The fresh takeover regulations are an improvement. Some welcome features have been introduced like the inclusion of foreign institutional investors among those acting in concert. The burden of proof to show they are not colluding has been placed on them, which is a good sign.
The second feature is allowing the acquirer to issue debt securities along with equity shares and cash payment to pay for the acquisition.
A bidder can now structure his payment to avoid being saddled with a large equity or cash outgo when the bid succeeds. By offering debt instruments at a fixed coupon rate, the money can be paid off over a period of time.
The new regulations have allowed one important concession. Promoters holding more than 50 per cent can hike their stake further without attracting provisions of the code. This provision is there in the City code on takeovers of the United Kingdom, and including it here will clear a lot of confusion.
It is not clear if the 10 per cent deposit in the escrow account will be enough to deter non-serious bidders. Also, one does not know how the panel arrived at the figure. If a company has serious intentions, it will surely pay even if the advance deposit 25 or 30 per cent.
But by introducing this feature, the panel has taken one step towards deterring non-serious bidders and protecting shareholders. The minus point is this: If an acquirer steps in with a bid after the 21 days are over, what happens? Will Sebi reject his bid even if the price is higher?
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As per the code, a competitive bid is one which comes within 21 days. Any bid after that is not a competitive bid.
But the shareholders will not see it that way. For them, any bid at a different price will be a competitive bid whether it comes within 21 days or not.
The best course would have been for the committee to do away with the 21-day stipulation. Market forces should determine what is a competitive bid and what is not. The panel should have said competitive bids are welcome three days before the date of closure of the first offer. The panel has also not considered the implications of non-voting shares. Take for example a case where an acquirer buys 20 per cent of non-voting shares of a company.
Under the current code, he is not obliged to make an open offer. But later, the acquirer can approach the high court and convert these shares into voting shares. There are provisions where one class of shares can be converted into another. The time taken is between 3 to 6 months.
After getting these shares converted, the acquirer can further buy nine per cent of the target company's stock from the open market and gain control over the company. The panel has not looked into this aspect, but hopefully, the amended Companies Bill will.
Another provision of the London City code that has found its way into these regulations is permission for a company to increase its stake in another company by two per cent every year without having to make an open offer. This is applicable only to companies which have a holding of between 10 to 25 per cent in another firm.
This provision should greatly benefit holding firms like Tata Sons.
(This is part of a series of views on the new takeover code.)