Sebi should ease M&A, delisting norms, say market participants
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Five years after the new takeover rules came into force, it is time for more steps from the regulator to smoothen the merger and acquisition process, market participants said.
On the wishlist: integrating the delisting guidelines and public shareholding norms with the takeover code; relaxing the creeping acquisition norms for majority stakeholders; and shortening the overall takeover timeline.
In 2011, the Securities and Exchange Board of India (Sebi), tweaked takeover norms on the recommendations of a committee. It rationalized the definition of control for listed entities and said that a company can acquire up to 25% in a firm without requiring to make an open offer. Earlier, the open offer threshold was 15%, which often discouraged private equity and venture capital firms from increasing their holdings in domestic firms.
The new takeover code also raised the open offer size to a minimum 26% from 20% earlier to give an exit for more investors. Earlier, any entity acquiring more than 15% in a listed firm was required to make an open offer for at least 20% shares from shareholders to take control of management.
“What still remains to be done is an integration of delisting guidelines and the takeover code,” said Apurva Shah, managing director of the investment banking coverage and advisory at Deutsche Bank India.
Today, if an acquirer’s holding crosses 75% in a company as a result of an open offer (without the intent to delist) it has to sell shares to bring down ownership to 75% to comply with the public holding norms.
On the other hand, if an acquisition is done with an intention to delist, the buyer has to first make an open offer. If, after the open offer, its shareholding crosses 90% (the delisting threshold), it has to make another offer to acquire the majority of the remaining minority shareholding for a successful delisting. If that doesn’t happen, then the buyer again has to scale back its ownership to 75%.
The two processes (open offer and delisting) have not been reconciled and this has resulted in only lengthening the period of uncertainty over a public transaction that would attempt to delist the listed company in one go, said corporate lawyer Somasekhar Sundaresan.
“Ideally, the code should have an option under which an acquirer can make a tender offer to acquire the entire minority. If the acquirer crosses 90%, he should be allowed to delist the target automatically,” said Shah of Deutsche Bank.
On the other hand, if the tender offer doesn’t cross the delisting threshold, then the buyer should be able to cap his purchases under the open offer at 75%, said Shah.
“This is an important nudge that the law must introduce to give specific clarity to acquirers around the world, including India. Else, buying out an Indian listed company has become the most complicated exercise anywhere in the world,” Sundaresan said.
Also, Sundaresan feels Sebi should do away with the artificial open offer size of 26%.
“This is clumsy, unwieldy and creates enormous administrative hassles for the acquirers and for Sebi,” he said.
“For example, one has to police who is in and who is out for eligibility to tender in response to the open offer only because the law currently creates an artificial quota of 26% as the offer size. One has to police whether shares may be sold when an offer is on, one has to police whether a person acting in concert may tender shares, one has to create varying minimum sizes of competing bids. All of this is wholly unnecessary and complicated.”
Another key area that requires streamlining is creeping acquisitions. Under current norms, an acquirer holding more than 25% but less than 75% can only buy up to an additional 5% of shares in any fiscal year without making an open offer.
This norm, according to market experts, should be relaxed by Sebi.
“An open offer under creeping acquisitions may be done away with once the holding is above 50%. A trigger of an open offer for a person who already has a majority stake and control over all operational decisions (that would give a clear control over all ordinary resolutions under company law) does not make economic sense,” Sundaresan said.
Another challenge for Sebi is to shorten the open offer timeline.
“Today, it takes about three to four months for an open offer cycle to get concluded. A gradual enhancement in the e-tendering technology has already started, which should further facilitate shareholder participation as well as bring down the time taken to complete the post-offer processes,” Shah said.
However, some market experts have a different opinion.
“Theoretically, if every single player sticks to timeline (most importantly, Sebi giving its observations within the stipulated time frame) a takeover can be completed in 55 business days. Sebi’s record in clearing offer documents has materially improved in recent times. We have seen anecdotal evidence of offers being cleared within a month,” Sundaresan said.
“However, when an offer price revision is involved, the system breaks down and the entire offer gets held up in litigation,” he added.