Minority shareholders have largely benefited as a result of the existing takeover regulations in India. Now that the Securities and Exchange Board of India (Sebi) is reviewing these regulations, it must thus ensure that, while rectifying deficiencies that hinder merger and acquisition (M&A) activity, the rights of retail investors are not diluted.
One of the key rules that may be up for review is the trigger limit for making an open offer. Acquirers have apparently complained that 15% is too low a threshold limit, citing that the limit in other countries is higher at 20-30%. The 15% limit was relevant a decade ago, when many large companies were controlled by promoters with relatively smaller stakes. Most of the new listings have promoters owning a much higher stake and this can be seen from the average public float. The government itself is mulling a proposal to hike the minimum public holding to 25%, stating that the average public float in many companies was barely 15%. By that logic, a higher open offer limit may be justified. But the question is how high the limit should be. Some big companies including those in the Tata group are still controlled with relatively small promoter holdings. In these companies, acquisition of a 30% stake is as good as a change of control.
Perhaps there needs to be a review of cases of global acquisitions and their impact on Indian subsidiaries, since there is a clear change of management control. The issue here is determining the offer price. There needs to be clarity on the time frame, which should to be used to determine the offer price—whether it should be based on when the global takeover was announced or when it was completed. Another is whether there was any specific price attributed to the Indian subsidiary in the global sale. The rules need to be tightened here and the process made more transparent. There is a trend for global M&A to be done through a scheme of arrangement, which is exempted from the takeover regulations. At times, these schemes are just acquisitions structured as mergers, and even involve a cash offer made to shareholders. This exemption needs to be reviewed too.
Similarly, in some cases such as when Vovlo purchased Eicher’s commercial vehicles business and Mahindra and Mahindra Ltd purchased Kinetic Motors’ two-wheeler business, these were done by hiving-off the main business activity and then selling it, rather than the normal process of acquiring the whole company. In these cases, although the management control changed an open offer was not triggered. The new takeover code should address such loopholes.
But the most important change could be a complete rewriting of the regulations, consolidating the various changes over the years. A tightly written and well drafted set of rules could make life easier for shareholders and acquirers. Lastly, the open offer process is prone to several procedural delays. While amending the regulations is a good move, Sebi could undertake to streamline the procedures, just as it has done for public issues.
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