The Sebi (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (Takeover Regulations) have been drafted by Sebi under its mandate to protect the interest of investors, promote the development of the securities market and regulate substantial acquisitions of shares and takeovers. The Takeover Regulations essentially require an open offer to be made by an acquirer acquiring substantial stake in or control of a listed company so as to provide the existing shareholders an exit opportunity in case they do not have confidence in the likely new management of the company.
As the Indian economy falls into step with world markets, there is a greater need to have regulations that reflect global best practices, ensure equitable and transparent operation of the market for corporate control and which balance the interests of acquirers, investors and target companies alike. The Takeover Regulations Advisory Committee (Trac) was constituted to review the Takeover Code in light of this felt need. Trac submitted its report to Sebi on July 19, 2010. The report included the draft of a new set of regulations to replace the existing Takeover Regulations along with detailed justifications for the changes proposed. This article seeks to analyse some of the thematic changes proposed by Trac.
One of the recommendations made by Trac is to increase the initial threshold for acquisitions triggering an open offer to 25 per cent of the voting rights up from 15 per cent under the existing Takeover Regulations. Trac has examined the shareholding pattern of listed companies in India and arrived at the conclusion that the earlier threshold was fixed in an environment where the shareholding pattern of companies in India was such that it was possible to control listed companies with holdings as low as 15 per cent. Given the increase in mean and median of promoter shareholding in listed Indian companies, Trac has decided that 25 per cent is the new level at which a new incumbent shareholder could expect to be in de facto control over the company and 25 per cent should accordingly be the trigger under the new regulations.
Here, Trac has made the same mistake that the Bhagwati Committee made before it. If the reason for setting the threshold at a particular percentage of voting rights is the likelihood of a shareholder exercising positive control over a company with such a percentage (which was also the reason cited by the Bhagwati Committee in its report in 1997), then there is no reason why there needs to be a hard numerical trigger in addition to a separate trigger upon change in control. The new takeover regulations should have acquisition of control over a listed company as the sole trigger for making an open offer to its public shareholders. Further, there is a contradiction in the stand taken by Trac in this respect and in its analysis of the definition of “control” later in the Report. While analysing the definition of “control”, Trac has taken the stand that “the existence or non-existence of control over a listed company would be a question of fact, or at best a mixed question of fact and law, to be answered on a case-by-case basis”. This is in stark contrast with its analysis while examining shareholding threshold limits where Trac has set an absolute number of 25 per cent shareholding on the ground of likelihood of a shareholder controlling the company with such a percentage.
Therefore, it is proposed that instead of a hard numerical threshold, there should be a rebuttable presumption of acquisition of control at 25 per cent. The presumption may be rebutted by the acquirer, for instance, by demonstrating that there exists a shareholder holding a much larger block of shares (say 40 per cent) who is in a position to unilaterally determine the policy decisions as well as day-to-day operations and management of the company. The threshold limits applicable in Israel under the (Israeli) Companies Law 1999 are illustrative of such a position and inspiration may be drawn from the same. Further, as is the case in jurisdictions such as the United Kingdom, Germany, South Africa and Singapore, this numerical threshold should be included in the very definition of control and not in addition to a separate trigger upon acquisition of control. Since the rationale for giving an exit opportunity to the minority shareholders is that the promoter in whom the shareholders could be said to have reposed their faith is being replaced by an unknown acquirer, such an exit is merited only in cases of change in control and not otherwise. An open offer should, therefore, be triggered only in cases of acquisition of control and acquisition of shareholding not amounting to control should not independently trigger an open offer.
By that same reasoning, a separate creeping acquisition limit for consolidation by a person already in control of the company is not required. Once Sebi has fixed 25 per cent as the public shareholding at which there can be said to be sufficient liquidity in the scrip and an accurate determination of price by the market, additional restrictions on the promoters’ ability to consolidate to that limit casts a shadow on the regulator’s faith in its own judgment in arriving at that percentage. Further, material change in shareholding pattern of the company without change in control cannot be an independent reason for an investor to be given an exit on the ground that it constitutes a material change in the factual matrix on the basis of which an investor can be said to have invested in the company. If that were to be the case, an open offer should also be required in cases of sale of undertakings, sale of material assets, etc. as is the position in France. The argument for deregulating substantial acquisitions not amounting to change in control is even stronger in the light of the fact that an increase in offer size of the mandatory open offer to 100 per cent (of the remaining public shareholders) has simultaneously been recommended by Trac.
Consequently, what is required instead is a more comprehensive definition of control that contemplates most of the likely scenarios where an open offer is merited. Here, Trac has shirked its mandate and simply stated that given that an appeal in this regard is pending before the Supreme Court, it has refrained from going into aspects of control in any detail. However, it may be noted that Sebi is not required by law to wait for the decision of the Supreme Court in the pending appeal in Subhkam Ventures vs Sebi and being the legislative body, it may amend the definition in the interim. In such a case, any interpretation of “control” given by the Supreme Court will apply only to fact situations arising before the amendment. Sebi should, therefore, discharge the responsibility of formulating a more wholesome definition of control and the proposed regulations should have acquisition of control as the only trigger for an open offer.
The author is a lecturer of securities law at the National Law School of India University, Bangalore. The views expressed are personal
