M&A activity gets time to cool off

Lock-in for preferential shares to affect mergers.

The Securities and Exchange Board of India's (Sebi's) decision to impose a one-year lock-in for shares allotted on a preferential basis, as a result of a share swap or corporate debt restructuring, is expected to hit merger and acquisition activity.

According to the new guidelines, "the lock-in period in respect of the shares issued on preferential basis pursuant to a scheme approved under corporate debt restructuring framework specified by the Reserve Bank of India RBI), shall commence from the date of allotment and shall continue for a period of one year and in case of allotment of partly paid-up shares the lock-in period shall commence from the date of allotment and continue for a period of one year from the date when shares become fully paid up."

So far, preferential allotment arising out of share swaps between the acquiring company and its target company, as also shares allotted to lenders under the corporate debt restructuring mechanism, were exempt from lock-in conditions. This provided shareholders an exit opportunity, if those shares increased in value.

Suppose company A acquires company B, and allots shares to the shareholders of B in lieu of cash, the shares so allotted to the latter will be locked in for a period of one year. Not only retail investors but financial investors too will be affected by the policy change.

According to merchant bankers, since most M&A deals take place through the share swap route, the Sebi decision will have a debilitating impact and effectively rule out share swaps as a currency for M&A activity.

Experts who have worked closely with Sebi on this issue said the rationale was to prevent "a few investors who have been preferentially allotted shares from exiting the company in a short period".

Incidentally, when the report was being finalised with the active cooperation of the market participants, the latter had suggested to Sebi that instead of a blanket ban on such sale of shares, it would be appropriate to place some checks and balances in the process.

Strong medicine

• Experts say it is to prevent a few investors who have been preferentially allotted shares from exiting the company in a short period
• Market participants had suggested to Sebi it would be appropriate to place some checks and balances instead of a blanket ban