The takeover code that Securities and Exchange Board of India (Sebi) notified last week has given the country’s private equity investors a reason to cheer. The new norm that has increased the open offer limit to 25 per cent from the current 15 per cent is expected to give enough room for PE firms to strengthen their presence in listed companies.
According to experts, the Sebi norm will permit the PE/VC industry in India to witness a steady increase in PIPE (private investment in public equity) deals. Though PE deals in listed space have decreased drastically, equity firms are optimitsic about the change the new norms would entail.
Bain & Company says one notable trend over the past six years has been a decrease of PE investments in the shares of public companies (PIPE deals), in proportion to the increase in public equity market valuations.
| PE DEALS IN LISTED FIRMS | ||||
| PIPE deals Year | Volume | Value ($mn) | Open market deals | |
| Volume | Value ($mn) | |||
| 2007 | 47 | 3,159.45 | 13 | 139.76 |
| 2008 | 14 | 301.69 | 25 | 477.18 |
| 2009 | 26 | 720.29 | 30 | 194.31 |
| 2010 | 23 | 456.61 | 24 | 289.59 |
| Till Aug 2011 | 15 | 459.75 | 22 | 257.45 |
| Source: VCCedge | ||||
“Comprising some 35 per cent of all deals in 2005, PIPEs comprised less than 10 per cent of the investments made last year,” the Boston-headquartered global management consulting firm notes in its latest report. “Apart from increasing public market valuations that inflated valuations, regulatory obstacles also dampen PE investors’ enthusiasm for PIPEs.”
Baring Private Equity Partners India said increasing the open-offer limit will allow companies the flexibility to raise higher, vitally needed, long-term capital from private equity investors.
“Companies can raise incremental capital from existing PE investors up to the new limit without the encumbering of an open offer process.” according to Rahul Bhasin, managing partner with the 1998-founded entity.
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According to data from VCCedge, the value of PIPE deals decreased from $3 billion in 2007 to $456 mn in 2010. About 15 deals worth $459 million took place till August this year,.
Mayank Rastogi, partner, Private Equity and Transaction Advisory Services, Ernst & Young, says the changes proposed by the securites market regulator signals a new step in the arena of mergers and acquisitions. “This should also support greater PIPE activity.” Though it is common to acquire 20-25 per cent in un-listed companies by PE firms, the open offer limit of 15 per cent barred PE firms to acquire a significant minority stake in listed companies in India.
Somasekhar Sundaresan, partner, J Sagar Associates, says the move will indeed benefit mid- and small-cap companies. “These are the companies that need capital to grow their businesses, and a small-ticket investment could easily constitute more than 15 per cent in their equity, and trigger an open offer under current law. Therefore, this is indeed good news for such companies.”
According to experts, the 15 per cent threshold was considered low, since such an acquisition would then result in the spending of the investor’s resources in paying other shareholders for their shares, rather than be deployed in productive business activities of the target company. “Increasing the limit to 25 per cent,” Rastogi notes, “can assist the target company in raising capital finance in a more robust manner.”