Investors holding lower stake will look to go beyond 25 per cent before October 22 so that they fall outside the purview of open offer under new Takeover Regulations.

Indian regulators are in an overdrive and every law is undergoing a revamp. A new Competition Law has been introduced ; Refurbished corporate laws are ready for launch; Direct Tax Code and Goods and Services Tax Act (GST) are set to bring a new era to direct and indirect taxation; and amendments to various other regulations are in the pipeline.

And now, new regulations for M&A involving acquisition of shares, voting rights and control (New Takeover Regulations) in listed companies have been introduced with effect from October 22. New Takeover Regulations are substantially in line with the report and proposal of the Takeover Regulations Advisory Committee, set up in 2009 to review the existing regulations.

So, what do the New Takeover Regulations have in store for potential acquirers and existing promoters?

Higher trigger limit

For acquirers, increase in trigger limit for open offer from 15 per cent to 25 per cent would allow holding of larger stakes (up to 24.99 per cent) without triggering an open offer.

Acquirers will also have greater say in corporate matters and can potentially block special resolutions (which require a 75-per-cent majority) in the context of critical decisions, given the voting pattern in most listed companies, where minority shareholders are not active voters.

Increase in this trigger limit would also enable small- and medium-sized listed companies to raise more growth capital from external investors.

The open offer size has been increased from 20 per cent to 26 per cent of share capital, such that in case of a 25-per-cent initial acquisition, the acquirer can reach 51-per-cent majority, assuming full subscription to open offer (though this has not been the norm in open offers historically).

The Advisory Committee's recommendation to increase the open offer size to 100 per cent of residual public shareholders and allow for “automatic delisting” has not been accepted. India could take a while to adopt this recommendation, in the light of economic and regulatory environment.

Cooling-off period

There will be transactions where the acquirer could end up owning more than 75 per cent (where upfront promoter stake acquired exceeds 50 per cent), with a conflict of Takeover Regulations, delisting regulations and 25-per-cent public shareholding requirement. In such circumstances, acquirer's shareholding is required to be reduced to 75 per cent (maximum limit).

According to the new Takeover Regulations, such acquirers, whose shareholding exceeds 75 per cent after open offer, cannot voluntarily delist the company for a 12-month “cooling off” period.

Applicability of cooling-off period provisions requires additional clarity, specifically where acquirer divests stake immediately to comply with the 75-per-cent limit.

Alternatively, can the acquirer decide to continue holding greater than 75 per cent stake for 12 months (though in non-compliance with listing agreement provisions), and proceed for delisting directly.

Indirect acquisitions (through acquisition of companies other than the listed company itself) have been defined with prescribed materiality parameters (asset value, revenue, or market capitalisation), and certain indirect acquisitions deemed as direct acquisitions for open offer triggers, pricing and compliances. This will be relevant in global acquisitions with an India-footprint as well.

In so far as promoters are concerned, there is not much in the New Takeover Regulations other than an increase in shareholding limit from 55 cent to 75 per cent through the creeping acquisition route (5 per cent annual stake increase). This threshold is now even more relevant, given that large investors can anywayacquire 24.99 per cent without an open offer.

Non-compete fee

A pro-minority change introduced is the scrapping of the separate non-compete fee payment to promoters. Existing takeover regulations permit payment of such non-compete fee/ control premium up to 25 per cent of acquisition price, and this payout is not considered for determining open offer price for public (though it has been historically prone to challenge by public and authorities).

Promoters are going to feel short-changed at being equated with other public shareholders for share pricing with no additional non-compete fee/control premium for their efforts put in developing and managing the listed company.

Exempt transactions (which do not trigger open offer) have been overhauled and strengthened to plug gaps, along with inclusion of anti-abuse conditions, to mitigate stake increase/ takeovers of listed companies without making an open offer for the public to exit.

This includes changes to exemptions of inter-se transfers amongst promoters/ others, court approved restructuring schemes (which is a common “exempt” route used for stake increase), and corporate actions such as buybacks and rights issues.

In summary, from a capital markets standpoint, investors holding stake in the region of 20 -24.99 per cent will look to go beyond 25 per cent before October 22 so that they fall outside the purview of new Takeover Regulations on any future stake increase up to 75 per cent.

Promoters will consolidate stake to strengthen their shareholding position immediately, in case they anticipate a stake increase by existing investors in the new regime.

Post-October 22, existing private equity funds/other investors will re-look their existing shareholding and target company potential/ current market capitalisation to evaluate stake increase up to 24.99 per cent.

Promoters of certain companies will consolidate shareholding gradually beyond 55 per cent, now that stake increase through creeping acquisition is permitted up to 75 per cent.

(The author is Partner at BMR Advisors. The views are personal.)

(This article was published on October 8, 2011)
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