Opinion
Hostile takeovers of faltering firms are integral to a competitive economy
Summary
- The Competition Commission of India has eased a takeover rule. This is welcome. Underperformers getting taken over get another chance under new ownership. Businesses finding their way into the best hands is how capitalism stays dynamic.
The Competition Commission of India’s (CCI) recent easing of a company takeover rule marks a welcome shift in a country where hostile acquisitions have long been viewed with alarm. Under the CCI’s revised rule, companies will no longer need its approval to acquire up to 25% of a target’s shares in the secondary market before making a formal bid.
Shares acquired for this purpose through bonus issues, stock splits, consolidation of face value and group restructuring would not need its prior nod either. The only condition is that the equity transfer should not spell a change in control and that the CCI be notified of such transactions within 30 days.
While takeovers must follow a code set by the Securities and Exchange Board of India, by which an open offer must be made to public shareholders if a quarter of another listed firm’s equity is bought, the CCI’s role is to ensure that markets stay well contested. Upon scrutiny, it can block a merger that stifles competition.
Also read: Will new competition rules open the door for more hostile takeovers?
The general aversion to hostile takeovers in India can be traced to the high prevalence of family-run businesses. Founding families have keenly kept control of their companies and society tends to see them as rightful owners even if their stakes are low and authority can be wrested.
An early test case was an attempt by London-based businessman Swaraj Paul to take charge of Escorts and DCM from the Nanda and Shriram families back in 1983. It took on the colour of a predatory scandal, with Paul portrayed as an intruder in India Inc, even though he had bought shares after the government allowed non-resident Indian investors to do so.
Once New Delhi signalled its sympathy for local industrialists, the actions of Indian regulators—including the central bank—converged to thwart Paul’s move. At the end, he retreated, frustrated by obstacles placed in the way of share transfers.
That episode made capitalists fortify themselves against unsolicited buyouts and stoked perceptions that these were unwelcome. It was only after India’s 1991 free-market embrace that attitudes slowly began to shift.
Yet, even today, the term ‘hostile’ unduly seems to evoke discomfort, raising visions of a business being snatched away. The prosaic truth is that an economy does well when its enterprises are in the best possible hands.
Also read: Global deals worth more than ₹2,000 crore under CCI lens from Tuesday
A poorly run business may be better served by new owners (and managers) after its share price slumps, turning it into a target for acquisition (if its equity is widely held). If an ownership switch does not work out and its market value doesn’t budge, then another set of buyers may swoop in.
Every free-market economy draws some of its dynamism from assets being reshuffled this way. It leads to superior allocation of overall resources, even as the threat of ejection keeps managers on their toes. This is the broad context in which the CCI’s relaxed rule needs to be seen.
Since part of its job is to prevent the ills of monopoly power, it has also tightened its criteria for merger scrutiny (with a special eye on the digital space). After all, fewer players in a field must not go against customers and innovation prospects.
The need to screen mergers above a certain size, however, should not mean we frown on every attempt made. Easing takeover bids would be pro-competition if takeovers deliver business efficiency and greater value generation.
Also read: Local customer base of global digital firms central to CCI’s new merger control norms
It promotes ownership rivalry, which pushes companies to be more competitive, lest they end up as targets.
