Takeover Code would aim to provide for a simpler, precise

regulatory regime

The much awaited Report of Takeover Regulations Advisory Committee released for
public comments and the draft regulations, if approved by the SEBI board, could alter the
face of M&A in publicly listed companies in India.

Much like the proposed revamp of tax laws, the draft regulations propose to fully rewrite
the existing Takeover Code and aim to provide for a simpler, precise, and unambiguous
regulatory regime. The Advisory Committee has used the existing Code and
jurisprudence around it as a starting point and has considered international practices
suitably modified to the Indian context.

Clearly, there seems to be an attempt to balance the interests of various stakeholders

including acquirers, shareholders, and target company, with the overarching philosophy
of protecting the interests of public shareholders in takeover situations. It is heartening to
see that the committee has painstakingly laid out the objectives and various issues
considered by it while drafting these proposals.

The two most significant changes in proposed regulations are the increase in threshold
limit for a public offer from 15% to 25% and the requirement to give an exit opportunity
to 100% public shareholders via a public offer as compared to the minimum 20% now.
The increase in threshold limit would be a welcome change for potential acquirers,
particularly private equity investors, and is in recognition of the changed scenario
where very few promoters control listed companies with 15% shareholding.

The Advisory Committee has also vehemently argued in favour of an exit opportunity for
all shareholders on grounds of equity and fairness as the exiting promoters may have de
facto control in many listed companies with shareholding in the range of 25% to 30%.
While the Committee has recognised issues like financing M&A deals under these
revised proposals, particularly the disadvantaged position of Indian acquirers vis-à-vis
foreign acquirers under the extant exchange control regulations, the balance seems to
have tilted in favour of public shareholders with a suggestion to relook into exchange
control norms laid down by RBI.

This proposal could mean that cost of an M&A transaction may significantly increase,
particularly in case of widely-held companies and in situations where budgets for M&A
deals is a constraint, could lead to some ongoing M&A decisions being reconsidered.
However, given that this model has been followed internationally, in the long run, this
could mean a stronger and more robust regime.

Another proposal which could enhance the costs of transaction is the removal of
exemption to 25% consideration as non compete payment from inclusion in open offer
price. Accordingly, no distinction shall henceforth be made between the price paid to
promoters and public shareholders in line with international practices. The Committee
has argued this to be a pro minority shareholder proposal and one which would prevent
payments to promoters couched as ‘control premium’ or ‘non compete fee’.

In what could be argued as a major acquirer friendly proposal, the target company would
need to be delisted if pursuant to a statutory open offer, the level of acquirer’s
shareholding increases beyond 90%. Such delisting would be undertaken by giving an
exit window to public shareholders at the open offer price. While the proposals have
stopped short of a compulsory minority squeeze out, this could obviate the need of going
through the cumbersome and expensive reverse book building process under the present
delisting guidelines. Further, following the public offer, if the acquirers shareholding is
between 75% and 90%, necessary steps would need to be undertaken to bring down their
shareholding to 75%.

Another interesting proposal is to include the “ability” in addition to “right” to appoint

majority directors or to control the management and policy decisions in the definition of
“control”. This could mean that open offer could be triggered if the acquirer obtains de
facto control and not necessarily de jure control — the determination of de facto control
would be purely factual and could be subject matter of litigation in times to come.

The proposal to allow promoters to shore up their shareholding to 75% under the 5% per
financial year creeping acquisition window should be a welcome change for family-
owned businesses. Promoters can also consolidate their shareholding through the
voluntary open offer route with minimum offer size being 10% — this could provide a
window to increase shareholding outside the statutory public offer route for 100%
shareholding.

Other welcome changes include revisions to pricing formula for the open offer, specific
provisions on open offer pricing in case of indirect acquisitions which would reduce the
ambiguity under the present takeover code. The proposal to constitute a committee of
independent directors to consider and give reasoned recommendations on the open offer
pricing is a welcome move from a corporate governance standpoint.

In summary, the proposed changes represent the progressive mindset of SEBI and seek to
align takeover regulations with globally accepted norms. This should be viewed as a
welcome change in the thinking of regulators who seem to be thinking of ahead of the
curve, given India’s increasing prominence in global economic affairs and capital
markets. It needs to be seen what form and shape does the revised Takeover code takes
once approved by the SEBI Board, but the landscape of M&A in public listed companies
India should get changed forever.