Markets regulator Securities and Exchange Board of India issued a press release late last week stating that its board has accepted most of the recommendations of the takeover regulations advisory committee (Trac). Which committee is it referring to? There was a committee by that name appointed by Sebi, headed by C. Achutan. But according to news reports, another committee by the same name was set up by the finance ministry to review changes to the takeover code. Both committees held consultations and submitted their recommendations to Sebi.
It appears that recommendations of both these committees have been taken on board. The regulator has gone ahead with some of the Achutan committee’s recommendations, such as the one disallowing non-compete fees for promoters. It has also increased the initial trigger for an open offer to minority shareholders, from 15% to 25%.
But Sebi has considerably diluted the recommendation of making it mandatory for companies making acquisitions to buy out all the shareholders of the target company, or in other words, make an open offer for 100% of the target company’s shares. It has decided to make a token increase in the open offer size to 26%. Needless to say, this was the main recommendation of the committee. It would have made a sweeping change to takeover regulations in India and brought them closer to international standards.
The Achutan committee had noted in its report that making offers of less than 100% gives rise to inequity. Promoter shareholders can sell their entire stake to the acquirer, but non-promoter shareholders have to be content with a partial sale of their shares if the response to the open offer is larger than the size of the open offer. The committee also noted that 100% offers are the norm in several international jurisdictions.
Also read | Mobis Philipose’s earlier columns
Most Indian companies that have made overseas acquisitions have had to acquire the entire shareholding of the target company. The committee concluded that “there is a very strong case for allowing all public shareholders to obtain a complete exit whenever an open offer is made.” It added that this recommendation “is based on several aspects including sound conceptual underpinnings, international best practices and feedback from the public.”
Achutan is a former presiding officer of the Securities Appellate Tribunal and his committee included 11 other members including representatives from leading investment banks, large companies, law firms, an investor association, an academician and executives from Sebi. Apart from its own deliberations, the committee relied on feedback from the public before making its recommendations. It’s not that all recommendations of all committees are to be always implemented; but considering that Trac had done its homework and given good reasoning for its recommendations, one would imagine that Sebi had good reasons to overrule the one on the open offer size.
Sebi chairman U.K. Sinha has said 100% offers would give overseas acquirers advantage over domestic companies, given the absence of acquisition finance in the country. It’s important to note that the Achutan committee has acknowledged these concerns and said that “the philosophy of equitable and fair treatment of all shareholders should have a primacy over other considerations.”
It should not be forgotten here that the decision to dilute the committee’s main recommendation may not have been taken at Sebi at all. News reports earlier this year said that the finance ministry held consultations on the takeover code with stakeholders, including industry associations. One report by the Press Trust of India even said that the ministry will finalize the changes in the takeover code, and that once it clears the amendments, it is likely to be cleared by Sebi in its next board meeting. Ironically, the committee set up by the finance ministry to review these changes, chaired by chief economic adviser Kaushik Basu, was called takeover regulations advisory committee. The reports also said the finance ministry was coming to a view that 100% offers would make acquisitions expensive, and this recommendation should be reviewed.
Going by these new reports, it does look like Sebi had two committee reports to consider. Of course, we don’t know if the second committee submitted a report, but its recommendations seem to have carried more weight. As mentioned earlier in this column, this works against the autonomy of Sebi, which was established as an independent regulator around 20 years ago.
The first committee took feedback from the public before making its recommendations. Its report was then put out for public comments by Sebi. For the finance ministry to step in and say that we will hold fresh consultations with stakeholders is a farce.
In the process, an opportunity to make India’s takeover regulations fair and equitable and bring them closer to international standards has been squandered.
Illustration by Shyamal Banerjee/Mint
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