Mumbai: India’s mergers and acquisitions (M&A) landscape is set for a transformation in 2011 as the capital market regulator is likely to approve most of the changes recommended by a committee.
A senior official at the Securities and Exchange Board of India (Sebi) told Mint that the regulator was likely to clear all the major suggestions made by the panel at its forthcoming October-end board meeting.
“We are planning to fix a cut-off date after which the companies would be required to follow the new guidelines,” said the Sebi official. “There is a possibility that the new guidelines will be applicable from April 2011. The rules will be applicable on a prospective basis. While the new law will take effect once it is notified in the gazette, the cut-off can be even fixed at a later date.”
The proposed acquisition of a controlling stake in Cairn India Ltd by Vedanta Resources Plc is, however, likely to be covered by the existing regulations, according to the first Sebi official cited above.
The regulator is seeking broadbased agreement on the changes. “We have received very positive feedback on the recommendations. Before clearing any proposal, Sebi tries to build a consensus,” said the Sebi official on condition of anonymity.
Another Sebi official said: “We have received a lot of responses and we are in the process of tabulating them. From the?general feedback, the sense is that a lot of responses are in relation to the 100% open offer.” The report had sought public feedback till 31 August.
In September last year, the regulator had set up a 12-member panel chaired by C. Achuthan, former chief of the Securities Appellate Tribunal, to review the 13-year-old takeover regulations in order to synchronize them with global standards. This July, the panel submitted its report, proposing major changes.
These include a rise in the open offer trigger to 25% from 15% and a recommendation that acquirer companies make an open offer for the entire remaining stake.
At present, the acquirer company needs to make an open offer for a minimum 20% additional stake of the target firm after reaching the 15% threshold. Making an offer for 20% often leaves out many minority shareholders after a few large shareholders tender their stock in the open offer. The panel was of the view that all shareholders should get an equal opportunity.
A senior corporate lawyer with J Sagar Associates, a Mumbai-based law firm, said: “Accepting all the recommendations may not be in the interest of the market. A number of suggestions like hiking the open offer trigger to 25% are blindly copied from other countries. While people are supporting this as being in line with global standards, Indian realities are different. Over 90% of Indian companies are promoter-driven. And the average promoter holding is 35-45%. Allowing outsiders to hold 25% can be destabilizing for promoters.” The lawyer declined to be named as the recommendations haven’t been cleared by the regulator.
So far, there have been 74 applications filed with Sebi for takeovers this year. It hasn’t been clear yet when Sebi will announce the final guidelines and whether all the recommendations will be accepted.
The Dow Jones news wire cited Achuthan on Monday as saying, “Sebi will likely announce new takeover rules by the end of 2010.”
In order to remove the ambiguities surrounding indirect acquisitions, the panel has also recommended some sweeping changes. Indirect acquisitions are those in which the acquirer firm (regulated outside India) takes over a locally listed entity through one of its subsidiaries. In one such case, Anil Agarwal-controlled Vedanta Resources has bid for acquiring a majority control in oil and gas firm Cairn India. On 16 August, Cairn Energy Plc announced that it would sell 40-51% in Cairn India to Vedanta for a maximum consideration of $9.6 billion (around Rs 43,780 crore today). Its offer of Rs 405 per share included non-compete fees of Rs 50. The stake sale will be followed by an open offer for up to 20% more of Cairn India’s equity at Rs 355 per share. Some analysts had criticized the valuation of the deal, saying that it may put retail investors in Cairn India at a disadvantage.
The proposed guidelines would have taken care of such issues.
“In keeping with the spirit of equal treatment for all shareholders, and the scope for use of non-compete payments, the takeover regulations ought to be explicit that consideration paid for the shares in any form to the selling shareholder and his affiliates...must be added to the negotiated price per share for the purpose of determining open offer pricing,” according to the panel’s report.
The recommendations will make acquisitions more expensive because of the open offer rule.
The panel has also suggested a new method to decide the price at which shareholders can tender their shares in an open offer, a move that could benefit all who want to sell their holdings to an acquirer.
The new 25% threshold will bring Indian rules close to the norm in some developed markets such as the UK, where open offers are triggered once the shareholding crosses 30%.
In case of voluntary open offers, when an entity already holds more than 25%, the open offer size has been proposed at a minimum 10%. If the entity wants to increase its voting rights without making an open offer, it can do so by acquiring up to 5% in the target firm in a given fiscal year. Under the existing rules, such offers can be made only by shareholders holding more than 55%. However, such voluntary open offers will not be allowed for an acquirer that has bought shares in the target firm in the preceding 52 weeks.
In case of indirect acquisitions, the offer price will stand increased at the rate of 10% per annum, estimated on a pro rata basis for the period from the date of announcement of the primary transaction. All open offers, under normal circumstances, have to be completed within 57 business days from the date of announcement.