TRIGGER LIMIT MAY GO UP TO 25%

100% open offer norm unlikely

Economic Times: 21/10/2010

Opposition Due To Advantage Of Overseas Buyers Over Indian Cos

Reena Zachariah MUMBAI THE Securities and Exchange Board of India,or Sebi, is set to unveil new rules on takeover of public listed firms based on the recommendations of a committee headed by C Achuthan,but may stop short of implementing a key proposal that envisages a mandatory open offer for 100% of the equity of a company by an acquirer.

The Sebi board,which is scheduled to meet on Monday,will discuss the overhaul of the takeover rules,notably an increase in the limit for triggering open offers to 25% from 15% and doing away with the concept of a non-compete fee to promoters.However,considering the resistance from industry bodies or lobbying arms of corporates,merchant bankers,corporate lawyers and fund managers,the capital market regulator may have to take a hard look at the proposal that makes it obligatory on all acquirers to buy out 100% of the equity of a target company,according to a senior official in Sebi.

This official said the bulk of the comments that it has received from industry as well as capital market intermediaries,including merchant bankers,related to this proposal.The opposition to this proposal stems from the fact that overseas acquirers have an advantage over their Indian counterparts.Indian corporates cannot access bank funds for buying out a company as RBI does not permit banks to fund such an activity.In contrast,many foreign companies do not face such restrictions and that makes it easier for them to make an aggressive bid for controlling local firms.

The 25% threshold for triggering a tender offer moves us closer to norms in other countries.Requiring the tender offer to be for all 100% appears fair to minority shareholders,but then building in a squeezeout provision would make it fair for acquirers, said Anantharaman,MD & head-corporate advisory & finance,Standard Chartered.

Mixed response to panels report

SEBI received 600 public comments on the committee's report. The committee was headed by C Achuthan, former presiding officer of the Securities Appellate Tribunal, the judicial forum that decides on appeals against the orders of Sebi. Although the responses have been mixed ,most of the comments relate to the open offer trigger limit of 25%,and the proposal seeking to make it mandatory for an acquirer to buy out 100% of a company's equity besides on non-compete fee.

"Even if the open offer size was reduced to 50% (from the proposed 75%), acquiring Indian companies would still cost 2.5 times more than what it would under the current rules,” says Sandeep Parekh, founder, Finsec Law Advisors. Several lawyers as well as bankers had said earlier the requirement to buy out 100% of the equity in an open offer would discourage takeovers in India given the costs involved.

The committee had recommended a 100% open offer as it felt that it would provide all minority shareholders an equal opportunity to exit. But this proposal, if implemented, could be in conflict with a government rule that makes it mandatory for all companies to have a minimum public shareholding of 25%.

Traditionally, most minority shareholders do not participate in an open offer because only a part of the shares that they tender is accepted. The panel has proposed that if an acquirer is able to increase his stake beyond 90% through the open offer, the target company can be delisted with the buyer not having to buy out the remaining shareholders through a reverse book building process. If the stake of an acquirer exceeds 75%,but falls below 90%,the acquirer will have to lower the equity holding to 75% by returning the shares to that extent.

If Sebi lowers the open offer size, the cost of acquisition would reduce, but the acquirer will not be able to scale up his holding because of low participation from minority shareholders.

However, if the open offer size is diluted by the regulator, it will have a ripple effect on several other proposals listed by the committee, many of which would become redundant, said a member who served on the committee.

"The philosophy of equitable and fair treatment of all shareholders should have a primacy over other considerations,” the report said.

These suggestions, if implemented, will replace an archaic takeover rule that was amended 23 times in 13 years and created more confusion than clarifying the regulatory position. But the recommendations could deter some takeovers, dragging the overall merger activity. Average annual takeovers rose to 99 between 2006 and 2009,from an average of 69 a year between 1997 and 2005.