Mergers & Acquisitions

New Norms for New India?

GRK Murty
In a world of continuous redefinition of industry boundaries and
commingling of technologies, businesses have to strive for
‘opportunity share’ in future markets. To catch up with such
demands, mergers and acquisitions have become universal tools to
attain greater market share; acquire additional brands; cannibalize
competing brands; realize improved infrastructure; create new
synergies; capitalize on efficiencies and economies of scale; globalize
in shorter span of time, etc.

There is however a flip side to these acquisitions: the interests of

minority shareholders in the target company are often lost sight of,
besides the very pricing of the target company’s shares being
questioned now and then. Against this backdrop, the Takeover
Regulations Advisory Committee that has been constituted under the
Chairmanship of C Achuthan to overhaul India’s takeover rules, must
be complimented for treating an acquisition as a ‘commercial call’
and accordingly recommending a complete rewrite of existing
regulations, which if implemented would have a far-reaching impact
on India Inc.

The committee recommended for raising the threshold level for

mandatory open offer from the present level of 15% to 25% which, if
accepted, will automatically force the promoters of such companies
which are being controlled with lower holdings to raise their stakes
to pre-empt hostile takeovers. Secondly, it would enable promoters
of the firms to raise equity through private equity participation or
institutional investment. Indeed, the industry expects the PE deals in
listed companies to rise if the recommendation is accepted by the
Sebi. Thirdly, it would encourage overseas players who are interested
in having a strategic stake in Indian companies to invest without
triggering an open offer. Cumulatively, all this would lead to likely
improvement in corporate governance in Indian companies, while of
course, leaving the promoters in a little financial hardship.

It has also taken care to uphold the underlying philosophy of

acquisitions—equality of opportunity for all shareholders, protection
of minority interests, transparency and fairness—by increasing open
offer size from 20% to 100%; directing independent directors of target
company to give mandatory opinion on the open offer; and asking
the acquirer to add non-compete fee/control premium, if paid to
promoters, to the offer price. Simply put, these guidelines would
mean minority shareholders getting the same price that the
promoters would get besides an equal opportunity to exit
investments. The mandatory requirements of independent directors
of the target company to comment on the offer and in the process
involve themselves in the takeover process would enable minority
shareholders to take well-informed decisions besides ensuring quality
corporate governance.

The proposals, if implemented, would also make it easier for

companies to delist the target company upon acquiring it—if the
acquirer ends up with 90% holding on the closure of the offer, it can
delist the company in one go. On the other hand, if the open offer
results in the acquirer holding 75-90% of the equity in the target
company, the acquirer can choose either to delist or may reduce the
equity proportionately so that the holding remains within the
acceptable level. This requirement for proportionate acceptance may
act as a dampener, of course marginally, for the shareholders cannot
be certain of their shares being accepted in the open offer. This is
quite an acquirer-friendly regulation. But the provision that the
acquirer cannot acquire shares in target firm for 26 weeks following
completion of open offer will prevent acquirers from playing a foul
game: underpricing of shares in the open offer and later buying them
in the secondary market.

There is another interesting recommendation: inclusion of the

‘ability’ in addition to ‘right’ to appoint majority directors or to
control the management and policy decisions in the definition of
‘control’. Which is why it could be said that open offer could be
triggered if the acquirer obtains de facto control but not necessarily
de jure control. Of course there is a downside to it: determination of
de facto control may lead to litigation. Nevertheless, the provision
offers clarity in understanding control of a firm.

Overall, the recommendations sound investor-friendly. There is of

course an argument that the proposed increase in the threshold limit
to 25% and offering exit opportunity to 100% public shareholders
under the open offer will make acquisitions pretty expensive. India
Inc. even argues that in view of non-availability of bank finances in
general for acquisitions will place Indian corporates at a
disadvantage vis-à-vis overseas companies. But the Chairman,
Achuthan argues that “if one cannot meet the fund requirements in
an acquisition process, then he should not acquire companies in the
first place itself”, and it sounds pretty logical. In any case, if it is felt
that multinational corporations who are known to mobilize capital
from global financial markets on easy terms will be placed at an
advantage vis-à-vis domestic companies in acquiring Indian entities,
the regulators may think of facilitating availability of finance
differently, of course, in healthy ways.
Despite these arguments, the proposed changes under M&A code
that is in alignment with the global practices deserve to be
implemented while of course, addressing issues pertaining to
availability of bank finance for acquisitions in general with a
progressive mind.

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