As mergers and acquisition (M&A) activity in India is beginning to gather steam, the Securities and Exchange Board of India (Sebi) has decided to streamline some of the loopholes in the existing takeover code which has been exploited by the predator and in some cases, the target companies.
Under the existing takeover regulations, Sebi till date has received 57 offer documents and 117 reports on transactions involving non-applicability of the regulations were filed with the market watch-dog. Twenty-seven cases were referred to the takeover panel out of which 10 cases were recommended for exemption by the panel.
Although there has not been a ==spate of M&A cases as expected by the market, there are a few issues which Sebi has to address immediately.
For instance, what should be the procedure to be followed for reference of cases to the panel. Where the application is made by the company, should the authority of the person making the application be backed by a board resolution and so on.
There is a debate on whether there is a need to give draft public announcement to the target company in advance, especially given the price sensitive nature of the issue.
Also, there are the obligations of the target company. For instance, when can the issue of capital be said to have been made-date of AGM resolution authorising issue of capital or the date of board resolution or the date of the prospectus/letter of offer(What if there is no formal letter of offer like in the preferential issue). This apart, how does one preclude the target company from issuing shares etc in such a manner as would foil the bid or frustrate it.
Many a time disclosures in the notice to the EGM which is called for approval of the preferential issue are found lacking in many respects like identity of the persons; pricing stated to be as per Sebi guidelines (exact or indicative price not stated, also in case of convertibles which of the two options given under the guidelines would be adopted not being disclosed. Emerging shareholding pattern not disclosed etc).
Under such circumstances, what are the implications; what other penalties could be imposed apart from forcing an open offer. Can the regulation provide for invalidating the preferential issue if the same has been found to be in violation of the Sebi guidelines/regulations.
There are certain terms which have not been defined clearly yet. For example , the term acquirer. There is no clarity in the existing takeover regulations whether the term acquirer includes a person acting in concert.
What is the liability of the acquirer/persons acting in concert in an open offer, especially in the following situation: A company acquires 25 per cent pursuant to a memorandum of understanding (MoU) which triggers an open offer. However, public announcement is made by another company which may be connected to the first company or a totally independent person. The second company is shown as the acquirer because under the open offer the first company is not going to acquire any shares. What would be the liability of the first company in such a situation if the second company fails to fulfil obligations.
At present, the persons deemed acting in concert includes FIIs with sub-accounts even though each sub-account is an independent account. Should this continue?
Another area which requires rectification is the offer period. Certain restrictions like induction of directors during the offer period is got around by inducting directors on or after the date of MoU but before the public announcement.
