Somasekhar Sundaresan: Majority holding is now an albatross

WITHOUT CONTEMPT

The recent amendments to the Takeover Code have taken corporate India by surprise. Not just because they took effect on December 30, 2004 despite being made public three weeks later, but also because they have made it impossible for persons holding more than 55 per cent in listed firms to realise proper economic value for their business interests.

The amendments have a single-point agenda: to ensure that public shareholding does not fall to below 25 per cent owing to an acquisition under the Takeover Code.

However, the other securities laws on public shareholding remain out of sync. The Delisting Guidelines continue to speak of different thresholds for mandatory open offers for delisting ranging from 10 per cent to adopting what is prescribed in the Listing Agreement.

The Listing Agreements that various companies have executed with stock exchanges have public shareholding thresholds varying from 10 per cent to 40 per cent. Some companies have no minimum prescribed because when they were listed there was no concept of minimum public shareholding.

One of the amendments now imposes a blanket ban on any acquisition of shares in excess of 55 per cent in any listed company. This is because an acquisition of an additional 20 per cent from the public through an open offer would take the public shareholding to below 25 per cent.

However, another contradicting amendment clearly contemplates the making of an open offer in situations where more than 55 per cent shares are acquired through an agreement.

This provision requires the acquisition under the agreement to be curtailed to a level that would ensure that the minimum public shareholding prescribed in the Listing Agreement is maintained.

The amendments prohibit any acquisition under the Takeover Code if the ultimate public shareholding could fall below the level prescribed in the Listing Agreement.

All such transactions henceforth can only be under the Delisting Guidelines, which do not have statutory force because neither the Securities Contracts (Regulation) Act nor the SEBI Act enable the making of these guidelines.

The net effect of these amendments is that if you hold more than 55 per cent in an Indian listed company and wish to exit your business, the holding in excess of 55 per cent will an albatross around your neck. This goes against the grain of basic economic sense.

First, you can't sell your entire beneficial ownership without uncertainty over whether you would get full economic value for it. Until the open offer closes (four months later), you would not know if your entire holding can in fact be sold at enterprise value, and you may have to take back some shares you originally sold under the agreement.

Second, if your buyer is willing to acquire all that you and the public shareholders are willing to offer, he would have to make an open offer only under the Delisting Guidelines. Ironically, the public shareholder may get a better price for his minority shareholding as compared to your majority shareholding.

Third, if your buyer wants the company to remain listed, and both of you agree that you should no longer hold any shares, the Takeover Code would force you to continue to hold shares that are in excess of 55 per cent, or offload such holding in the market (because you would still be a promoter). Imagine the self-destruct when a bulk holding ranging from a single share to 35 per cent of the capital is offloaded in the market system.

Funnily, the changes also discriminate against purely Indian deals. The obligation to make an open offer exclusively under the Delisting Guidelines, does not apply to global arrangements leading to indirect acquisitions. Let us take a real-time example.

When P&G acquires Gillette globally which has a listed Indian subsidiary with about 88 per cent being held by Indian and foreign promoters, neither the bar on the transaction nor on an open offer under the Takeover Code, will operate.

P&G can stay away from the expensive Delisting Guidelines and make an offer only under the Takeover Code. It merely has to undertake that it shall raise the public shareholding to the level applicable to Gillette's Listing Agreement within 12 months of the open offer.

However, if ACC were to sell a 75 per cent-owned asbestos subsidiary, as an integral requirement of Holcim's purchase of interest in ACC along with Gujarat Ambuja Cements, ACC would have to wait until the open offer is completed to check if it can indeed successfully offload the asbestos subsidiary.

(The author is a partner of JSA, Advocates & Solicitors. The views expressed here are his own)