The stock market boom of 2003-07 marked a dynamic shift in the attitude of Indian promoters towards the exit from a family-run business. Not even a decade ago, India promoters would shy away from an exit call, but the last few years witnessed several promoter buyouts of Indian listed companies by foreign or large Indian players seeking to consolidate market position.
Indian promoters are, generally, hands-on when it comes to running (and not just managing) the business. They are often a repertoire of valuable high-end technical/commercial expertise or sensitive business data (clients, trade data, etc.), essential to run the company. So, to protect the interests of the target company upon their exit, the acquirer would impose a negative covenant on outgoing promoters to carry out similar business. Commercially, this translates into a non-compete payment to the promoter over and above the agreed purchase price of the shares being acquired.
While the commercial rationale cannot be doubted, non-compete payments have been a matter of debate, under both the Securities and Exchange Board of India’s (Sebi) takeover code and the Income-tax Act. Recently, the issue came up for consideration before the Securities Appellate Tribunal (SAT) in Tata Tea’s case in a 15 September ruling.
The SAT ruling dealt with the acquisition of 24.15% equity by Tata Tea (the acquirer) in Mount Everest Mineral Water Ltd (the target). As part of this, the acquirer also made a non-compete payment to the outgoing promoters of about Rs3 crore (less than 25% of the purchase price) over and above the purchase price of Rs150 per share. The acquisition (more than 15%) triggered an open offer under the takeover code. The key issue for evaluation was whether the non-compete component paid to the promoters should be factored in to calculate the offer price payable to the target shareholders under the open offer.
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The Takeover Code [Regulation 20(8)] provides that where the non-compete fee payment exceeds 25% of the offer price, the excess thereof would be added to the offer price paid to the target shareholders under the open offer. This clause was inserted by a 2002 amendment made on the recommendation of the Bhagwati committee.
SAT observed that the Bhagwati committee report clearly recognizes the legitimacy of non-compete payment to outgoing promoters, and specific provisions are also introduced in the code to deal with this. Given that the non-compete payment was well within the 25% benchmark provided under the specific legislative framework, SAT held that Sebi has a limited role to play.