The biggest winners in the overhaul of Securities and Exchange Board of India’s takeover regulations appear to be existing promoters. This is despite the committee giving “primacy to the goal of protection of the interests of public shareholders in takeover situations”.
A key difference between India and markets such as the US and the UK is the owner-manager relationship. In India, the board is appointed and controlled by the majority shareholder. That is not the case in the US and the UK. Hewlett-Packard Co.’s then chief executive Carly Fiorina went ahead and acquired Compaq Computer Corp., with the board’s support, despite the founder’s son opposing the deal. That is unthinkable here. A chief executive who dares to oppose the promoter is usually shown the door.
This difference may not matter for shareholder returns, but it matters in a takeover battle. A good takeover should be able to protect minority shareholders, even as it encourages friendly takeovers. It should equally support hostile takeovers too, but the proposed takeover regulations may do just the opposite.
The 100% mandatory offer
The 100% mandatory open offer condition is probably the best part of the new rules but has the potential to turn into the worst.
Existing promoters control companies with stakes even lower than 51%. The report states that 27% of companies listed on the Bombay Stock Exchange have promoter stakes of less than 35%. But acquirers will be forced to buy out all shares in an offer. The cash required will balloon and may discourage merger and acquisition activity.
The counter argument, which was also the guiding principle for the report, is that all minority shareholders should get the same price as the promoter. No fault can be found with that. In a 20% public offer, shares are accepted on a proportionate basis. They can also sell in the open market, but usually at a discount to the open offer price. If the new regulations lead to a flood of acquirers, public shareholders will certainly benefit. But they may also turn into losers, if acquirers disappear, deterred by the high acquisition cost.
Delisting becomes easier
The revised regulations allow the acquirer to delist the company, if the public stake falls below 10%. At present, a delisting can be only done through a reverse book-building process, which ensures a windfall for the minority shareholder. While acquirers may like this rule, small shareholders will certainly frown at it.
No man’s land
What happens if, after an open offer, an acquirer’s shareholding crosses 75% (falling foul of the minimum public holding of 25%) but is below 90%, which does not make it eligible to automatically delist. The acquirer can lower its stake to 75%, by returning shares proportionately to the promoter and public. Thus, shareholders could find themselves at the losing end.
Brave hearts for hostile takeovers
A good takeover code should encourage hostile takeovers, especially in countries such as India. They ensure that promoters run their companies well, their shares are valued by investors, trading at healthy multiples. By keeping a 100% mandatory offer, hostile takeover attempts become difficult. In a free market, hostile takeovers help restoring assets to their real values.
The 25% trigger
While the 100% mandatory offer could benefit minority shareholders, the 25% trigger, up from 15% at present, seems to do the opposite. With a 24% stake, an acquirer can appoint directors and influence if not actually control a company’s affairs. There is no concrete definition of control, which leaves it open to interpretation and litigation. Again, an owner-determined board makes transparency in such cases difficult. There is also the possibility of an acquirer buying less than 25%, say at Rs100, and then buying the rest at Rs 80, after a year. The open offer may be made at Rs80, rather than Rs100, in that case. Promoters get special treatment. They can make a 10% voluntary open offer, without triggering an open offer. They also have the option of a creeping acquisition of 5%. They can hike their stake through a buy-back, even beyond these limits, if they have not participated in the approval process.
Here, a volume-weighted price is being introduced which is a new concept. Key will be a volume-weighted price 60 days prior to the announcement. What will happen if bulk deals have been done at prices much lower than the current market price? The existing price determinants had worked well for shareholders. If the result is that the offer price turns out to be much lower than the market price, then minority shareholders will surely feel cheated.
Was a sweeping change called for?
Was the existing takeover regulation really broken? The report states that compared with an average of 69 deals a year between 1997 and 2005, takeovers have increased to 99 a year between 2006 and 2010. That seems to indicate progress. As an emerging market, should we focus on growing the base of listed companies, or encourage acquirers to delist?
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