increasing the trigger limit will be beneficial for the industry. ?The new threshold will support capital inflows from private equity players who will now have an additional 10% stake to acquire without the added obligation of an open offer?. This will also clearly spell out the intentions of the acquirer, said, Ashwin Parekh, expert, Ernst & Young. Moreover, a higher threshold for triggering open offer is also in line with global practises. In UK, Europe and Singapore, the mandatory open offer is triggered when the acquirer?s stake reaches 30%.
A senior official in the ministry told FE ministry was also in agreement with Achuthan panel on abolishing non-compete fee. In merger and acquisition deals, a non-compete fee is paid by the acquirer to the promoters of the target company for not entering the same trade, and such payments could be as high as up to 25% of the deal value.
Although chambers are in favour of keeping the non-compete fee, the ministry is inclined to scrap it. Experts believe that non-compete fee will hurt the interest of the foreign conglomerates who are looking for Indian partner. Parekh added, ? a clause like non-compete fee can be a show-stopper for the foreign players as they have diversified interests and ventures. So this clause can be a great put off?.
In July 2010, a Securities Exchange Board of India (SEBI) appointed panel headed by former Securities Appellate Tribunal (SAT) chairman C Achuthan had presented a draft of the new takeover code proposing sweeping changes that corporate acquisition norms.
The finance ministry is expected to ask the Sebi to dilute the statutory open offer limit which has been proposed at 100% as it could make things difficult for Indian companies, especially smaller ones without the ability to raise the requisite funds.
The finance ministry earlier held consultations with the industry representatives and other stakeholders chaired by chief economic advisor Kaushik Basu on the issue. The finance ministry wanted to take the views of the industry on the revised takeover code before giving its opinion to Sebi.
Sebi was to take up the revised takeover code at the last board meeting under previous chairman CB Bhave in February, but the issue was deferred as the finance ministry wanted to have detailed discussions on the issue first. The matter is likely to come up in Sebi?s next board meeting.