New Rules of the M&A Game

A Sebi-appointed panel proposes major changes in takeover norms to make the process fair. The real test will be in their implementation.

After nearly a year of deliberations, a panel set up by the Securities & Exchange Board of India (Sebi) to review the country’s takeover framework has turned in its report. The panel, headed by former Securities Appellate Tribunal head C Achuthan, has offered far-reaching recommendations that can potentially change the way M&A activity is conducted in India. 

The Sebi takeover norms were in dire need of an overhaul, having first come into existence way back in 1997 as a result of a report by a panel headed by PN Bhagwati, the former Chief Justice of India. As M&As gained momentum in India and Indian corporations became more attractive to potential acquirers— both Indian and foreign—it became amply clear that some of the provisions needed to be altered not just to provide a more level playing field, but also make it more investor-friendly. And the Achuthan panel aims to do just that: make the takeover environment more equitable and just for all concerned.

The most significant change proposed is that of increasing the threshold shareholding level for making an open offer to 25 per cent from the earlier 15 per cent. This alone has the potential of changing the way the corporate sector views share acquisitions in this country. Earlier, several segments of shareholders were unable to pick up meaty stakes in good companies because they would mandatorily have to make an open offer the moment the earlier trigger of 15 per cent was breached. This kept out several categories of shareholders, notably private equity firms who were typically not interested in controlling companies, but wanted significant positions to justify their investments. The raising of the trigger will now allow many such investors to come in with stakes just under the 25 per cent trigger and hold strategic stakes in companies that need investment. While strategic investors may have wanted an even higher threshold since over 25 per cent stakeholding allows blocking of special resolutions, the level proposed by the panel is significant enough to facilitate large strategic fund flows into companies.

Perhaps equally important is the proposal under which a mandatory open offer must be made for the remaining shares of a company once the 25 per cent limit has been breached. The current rules require an acquirer to only make an open offer for another 20 per cent of the company. The Achuthan panel deserves kudos for proposing this change, which, once implemented, will ensure that all remaining shareholders in a target company get an exit option via the open offer. 

Yes, this will make the process of acquiring a company more expensive, but whoever said acquiring companies was a cheap affair? Acquirers keen to grow inorganically must be ready to put their money where the mouth is. At the same time, the proposals also allow existing promoter groups to make voluntary open offers for only 10 per cent additional stake.

Minority shareholders, who have often got a raw deal in case of takeovers or when two acquirers have fought for control over a target company and revised bids, are in for better times, if the panel’s recommendations are accepted by Sebi. In line with international practice, the Achuthan panel—which also had some star corporate CFOs as members—has recommended that the target company must set up a panel of independent directors to provide mandatory opinion on an open offer. This will ensure minority shareholders are able to take an informed decision on whether or not to tender their shares in the offer. 

The panel has also streamlined several other procedures and simplified them, seeking to make the new takeover norms contemporary and easy to execute. 

On several occasions in the past, Sebi found itself caught on the wrong foot as many of the existing takeover norms were tested by smart acquirers, even as minority shareholders were left as mute spectators. This is expected to change once the new proposals become law after public discussion. However, for Sebi, the real test will lie in how effectively it is able to implement these proposals in real-life situations. Clearly, a new chapter in the country’s M&A scenario is about to begin.

These are the author’s personal views. He  can also be reached at majumdar.sourav@gmail.com

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Sourav Majumdar