Draft report of Take over code for companies take over by other companies
Nowadays, mergers and acquisitions with/of other companies are of the order. The existing rules favored promoters rather than other shareholders including minority share holders. In India, two companies had entered into agreement whereby Daiichi was to take management control of Ranbaxy by giving sizable premium to the market price of Ranbaxy at that time. Promoters of Ranbaxy could encash all their shares at this premium and in contrast only 20% of the remaining shareholders could get premium thus hitting the minority shareholders.There have been many such examples where differential treatment were given to promoters and minority shareholders in case of open offer and minority shareholders are the sufferers ultimately.
In order to correct this, one committee was appointed by the Securities Board of India , under the chairmanship of the former head of Securities Appellate Tribunal C.Achuthamenon. He has submitted its report to the market regulator. The committee was formed in September 2009 and its mandate was to look at an overall change in takeover norms. This will become law once SEBI accepts it.
The main points of recommendations are:
- When a company is having 100% equity capital and when acquires 15%, open offer trigger is on in the existing system. Companies have been seeking a higher open offer trigger threshold as international norm is 35%. Looking into decision making for which voting rights is essential, this limit is enhanced to 25%. This is called control of 25% equity with voting rights.This gives PE entities and institutional investors more room to raise stake without triggering an open offer if stake is less than 25%. It is likely to increase foreign flows. This control is also defined further now as the ability to indirectly exercise voting rights or exercise control over the target company. If this control beyond the trigger threshold limits in will attract the obligation to make an open offer regardless of whether such target company is a predominant part of the business or entity being acquired.
- The Companies will now have to make a public announcement of the open offer on the same day as the shareholder agreement. Earlier, companies had four days to make this announcement public.
- The timeline for the offer will be 57 working days. The fact that timeframes have shrunk is great and it also goes along with the fact that with the shorter time frame, there would be less scope for manipulation.
- The promoters limit was 55% so far. But now it is increased to 75% and balance should be from public. So creeping acquisition is possible now for the promoters having 55% now to go up to 75%.
- Earlier the open offer is limited to 20% of shareholders of the company and hence the remaining shareholders who are unfortunate or who are given only part are the losers. Minority shareholders are affected much in this method. In order to correct this anomaly, the panel has recommended an offer for the entire 100% equity holdings in case of a statutory open offer so that all shareholders enjoy the offered price and tender their share against open offer and hence there is no discrimination.
- In the above process, if the shareholdings of acquirer cross 90% of the equity, the said company will be delisted automatically. Since mandatory 25% shares to be in the public hands in case of listed companies, for those who want their company listed but likely to get shareholdings of more than 75% but below 90%, they have to accept the open offers upto the maximum non-public shareholding limit i.e. 75%.
- Open offer will also get triggered if promoters acquire more than 5% in any fiscal year. The exemptions from open offers are buybacks, corporate debt restructuring, rights issues, and schemes of arrangement not involving the target company etc.
- For price determination, in the place of six month average price, the average cost of acquisition for 52 weeks has been added. This is a boon for investors. A sixty trading day weighted average price has also been included in the list of price to be considered to determine offer price.
- The panel also clarified on indirect acquisition rules. If the Indian target company is more than 80% of the parent’s assets, then the indirect acquisition can be treated as a direct acquisition. This announcement also should be made on the same day.
- For voluntary open offer, under the existing rules, shareholder holding more than 55% only can offer. As per the recommendation, anyone holding more than 25% can offer minimum of 10% and maximum of that % which will not result in a breach of the maximum non-public shareholding permitted under the listing agreement i.e. 75% now.
- The Independent directors of target company to give mandatory opinion on open offer which will help retail investors in taking better informed decisions. This amendment is in line with global best practices.
- The Non-compete fee/control premium (if paid to promoters) need to be added to offer price in order to give equal treatment for all shareholders. This will prevent abuse of any kind of extra payment made only to the promoters.
- The Acquirer is to make up-front disclosure of delisting plans which will help minority shareholders to take a better call on holding or tendering of shares
- 100% open offer may lead to lower M&A activity ahead.
- Welcome from Minority shareholders and India will be moving towards international standards overcoming the lobby of corporate india.
- There are going to be big questions on financiability of a 100% offer. The acquirer should arrange for money. Share swaps are allowed.
- Corporate India may lobby very hard against this 100% open offer and asking SEBI to approve upto 51% instead of 100% as recommended by panel.
Anyhow SEBI is doing nice thing to improve Indian market in line with international norms. After checking the public comments, SEBI may accept in full or partial of recommendations and it may take 3 months.
C. R. Venkata Ramani