The Hindu Business Line : Takeover code gets complex in differential voting rights milieu

As a measure of promoting public interest, the SEBI Takeover Regulations ordain an acquirer to acquire 20 per cent of the voting rights after having acquired 15 per cent or more of the same from the promoters.

— G.R.N. Somashekar

A fair deal needed in voting power.

S. Murlidharan

The SEBI Takeover Regulations at the very rudimentary level is all about giving the public shareholders an opportunity to get the same attractive price which a shareholder — usually a promoter —gets on a negotiated deal.

Of course, the regulations do not place the promoter and the public on a par in this regard. Indeed this is neither possible nor warranted because while the promoter offers on a platter controlling interest thus entitling him to a hefty control premium, public shareholders bring shares in dribbles and driblets. However, as a measure of promoting public interest, the regulations ordain an acquirer to acquire 20 per cent of the voting rights after having acquired 15 per cent or more of the same from the promoters.

Thus Daiichi Sankyo which acquired 34 per cent stake from the promoters of Ranbaxy at a hefty Rs 737 per share whose market value at that time was around Rs 450 had to offer to buy from the public another 20 per cent thus taking its stake to 54 per cent .

While every share in a lot of 100 shares belonging to the promoters were thus bought, only 30 out of 100 belonging to others would be bought (20 per cent of non-promoter holding of 66 per cent or 20 divided by 66 and multiplied by 100). The public should be happy with this regime.

Economic rewards

Simple as it is, the regime could become complicated where shares carry differential voting rights. Tata Motors plans to make a rights issue of shares carrying one vote for every ten shares as against the one-share-one-vote norm for the existing shares.

Differential voting shares are rooted in the philosophical realisation that small shareholders at the end of the day are interested more in economic rewards than in voting.

Tata Motors therefore plans to entice them with a sweetener — 5 percentage points extra dividend vis-À-vis the shares carrying full voting rights. Thus if the company announces 20 per cent dividend, the shares carrying lesser voting rights would get 25 per cent. So far so good.

But what about the market? Well, during normal times there may not be a marked difference between the quotations for the two sets of shares because while the 5 per cent extra dividend is no big deal considering the fact that dividends are on face or par value, inferior voting rights may not ipso facto translate into a thumbs down for these shares.

But should there be a takeover attempt, friendly or hostile, the shares with full voting rights may well command a huge premium vis-À-vis the shares conferring lesser voting rights. Let us say the existing share capital of a company is Rs 100 crore carrying full voting rights. And this company issues rights shares of Rs 20 crore with every ten shares being vested with one vote. Let us say 20 per cent of the shares carrying full voting rights are disposed of by the promoters to the acquirer.

Having reached and crossed the 15 per cent voting power threshold, the acquirer is obliged to acquire another 20 per cent of the voting power of the company. It would be unfair if the extant regulations are read to mean acquisition of 20 per cent additional shares from the first category of shares alone because the accent of the regulations is on voting power and nobody can deny the fact that the second set of shareholders too have voting rights though inferior to those of the first set of shareholders.

Voting power

In all fairness they must also be allowed to partake in the exercise even though they cannot expect the same number of shares to be bought from them for every 100 shares held. In the example on hand, the ratio of the two sets of capital is 100: 20. But converted into voting power, the ratio is 1000:20.

Thus the acquirer ought to make his offer to both the sets of shareholders so as to keep his promise of buying out 20 per cent of the total voting power of the company in such a manner that both of them get a fair deal, the one that reflects their inter se voting rights.

Of course, this is easier said than done because as would be seen from the following assay in mathematics by a novice, no simple and satisfactory formula is available. If out of 1020 lakh votes, 20 per cent, that is, 204 lakh votes are obtained in the ratio of 1000:20 from the two sets of shareholders, the first set of shareholders would be bought out to the extent of 200 lakh votes or 200 lakh shares having full voting rights and the remaining 4 lakh votes must be obtained by acquiring 40 lakh shares from the shareholders having inferior voting rights. While this appears to be fair, it would introduce a distortion, the one that would place a perverse premium on inferior voting rights.

If 200 lakh shares are obtained from the first set of shareholders, in all fairness to them not more than 4 lakh shares should be obtained from the second set of shareholders, given the fact that the voting rights differential between the two sets of shares is 50.

Mathematical formula

One hopes a simple and more satisfactory mathematical formula is found to do justice to both the sets of shareholders. If only 4 lakh shares are bought from the second set of shareholders, only 40,000 votes would have been acquired whereas the need was for 4 lakh votes.

While acquiring only 4 lakh shares from the second set of shareholders would be a perfect solution in the direction of doing inter se justice to the two sets of shareholders, the SEBI regulations would stand violated inasmuch as the acquirer would have fallen short of the 20 per cent vote mark by 3.6 lakh votes. Perhaps SEBI should step in to end this seeming impasse.

(The author is a Delhi-based chartered accountant.)