Two developments this week offer glad tidings to everyone with an interest in a more robust market for corporate control in India.
On Wednesday, the Competition Commission of India (CCI), the recently empowered watchdog, cleared the bid by Reliance Industries to take control of the struggling life insurance and general insurance companies from the Bharti-AXA combine. This is the first order by the regulator on a merger and acquisition (M&A) proposal since it began vetting such deals in June. Significantly, the CCI gave its green signal within three weeks.
There was a lot of worry within the community of deal makers that the regulator had been originally given upto 210 days to vet and clear an M&A deal; the European antitrust agency has to give its clearance within 180 days. In response to these concerns, the government brought down the time limit for regulatory clearance by the CCI to 180 days as well. The CCI order offers hope that the average deal will be cleared in less than a month, instead of more than six months.
On Thursday, the Securities and Exchange Board of India (Sebi) tweaked its M&A regulations, a year after a committee headed by C. Achuthan had recommended changes to rules originally framed in 1994. The new rules will ensure that an acquirer can now buy up 25% of a target company’s equity without making an open offer to shareholders, instead of the current 15%. Once the threshold is crossed, the acquirer will have to make an open offer for another 25% of the target’s equity, rather than the current 20% and the recommendation of the Achuthan committee that the open offer should be for all the remaining equity, leaving the acquirer with full ownership of the target. The initial purchases as well as the extra 25% from the open offer will give corporate raiders a minimum 51% in the target company.
Most corporate managements in India do not face adequate pressure from either boards or shareholders or bankers or raiders. These are incentives for weak corporate governance and misallocation of capital. A more robust market for corporate control is not a magic wand against these failures -- but it is definitely part of the answer. That is why the CCI order and the new Sebi takeover regulations have to be welcomed.