The Hindu Business Line : Promoters would need innovative strategies to finance acquisitions

Will the recent change in the SEBI takeover code trigger a rush among the promoters to buy back their shares? The question does not seem to elicit any clear answer from the experts, though the Indian promoters have been awaiting an amendment of this nature for a long time.

“The moot question is as to whether this change will trigger the promoter buying,” concedes Mr Girish Vanvari, Executive Director, M&A Tax, KPMG.

He says that the global financial meltdown has its impact on the Indian scenario too, wherein liquidity has become sacred and there is a severe credit squeeze.

“It will be interesting to see the financing innovative strategies, which the promoters may adopt to make the most of this opportunity,” adds Mr Vanvari, during the course of an email interaction with Business Line.

The Securities and Exchange Board of India responded to the economic situation emerging pursuant to the global financial crisis by announcing liberal amendments to the Substantial Acquisition of Shares and Takeovers Regulations, 1997, (a.k.a. SEBI takeover code) that give an opportunity to Indian promoters to increase their stake in Indian companies.

The recent amendments permit promoters to consolidate their holdings in a company up to 75 per cent vis-À-vis the earlier limit of 55 per cent through creeping acquisition. Prior to this amendment, promoters holding 15 per cent or more (directly or indirectly) could increase their shareholding by 5 per cent on an annual basis without triggering an open offer. As soon as the promoter touched the threshold of 55 per cent holding in a company, any increase of stake by the promoter led him to make an open offer of 20 per cent to the public shareholder.

Now, a promoter can continue to increase his shareholding by 5 per cent on an annual basis up to 75 per cent without triggering the open offer. Further, the mechanism through which this can be effected has also been laid down by SEBI; i.e. the amendment permits an increase in holding only through the secondary market purchase and not through bulk, block or negotiated deal or through preferential allotment.

Is the absence of benefit for preferential allotment a drawback?

On this, Mr Vanvari is of the view that the effect of the non-availability of the exemption to preferential allotment is neutral in the current market scenario, as the pricing of preferential allotment would be based on the higher of the 26 weeks’ average price (high and low of the closing price) or the 2 weeks’ average price.

“Certainly, the 26 weeks’ average price would be far higher than the 2 weeks’ average price and current market price,” he reasons. Thus, it would be more meaningful for the promoter to go for an open market purchase vis-À-vis preferential allotment, avers Mr Vanvari.

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