Sebi panel wants takeover norms recoded

India's merger and acquisition rules are all set for a makeover, with a panel set up by the market regulator virtually rewriting the Takeover Code. The new rules, experts said, were likely to make M&As expensive, while offering better terms to minority shareholders.

The Takeover Regulations Advisory Committee under the chairmanship of C Achuthan, in its 139-page report to the Securities and Exchange Board of India, has proposed sweeping changes on critical issues, including the open offer trigger, offer size, indirect acquisitions, exemptions from open offer obligations, calculating the offer price and competing offers.

This comes nearly 16 years after the guidelines were formally notified for the first time and after 23 amendments to the last major review in 1997.

The takeover panel, formed by Sebi in September 2009, has recommended an increase in the open offer trigger from 15 per cent to 25 per cent. Further, the open offer has to be made for all the shares of the target company, instead of the current practice of an offer for acquiring an additional 20 per cent.

Analysts said the proposed rules would raise the financing required for taking over a firm, but would encourage investors taking strategic stakes in companies.

Last year, ABG and Bharati Shipyard had been locked in a six-month battle for a bigger stake in Great Offshore, with both shipbuilders revising bids several times. Minority shareholders who sold their shares, however, lost out on the final open offer at a higher price.

Rohit Berry, partner and leader of M&A practice at BMR Advisors, said given the higher financing involved, it will force reworking on some planned deals and may invite strong opposition from corporate India.

But Achuthan, who had earlier served as the presiding officer of the Securities Appellate Tribunal, said the committee thought the 20 per cent (open offer) size is not a very equitable one. "Everybody should get an opportunity to place (shares), why only 20 per cent? So, we have recommended that this offer size should be increased to 100 per cent, except in the case of voluntary offers, which can be misused to get a company delisted," he explained at a press meet on Monday.

The panel, which also had Tata Steel Ltd Chief Financial Officer (CFO) Koushik Chatterjee and Larsen & Toubro Ltd CFO Y M Deosthalee as members, concluded that since a holding level of 25 per cent permits the exercise of de facto control over a company, this could be fixed as the appropriate open offer trigger threshold in the Indian context.

The committee has also noted that the 100 per cent open offer requirement could result in an acquirer ending in holding beyond the maximum permissible non-public shareholding, which may require the acquirer to either delist or bring down his holding to meet the continuous listing requirements. The panel has recommended that the acquirer may state upfront his intention to delist if his holding in the target company were to cross the delisting threshold, pursuant to the open offer.

In the absence of any such disclosure or when the response to the open offer is below the delisting threshold, the acquirer would be required to either proportionately reduce both his acquisitions under the agreement that triggered the open offer and the acquisitions under the open offer or to bring down his holding to comply with continuous listing requirements.

This option is currently not provided under the regulations, and will provide a seamless opportunity to new acquirers for delisting.

"We have tried to make the process as seamless as possible. If it crosses 90 per cent, then the company will be automatically delisted," said Achuthan. Adding that the committee had also tried to "streamline exceptions, as there are so many (exceptions)" in the regulations.

The committee has also recommended that a short public announcement should be made by the acquirer on the date of entering in to an agreement followed by a detailed public statement within five business days thereafter. The overall timeline for an open offer has been brought down from 97 days to 57 business days.

The committee, in its attempt to enable transparent consolidation by persons already holding in excess of 25 per cent, has recommended voluntary offers of a minimum size of at least 10 per cent and a maximum size of such number of shares that would not result in any kind of breach of the maximum non-public shareholding permitted under the listing agreement. Under the existing regulations, an offer for a percentage lesser than minimum prescribed percentage can only be by shareholders holding more than 55 per cent.

The panel has also recommended that creeping acquisition be permitted only for acquirers who hold more than 25 per cent of the voting capital, subject to aggregate post-acquisition shareholding not exceeding the maximum permissible non-public shareholding. It has, however, left the annual creeping acquisition limit unchanged at five per cent.

In another recommendation that is expected to enhance the corporate governance norms, the committee has made it mandatory for the independent directors of the target company to give their recommendation on the open offer. Also, no appointment of representatives of the acquirer to the board of directors of the target company would be permitted unless the acquirer places 100 per cent of the consideration under the open offer in cash in an escrow account.

Meanwhile, any material transactions outside the ordinary course of business cannot be undertaken during the offer period without approval of shareholders of the target company.

Major changes have been proposed in the manner minimum price payable is calculated. According to the committee, the offer price would be the highest of (i) market price to be based on 12 weeks volume weighted average of market prices as against higher of weekly averages of market prices for 26 weeks or 2 weeks; (ii) a qualitative improvement and expansion in the look back provision; (iii) in the case of indirect acquisitions, ascription of value to the target company under certain circumstances.

Also, any kind of non-compete fee or control premium paid to promoters will have to be factored in while calculating the open offer price for the minority shareholders.

The committee has also recommended certain changes such as increasing the period for making a competing bid, prohibiting acquirers from being represented in the board of target company, and permitting any competing acquirer to negotiate and acquire the shares tendered to the other competing acquirer, at the same price that was offered by him to the public.