Raising the open offer threshold to 25 per cent will help PE firms invest more in companies but unless RBI allows banks to fund domestic M&As, Indian firms will be at a competitive disadvantage.
Koushik Chatterjee
Group CFO, Tata Steel & Member, TRAC
M&As will be critical for India’s growth and the idea was to ensure that all stakeholders got a fair deal — there must be no disguised payment for one group of shareholders
Mergers and acquisitions (M&As) are intrinsically related to execution of corporate growth strategy, and so straddle wide-ranging areas including corporate governance, behavioural finance, corporate control, capital markets and financing, financial reporting and disclosure standards, investor relations and communications.
Sebi’s Takeover Regulations Advisory Committee (TRAC), of which I was a member, had the remit of re-looking the current takeover regulations, and its focus was to follow the stated principle of providing a transparent and forward-looking regulatory framework for undertaking M&A activities that would protect the interests of all investors.
While takeover regulations primarily focus on specific situations of substantial acquisition of shares and a change in corporate control, they also need to be in harmony with other regulations including tax, Company Law and various capital market regulations. This is critical for balancing the interest of all stakeholders to ensure that a fair and robust regulatory framework is in place to facilitate takeover activities in the future.
The framework for the proposed takeover regulations is meant to stand the test of time for the next decade. In order to achieve 9 per cent-plus GDP growth, India’s corporate governance and regulatory framework need to be benchmarked to global standards to attract both domestic and international capital. M&A will be a critical lever for inorganic growth as the country will perhaps continue to be one of the key regions for global economic activity. Hence TRAC recommendations should be seen in the overall context of providing an efficient and effective framework for future M&A activity.
One of the key recommendations of TRAC is to increase the threshold of the open offer to 25 per cent from the current 15 per cent. The existing threshold was relevant a decade ago when many companies in India were owned and controlled with a lower threshold. With the development of the regulatory framework for creeping acquisitions and preferential allotment of equity to fund growth, this threshold has clearly outlived its purpose as is evident from the significant increase in promoter holdings in Indian companies in the last decade. The increased threshold will provide a meaningful trigger level beyond which a shareholder will certainly have positive control in the affairs of the company. Another collateral benefit will be for the financial and strategic investors who can invest in companies to provide capital, technology and know-how for growth and value creation without affecting the control of the company. It is obviously important for the incumbent shareholders of the company to ensure such investors do not have shadow control on the company at the expense of the other shareholders.
Complementing the above recommendation is the increase in the open offer requirement for 100 per cent of the shares upon crossing the threshold of 25 per cent. This provides a fair opportunity to all shareholders to exit the firm, which is fair and equitable for the incumbent shareholders. TRAC has also proposed a tight framework for the price paid to exiting shareholders so that there is no disguised consideration paid differentially to any group of shareholders. Though doubts are being raised whether the Indian financing environment can cope with such a requirement, I believe this will lead to further development of capital markets in India with new financing structures and instruments like acquisition-related equity raising, issuance of convertible debt instruments, and will also promote the usage of other non-cash considerations like exchange of equity. I hope RBI would look at the option of allowing Indian banks to acquire funds in the country as this is not a speculative activity but is a genuine corporate action under the regulatory control of Sebi.
TRAC has also recommended that the creeping acquisition provisions continue to be available to shareholders in control to enable them to consolidate their holdings. One of the best defence mechanisms for any company in the long term is not regulatory protection but continued value creation for all the shareholders.
Finally, TRAC has proposed that it would be mandatory for the board of the target company to provide its reasoned view of the takeover proposal and make a recommendation to the shareholders of the company. This puts significant responsibility on the boards, especially the independent directors, to provide corporate stewardship in takeover situations. This will perhaps set the scene for new standards in corporate governance in the country.
K Balakrishnan
Chairman & Managing Director, Lazard India
Raising the threshold to 25% and the 100% open offer are both good ideas but Indian firms will be at a disadvantage vis-a-vis MNCs when it comes to financing M&As
Global experience demonstrates that in most markets, consolidation has led to increased efficiencies, better utilisation of resources and has significantly benefited the consumer. As India continues to integrate itself into the global marketplace, increased M&A activity is a logical outcome.
While the extant Takeover Code provides for a framework for M&A activity, it is essential that it evolves with changing market dynamics. The proposed revisions to the Takeover Code are well-directed and intended to ensure that the regulatory framework is in line with market realities and protects the interests of all stakeholders.
Two of the critical provisions — the increased threshold from 15 per cent to 25 per cent and the requirement of an offer to acquire all outstanding capital of the target firm — have significant implications. Are these provisions fair and friendly from a minority shareholder’s standpoint?
The increased threshold implies that a shareholder or a group of shareholders acting in concert can acquire up to 24.99 per cent of the equity capital of a listed company without triggering an offer. Under the Indian law, select critical company decisions require a 75 per cent majority shareholders’ vote; thus, the possibilities of a disruptive 24.99 per cent equity shareholder (without triggering an offer) blocking some or all major decisions of the company are real. The question is whether “such potentially disruptive blocking rights” are fair from a minority shareholder’s standpoint and if they are good for stable management. The other question is whether the situation is materially different from a 15 per cent threshold. I would argue that while the threat of disruptive situations does exist, it cannot and should not be considered a norm. In a hostile situation, a shareholder with a disruptive intent could acquire the level of shareholding required to attain objectives and a 15 per cent or a 25 per cent threshold level should not be a deterrent.
With a view to fuelling growth and financing potential acquisition opportunities, companies seek to mobilise capital from large investors; and the current 15 per cent threshold restricts the quantum of capital that could be mobilised. The increase in threshold to 25 per cent provides increased headroom. Effectively, large investors (including growth capital PE investors) through appropriate documentation do have a fair bit of influence. If a block shareholder has invested at a fair value to acquire a large block, say, a 24.99 per cent equity stake, it is only appropriate that the investor has the ability to block critical corporate decisions for a good cause. While the probabilities of a disruptive shareholder with potentially ulterior motives exist, this is best dealt with good corporate performance and governance.
The 100 per cent take-out offer implies that in the event of a trigger, all equity shareholders would be able to divest all of their shareholdings at the same price as that of the promoter shareholder, and at their option. While this will increase the outlays of an acquirer, it is only fair that minority shareholders have the option to exit or stay invested with the new acquirer. The 20 per cent offer rule has created situations where minority shareholders were unable to exit, particularly where the delta between the market price and the offer price was high, and after years they are yet to see those prices in the market. This is quite unfair to minority shareholders. Given that companies have mobilised capital from minority shareholders to part finance growth, it is only fair that they have the ability to sell their shares along with the promoter shareholder and at the same value.
Conceptually, it is true that global multinationals could have access to larger quantum of capital and potentially have easy access to low-cost acquisition capital. While there is a fair bit of capital to support Indian companies in their India acquisition plans, acquisition debt is not inexpensive and is not readily available. Thus, one could say that global multinationals do have an edge over their Indian peers in this regard, at least as long as the regulatory framework facilitates growth of acquisition finance in the country. However, seeking to reduce acquisition outlays at the cost of minority shareholders is not a solution.
If we were to relate the possible aforesaid competitive disadvantage of Indian companies with that of the disadvantage to minority shareholders, my vote would be for minority shareholders and a 100 per cent take-out offer!
Overall, TRAC’s recommendations are comprehensive and in many aspects would play a vital role in determining the rules of the future M&As in the country.
Views expressed are personal
