Minority investors own a sliver of a company’s equity, but make promoters wealthy by turning their holdings liquid and valuable compared with an unlisted entity. This fact is often forgotten while debating issues affecting shareholders. An overhaul of the takeover regulations by market regulator Securities and Exchange Board of India, or Sebi, which may see the 15% open offer trigger being hiked, is one of them. Minority investors run the risk of getting a raw deal in the process.
The need for revising the open offer limit from 15% apparently stems from higher limits in other countries, of up to 30%. Also, low promoter holdings in the 1990s necessitated a lower threshold, which is no longer the case. The current limit is based on the recommend- ations of the justice P.N. Bhagwati committee report of 1997. This report also said that comparing procedures, regulations and quantitative limits in different countries to set rules for India would be meaningless.
That reasoning holds good even today.
Consider this: The threshold for an open offer was 25% under the listing agreement, before the takeover regulations became law in 1994. But the Bhagwati committee report mentions that acquirers would keep their stake at just below 25%, and still control a company without making an open offer. That’s why a lower limit was fixed. If the 25% limit was misused in the 1990s, what is the assurance that it will not happen again? Even under the current regulations, there were cases where promoters acquired a stake just below 15% and then subsequently hiked their holdings at lower prices than their initial purchases.
Another approach is to examine if the existing threshold is hindering mergers and acquisitions (M&As). That would give just ground for a revision. Friendly acquisitions do not face issues except where the promoter has a very low stake. In hostile takeovers, a higher threshold is seen as being useful. The argument is that after 15%, the 20% mandatory open offer yields only a 35% stake, not enough to control a company. In both cases, the acquirer is free to make an open offer for a higher stake. The 20% limit is the minimum level. So an acquirer with a 15% stake can offer to buy a 36% stake too, to get a 51% majority stake. But another complication presents itself here. A target company’s share price often rises far above the offer price after the acquisition is announced. As a result, the open offer gets a poor response. The acquirer still has the option of adopting the creeping acquisition route, but that is a slow process. What will work is a sufficiently higher offer price, but that will increase the acquisition cost for the acquirer.
That is perhaps the crux of the issue. Under the current takeover regulation, the balance is tilted in favour of minority shareholders. A revision in the threshold will strengthen the position of the acquirer and possibly lower the acquisition cost. An acquirer can get a significant stake without making an open offer. But the minority shareholder loses. A secondary market exit is an option, if the share price rises on a strategic investor buying a sizeable stake. But in the absence of an open offer, the gains may be relatively lower. Minority shareholders may thus see their benefits from an M&A announcement diminish.
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