Mumbai: Chairman of the takeover regulations advisory committee, C. Achuthan , explains the rationale behind the changes suggested and their impact. Edited excerpts:
What are the key pro-investor moves in this new code?
The material benefit is 100% public offer. Under the existing norms, when an acquirer buys a large block of shares, say 30% from a single investor, the seller gets a complete exit. However, since the public offer is only 20%, other shareholders may not get full exit. We propose that everybody should get (an) exit route. Now, there is only one price and there’s no question of icing. Any control premium or non-compete fees need to be added to this. If you want to pay non-compete fee, you factor it into the acquisition price—straightaway.
We have also made the fairness opinion by independent directors mandatory. The management of the target company is in the best position to determine whether the price offered is right or not. On the management side, we have suggested that during pendency of uncertain takeovers, there shouldn’t be uncertainty in management of the company such as appointment of directors.
You have also provided for immediate disclosures of takeover moves.
That was important. Otherwise, if some smart people come to know about the acquisition, the share price will shoot up. We have taken care of that. It’s not cumbersome. There are few items that need to be disclosed and the price is frozen on that date for the purpose of the offer.
What are the key changes on indirect acquisitions, caused by takeover of a parent company?
Earlier, there were two dates and a lot of confusion. Now we have only the date on which the parent company is taken over. That will be the trigger and the price will be as on that date. However, if the subsidiary waits for the transaction to consummate and then makes the announcement (for open offer), it has to compensate the shareholders for the notional loss incurred due to the delay in payment—the interest that they would have earned in a bank fixed deposit.
Did you consult foreign investors?
We didn’t personally contact anyone, but had given an open-ended invitation. We got a lot of responses. We were particular to finish it in one year. It would have been over earlier had we gone suo motu.
How many companies responded?
I am not sure of the exact number. Around 70-80 companies must have responded. Some companies sent detailed responses, others sent in brief responses in one page.
What is the logic of raising the threshold for the open offer trigger to 25%?
We are talking about substantial acquisition of shares. In 1994, 10% was considered substantial. Today, this is not the case. We did some studies and found the promoter holdings in Indian firms, if you take mean and median, are 48.5% and 50%. The companies with less than 15% promoter holding are hardly seven or eight.
Why not more than 25%?
There were suggestions for 30%, 33% and so on. We had a rationale—25% is (critical) in special resolution. (Any shareholder with more than 25% holding can block a special resolution under company law.) As long as you have 25%, you have a substantial say in the affairs of the companies.
How exactly is the new definition of control different from the earlier one?
The difference is the addition of the word “ability”. You can’t have scientific definition; it can only be fact-based. If you are going to a financier, there won’t be any formal agreement, but he may insist that his person will be the managing director or CFO (chief financial officer). (This means he has the ability without having a right.)
I gave a practical example. There are several ways of doing it.
How do you enforce this ability to control?
It is purely on the conduct of the parties.
Is this targeted at the private equity funds?
We are not targeting any particular buyer or seller. In fact, the private equity players are benefited. In the existing norms, if they cross 15%, they were treated as acquirers. Now they are benefited by the change.
There are instances where listed entities hive off critical businesses and then sell them. Does the code cover such issues?
If a business is hived off to a listed entity, the takeover regulations will apply. If that particular business is hived off to a private company, then there is no problem. The takeover regulations apply only to listed companies.