Synchronisation of delisting norms mooted

Paper says acquisition beyond 50% should result in an open offer

The Securities and Exchange Board of India's (Sebi) delisting guidelines need to be synchronised and made part of the takeover regulations, a working paper by two Sebi researchers concludes.

In a recent paper posted on the market regulator's website, Sebi researchers M T Raju and Deepthi L S have analysed the trends of takeover activity in India since 1997.

The study has also analysed the relationship between takeovers and market activity.

The paper has trashed the argument for extending the upper limit for creeping acquisitions to 75 per cent, and reiterated that any acquisition beyond 50 per cent should result in an open offer.

"Otherwise if the existing promoters are allowed to acquire shares through the creeping acquisition route till they reach the holding level of 75 per cent, their activity may reduce liquidity in the markets and (thereby) the role of the retail investors."

This leads them to recommend that when existing promoters hold more than a 50 per cent stake in the company, they should not have the option of creeping acquisition facility irrespective of the percentage of shares acquired.

The authors say this is because "(shareholding) greater than 50 per cent gives management control and there is no threat of a takeover".

The paper says that the 20 per cent minimum tab in open offers is too low since the size of the companies are fairly large and credit financing is easily available.

Further, the "the 20 per cent limit will only give partial exit and not full exit (to all shareholders)".

An analysis of the takeovers between 1997-2004 shows that 20 per cent of the companies which changed hands belonged to finance industry, nine per cent to the metal industry and 7.5 per cent to the infotech industry.

These three industries together accounted for about 37 per cent of the total takeovers.

On the basis of the size involved in takeover activity, the petrochemical industry stood at first place, followed by electronics, electricals and metals.

In terms of amounts involved in taking over companies, the finance and infotech sectors shared a meagre percentage.

For the past seven years, a total of 493 companies have been taken over through the open offer route. As many as 1,479 companies availed of themselves of exemptions during this period. Under the open offer category, a maximum of 98 companies made public offers in 2002-03.

In the first six years, the number had been continuously on a rise. It was only in 2003-04 that the takeover activity slowed down to 65 companies.

The data on acquisitions also show that change in control has a predominant share with about 60 per cent of the companies' acquired under this category.

This is distantly followed by 'consolidation of holding' at about 27 per cent and the third place is taken by 'substantial acquisition of shares' amount to 13 per cent of the total activity.

Acquirers are mostly Indians in almost four out of five cases. Only one-fifth of the total number of companies involved moved into foreign hands. A different angle of analysis of promoters and non-promoters discloses that non-promoters are dominant acquirers with a share of about 73 per cent of the total activity.

Existing promoters played a minor role with about 27 per cent while taking over companies. This indicates that new entrepreneurs (not connected with existing management) are taking a keen interest in taking over listed companies.

This is further reinforced by the role of new shareholders whose stake stood at about 56 per cent. Existing shareholders had a share of about 44 per cent.

"Certain illusions such as, foreigners garnering Indian companies doesn't appear to be a fact," the paper concludes.

Acquisition through schemes of arrangement account for Rs 9,333 crore which is slightly less than half of the amount offered in open category.

The number of companies that entered into memorandum of understanding account for 334 in the entire period. The number under this category has been continuously on rise till 2000-01 and thereafter there is a continuous fall.

Interestingly, a total of 1,479 companies were exempt from the making of open offers during the period. This is almost three times the number of that made open offers.

The amount involved works out to Rs 19,908 crore. This is much higher than open offer amount of Rs 15,308 crore.

Interestingly, the preferential allotment route was the dominant method used by acquirers to avail themselves of exemptions till September 2002. Thereafter, this route became a less used one, because of a change in regulations.

The analysis of the relationship between the secondary market and takeover activity shows that acquisition generally precedes a rise in the market. In other words, the predators acquired shares in a falling market so that their commitment in the open offers could work out to be less.