Takeover regulations were first introduced in 1994. They underwent an overhaul in 1997, based on the recommendations of the Justice Bhagwati Committee. The regulations were then periodically re-looked and amended 23 times, keeping pace with global events and developments in the capital market.
Being one of the fastest developing economies in the world after China, India has seen a tremendous increase in the extent of mergers and acquisitions (M&As). The Securities and Exchange Board of India (Sebi), vide an order dated September 4, 2009, constituted the Takeover Regulation Advisory Committee (TRAC) under the chairmanship of C Achuthan (former presiding officer of the Securities Appellate Tribunal) with a mandate to suggest suitable amendments to bridge the gap between the decade-long regulations and a rapidly evolving M&A market in the country.
Clearly, while drafting any legislation, concerns and interests of various stakeholders are involved and these are very often in conflict with each other. As TRAC has stated, its approach has been one of balancing and calibrating conflicting objectives; however, the goal of protection of interests of public shareholders seems to have been paramount for TRAC members. Also, given the increase in M&A activity and the likelihood of its further acceleration, an attempt has been made to provide clarity on several vexed issues which have emerged over the last few years.
Threshold limit of 25 per cent
TRAC has recommended an increase in the threshold limit for an open offer to be in line with global practices. The threshold limit has been revised to 25 per cent from 15 per cent. Such an increase would help companies raise growth capital by way of inviting strategic investors, without triggering open offer conditions.
Currently, threshold limits for an open offer in some of the countries are: 30 per cent in the UK, 35 per cent in Hong Kong, 33 per cent in Malaysia and 30 per cent in Singapore. Although the threshold globally is generally 30 per cent, the limit has been increased to 25 per cent keeping in mind the limits for passing special resolution and exercising de facto control. While the threshold limit has been increased to 25 per cent, one needs to see whether promoters (having shareholding between 15 per cent and 24.99 per cent) would be required to make an open offer if their shareholdings cross 25 per cent, through creeping regulations or otherwise, under the new takeover regulations. The draft regulations are silent on this aspect.
Definition of ‘control’
The open offer trigger is not only a percentage limit of shareholding, but as such, the acquisition of control, and could conceivably be at a level of shareholding lower than the threshold. This aspect of control is clearly a vexed one and in the light of the current controversies, the recommendations of TRAC aim at providing better clarity on the investments made by financial investors, such as private equity funds and venture capital investors, which typically seek protective interest in their target companies. However, it seems that TRAC has tactically dealt with the definition of the term “control” by including “ability to appoint majority of directors or to control management or policy decisions” while determining control. As the Subhkam case, which deals with the term “control”, is pending for disposal in the apex court, one has to wait and watch how the interpretation of “control” evolves, given its inherent subjectivity. TRAC has also distinguished between “negative control” vis-à-vis “positive control”; it has refrained from stipulating any dispensation qua the former and recognises the subjectivity qua the latter.
Offers to be made for entire 100%
The offer size from the existing minimum 20 per cent is recommended to be increased to 100 per cent. This will provide full exit opportunity to all shareholders; it, however, substantially increases the acquisition cost for acquirers.
The amount of financial outlay would obviously be significant and, given that acquisition funding in India is relatively less easy to come by as compared to an overseas acquirer, in a sense, it creates a non-level playing field in favour of the latter.
De-listing window
Another major change includes allowing a single window for de-listing if the acquirer discloses his intention of de-listing upfront and the shareholding acquired in an offer crosses the maximum permissible non-public shareholding limit. Such a seamless go-private route is definitely progressive and eliminates the need for passing through the cumbersome reverse book-building process under de-listing guidelines. This window is not available for achieving de-listing through voluntary offers.
Payment of non-compete fees
A question which often comes up in takeover situations is that of the parity of treatment between exiting promoter shareholders and the minority ones in the context of the payment of non-compete fees/controlled premium. For instance, in 2006, when German cement maker Heidelberg took over Mysore Cements from the S K Birla group (promoters), the open offer price was Rs 58 a share; however, the promoters of Mysore Cements received an additional Rs 14.50 per share as non-compete fee (this was 25 per cent of the open offer price). The current regulation allows a window of 25 per cent of consideration to be paid as “non-compete fee” to exiting promoters which minority shareholders could be deprived of. In a move that aims at allowing parity of treatment, TRAC has recommended removing such exemption by including the control premium amount under the calculation of negotiated price. As such, the 25 per cent differential has been removed.
Other aspects
Currently, the exemption from open offer can be provided by referring the case to an exemption panel constituted by Sebi. However, the draft in question provides for Sebi to grant an exemption and the reference to the takeover exemption panel is sought to be made optional from a Sebi standpoint as opposed to the current situation where it is mandatory. Interestingly, there is a reference in the TRAC report that the present tax regime in India is more favourable towards open market transactions as against open offer transactions, the latter being taxable. TRAC has expressed the view that there is a need to bring parity. It may, however, be noticed that the Direct Taxes Code, which is on the anvil, in any case, contemplates the taxation of capital gains regardless of the mode of divestment.
To sum up, the new regulations mark a watershed in India’s M&A landscape and will materially alter the rules of the M&A game in a variety of ways. On an overall basis, the TRAC recommendations seem to have been reviewed well and the next few years should be interesting as far as M&A activity for listed companies is concerned.
The author is executive director and joint leader of the tax practice, PricewaterhouseCoopers
