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Will the concept of buyouts be a reality in India?
The provisions of the new takeover code by SEBI are not as dynamic as originally proposed by the Takeover Committee. But they will still prove to be game-changers when it comes to M&As in India.
Issue Date - 15/09/2011
After a long wait (and lots of debate) market regulator Securities and Exchange Board of India (SEBI) finally came up with a new takeover code. Well, on the face of it and as said by C. Achuthan, Chairman, Takeover Regulations Advisory Committee (constituted by SEBI to give suggestions to make necessary changes in regulations for takeover of listed companies in India), the new takeover code is devised to help the minority stakeholders during an event of merger or acquisition. And Achuthan derives this confidence from the two new rules present in the code. First, an investor who could earlier hold a position of up to 14.99% without needing to go for an open offer can now hold up to 24.99% without triggering the same. Second, once the open offer threshold is triggered, the investor has to place a minimum offer size of 26% (as compared to 20% earlier).

The second rule for sure comes as a great relief to the minority shareholders for the very fact that adding the 25% open offer threshold and then a minimum offer size of 26%, an acquirer has to move on to a majority position. And that would give the minority group a clear idea about the future ownership, thus a clear platform to take a decision about their exit. Also, the 26% wide window will allow most of the minority group members to sneak into the ready-to-exit league. But the question remains: On a standalone basis, is the first rule as friendly as it seems, or is claimed?

Well, certainly not. Reason: With a 24.99% position in a company, an investor can actually make life difficult for the management without even going for the open offer. In such case, while the investor with one fourth of the company’s stake can dictate the terms, the minority shareholders will face the consequences as there will be no exit routes for them. Agrees Dheeraj Malhotra, a Delhi based corporate lawyer at MPartners as he tells B&E, “We may see the advent of dominant control groups that are able to control and manage the affairs of the company at will and at a later date able to squeeze out a weak minority by delisting the company. What may seem like an immediate gain to the public may in the end be a losing proposition.”

Further, in companies where promoters holding is below 25% (in BSE 500, there are 98 companies where there are single public shareholders holding between 10% to 14.99% of total shareholding), they can now easily and silently strengthen their grip on the company till the open offer trigger threshold. A case in point is EIH (the company which owns Oberoi group of hotels), a company in which ITC is currently holding 14.98% to avoid the open offer requirements. However, under the new norms, ITC can hike its stake by another 10% and still stay away from placing an open offer for additional 26% as it would have been required to do before. Besides EIH-ITC combination, such shareholding pattern can be seen in Cairn India (investor is Petronas with 14.94% holding), Binani Cement (investor is JP Morgan with 14.91% holding), Indiabulls Securities (investor is HSBC Global with 14.84% holding), Infotech Enterprises (investor is General Atlantic with 14.76% holding), Amtek India (investor is Warburg Pincus with 14.64% holding), Allcargo Global (investor is Blackstone with 14.63% holding), etc.

Now these companies can increase their holding to 25% through open market purchases, which can result into a fresh bounce in the stock of their respective targets. On the other hand, in a reverse scenario, where promoters have a higher holding, they can easily reduce their holding by 24.99% without going to the market. While this will a boon for them in terms of accessibility to liquidity, such uncertain ownership situation will make the minority shareholders suffer.

However, the real beneficiaries of the new code will be the private equity industry, which can now eye for larger deals. With the new threshold limit for takeovers, the private equity players can now buy a meaningful stake in a small or medium-sized company without having to make an open offer. In fact, experts believe that the new SEBI proposal will increase the deal size by about 70%.

Another significant change that runs in favour of PE players is that “there should not be any non-compete fees paid to the promoters” by the acquirers. This will not only bring-in the transparency in the structuring of PE deals, but will also result in Increased PE activity going forward.

These revisions surely will change the dynamics of M&As in India, in comparison to the current scenario. However, the revisions are not as dynamic as proposed by the Takeover Committee, as the open offer size proposed by that committee was 100%, whereas SEBI has revised it to only 26%. To this extent, the impact of revisions is not as forceful as originally expected. Having said that, these revisions will still prove to be gamechangers in the game of M&As; which way the game would change is what remains to be seen.

Karan Arora           

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