For a more equitable takeover code

For a more equitable takeover code

Should open offers be required for part or whole of the public shareholding of a company? Why should only promoters be allowed to sell all their shares at the high open offer price? The Achuthan committee, in recommending a revision of the Securities and Exchange Board of India’s (Sebi) takeover regulations, suggested that this 13-year-old inequity be corrected. Thus, even the public should be entitled to sell their full shareholding at the offer price—which is often at a premium over the ruling market price. Yet Sebi, which postponed a decision late last month, seems to be finding it difficult to make up its mind on the matter.

Since the release of these recommendations, an almost one-sided debate has started as to how this requirement would hurt the acquirers. First, it is said that this would make takeovers expensive. Second, foreign acquirers would get an edge because they have better access to finance for takeovers, and with lesser conditions in comparison with Indian acquirers. The voice of the scattered and small public shareholders who have suffered this discrimination is wholly lost in this. The irony is that most recommendations the committee received were in favour of stopping this discriminatory treatment. And the committee’s recommendations were also made after noting that Indian law was an exception compared with several other countries that treated all shareholders alike.

Let us consider an example. An acquirer buys, say, all of the 40% holding of the existing promoters. Regulations require that only 20% of the capital, i.e., one-third of the 60% public shareholding, is required to be acquired through the open offer. There is no logic why the promoters’ shares are treated as more equal than that of the public shareholders. One must recollect that almost as a rule, open offers are likely to be made at a price higher than the ruling market price. Clearly, the promoters are able to sell not only their full shareholding, but they also do so at a much higher price. The public shareholder suffers silently.

Public shareholders already have something to be bitter about—that the acquirer can pay up to 25% as a non-compete fee exclusively to the promoters. This differential treatment has also been sought to be removed, but even this is vehemently opposed. For all other purposes, the shares of the public are on a par with that of the promoters. They get the same vote and dividends.

It is even stranger that the takeover regulations are mainly intended to give public shareholders a fair deal. The committee observed that one of the main objectives of the regulations was “to provide each shareholder an opportunity to exit his investment in the target company when a substantial acquisition of shares in, or takeover of a target company takes place, on terms that are not inferior to the terms on which substantial shareholders exit their investments".

The argument that takeovers would become more expensive has a point, but that the public shareholders should suffer to reduce the purchase cost is absurd. The other argument that foreign acquirers would have an edge, too, is relevant, but that edge is only marginal. Foreign acquirers have always had an edge.

The fund requirement in a takeover on account of a 100% open offer is not multiplied as it is made out to be. To take the example given in the committee report, if the promoters’ 60% is acquired, then normally 20% more is to be acquired from public shareholders. By making a full acquisition, the cost increases by only 25%. Of course, the actual increase in cost will vary depending on the public shareholding. Thus, it is not understood how takeovers will become prohibitively expensive or how foreign investors will get a clear edge.

As pointed out by the committee, the bogey that the acquisition cost will substantially increase on account of a full open offer is not supported by past record. Till now, in just 10% of open offers has the response exceeded the 20% open offer mark. Even in these cases, the higher response was because there was a huge premium over the ruling market price. As the committee noted, “The analysis revealed that the offers which were over-accepted were those offers where the offer price represented a large premium to the post offer price, and where the potential loss to shareholders who did not receive full acceptance was the highest."

Further, it is not necessary that the acquisition cost has to increase. If, say, the acquirers want only 60%, then 60% of the shares of all shareholders—the promoters and the public—can be acquired. The promoters and public should both retain part of their shareholding. Thus, it is a misconception only a 100% acquisition of the company will do justice. Even a 60% proportionate acquisition, but from all shareholders, would be fair and just.

The Indian corporate peculiarity of promoter control and large promoter holding does need to be taken into account. But that is no reason to discriminate against public shareholders while deriving the value of their shares. One hopes that the small shareholders’ faint voice does not result in their continuing to receive the unfair treatment seen over the last 13 years.

Jayant Thakur is a Mumbai-based chartered accountant.

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