The Securities and Exchange Board of India (Sebi) is reportedly considering two changes to the takeover code which, unfortunately, will not improve the lot of the independent or small investor. The first is to make it mandatory for the boards of target companies to advise shareholders on how to weigh competing bids. This happens in well-regulated markets but is not obligatory in India. Ideally, if a board, with its knowledge of the company it runs, offers impartial advice in a fiduciary capacity on which is the best suitor for the company, then that will indeed be helpful to small shareholders who have neither the acumen nor the resources to get expert advice. On the other hand, people who run a company cannot be impartial about it, particularly when the induction of a new shareholder will be of enormous significance to them. The Indian reality is that even independent directors are hardly ever so and the ability of controlling shareholders’ nominees to put on an independent hat is very uncertain. So, this is a good theoretical idea which, in reality, is unlikely to deliver much.
While independent board advice on competing bids may not actually be forthcoming, the attempt to mandate it is unlikely to do any harm. That cannot be said of the other proposal — to raise the trigger, form the present 15 per cent to 25 per cent, at which a substantial acquirer has to make an open offer to all shareholders. It is true that Indian promoters today have a much higher stake in the companies they control, compared to the situation that prevailed when the takeover code came into play. Therefore, it will be logical for Indian rules to move towards global practices where controlling stakes are higher. But two arguments militate against the proposal. The open offer is for the good of small shareholders — to ensure that they also get the control premium that an acquirer is willing to pay to those who control a target company. Any dilution of it, delaying its onset by as much as 10 percentge points on a base of 15, will go against the interest of the small shareholder and be helpful only to promoters. Though, typically, controlling stakes today exceed 25 per cent (every promoter tries to ensure a stake in excess of that to prevent a special resolution from being bulldozed through), in some cases they don’t. Thus, if the new trigger is introduced, there will be greater space for controlling interest to change hands and control premium to be paid without the small shareholder coming into the picture at all.
It is disingenuous to argue that the proposed change seeks to bring Indian regulations in line with global practices, because in this matter, there is no one global practice, with European and US rules differing widely. On the other hand, it is necessary for Sebi to live down its past record of tilting the takeover code heavily in favour of promoters and against independent shareholders. This was justified initially on the ground that past regulations prevented Indian promoters from building up large stakes and so they needed time to build stake and security without having to worry about takeover threats. It is high time the takeover code tilted in favour of the small shareholder. That will both boost the equity cult and create an efficient market for managements.