Please-all Takeover Code

The new Takeover Code, to be effective from October 22, 2011, is creating a lot of discussion among promoter groups. Promoters who are at the edge of shareholding, below 25 per cent, are scouting for funds, to raise their stake above the threshold limit of 25 per cent; the big players are gearing up for hostile takeover by raising their stakes, and in midst of all this, the market regulator is closely monitoring the gamut of activities.

PLUS POINTS

The new Takeover Code has something for everyone; the plus points include increase in the threshold limit for making an open offer from 15 per cent to 25 per cent. This is a welcome change for companies looking for growth, as they will now find it easier to raise money from private equity funds, venture capital funds and other strategic investors. This may also bring back the much-needed foreign direct investment (FDI) inflow into the country, which can boost the overall market sentiments.

The small investors also have reasons to rejoice: the increase in the open offer size to 26 per cent from 20 per cent earlier, disallowance of paying non-compete fees by the acquirer, the change in formula for calculation of offer price, are some of the measures taken by the regulators to avoid injustice to minority investors.

Promoters who want to consolidate their shareholding above 55 per cent can now raise it up to 75 per cent through 5 per cent annual creeping acquisition route, without triggering open offer.

Although the regulators wanted a robust law in place to curb all shortcomings and bring in transparency in dealings, they seem to have overlooked certain aspects which may have adverse implications for a few.

It appears that for companies with promoters' shareholding between 15 per cent and 20 per cent, an open offer is now inevitable for the promoters to increase stake beyond 25 per cent at any time in the future.

ADVERSE IMPLICATIONS

Promoters holding shares between 20 per cent and 25 per cent may have to quickly scout for funds to take their shareholding above 25 per cent; else they will be required to make an open offer to consolidate their holding after October 22, 2011. Further, liquidity in these stocks may be a major impediment for promoters looking to increase their stake in 3-weeks timeframe.

Companies with a sound performance record and with future growth prospects need to beware, as the big players can now gear up to make the hostile bid. The hostile takeover has now become easier than before, as one can increase their stake up to 24.99 per cent, by acquiring through market and then make an open offer of 26 per cent, to raise their stake close to a dominant 51 per cent. Even if some investors don't participate in the open offer, the raiders have another chance to make a voluntary open offer of an additional 10 per cent.

Further, the scope of exemption provided for inter-se transfer amongst qualifying promoters and ‘person acting in concert' has been narrowed under the new takeover code. The new takeover code doesn't seem to have covered the exemptions for transfer to limited liability partnership, partnership firms, trusts, foreign collaborators etc. The definition of ‘relatives' has also been restricted, and the scope of exemption, through a scheme of merger or reconstruction, is curtailed, with imposition of new conditions. The new Takeover Code is certainly a step towards a more vibrant and simplified regulatory regime, which has tried to adopt the best international practices. However, only time will tell how the Indian corporate sector reacts to it.

(The authors are Executive Director and Manager, KPMG, respectively.)

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