The takeover code
An increase in the open offer size from 20 per cent to 100 per cent has been recommended by the takeover committee. It's likely to be implemented in the next financial year.
Finance Minister Pranab Mukherjee
THE CHANGE
An increase in the open offer size from 20 per cent to 100 per cent has been recommended by the takeover committee. It's likely to be implemented in the next financial year.
THE INTENT
Through its proposals, the Sebi committee intends to help small investors gain from takeovers, bringing them at par with institutional investors. This proposal is also expected to further the reforms agenda in the Indian capital markets.
THE IMPACT
The key recommendation of the takeover committee is to increase the open offer size to include all shareholders of the company.
Currently, this size is a minimum of 20 per cent of outstanding shares. "Sebi's proposal intends to provide each shareholder the opportunity to exit his investment on terms that are not inferior compared with those for institutional shareholders," states Macquarie, a research firm.
Also, a non-compete fee, if considered, is to be included in the open offer. This would be paid to every shareholder, not just to promoters. There is also a proposal to reduce the period to complete the process from 95 calendar days to 57 business days from the date of announcement of the offer. The proposal will also further the reforms agenda in the Indian capital markets.
The acquisition of Ranbaxy Laboratories by Japanese drugmaker Daiichi Sankyo can help put the matters in perspective.
After acquiring the promoters' stake as per the prevailing laws, Daiichi Sankyo made an open offer to buy 20 per cent of the outstanding shares of the company.
The offer, made at Rs 737 a share, was 45 per cent higher than the market price of Rs 499. Since the promoters offloaded their entire 34.8 per cent stake for around Rs 10,000 crore, not all individual investors were able to sell their shares at Rs 737. This was because the open offer was confined to only 20 per cent of the outstanding shares, while more than 60 per cent of the company's equity shares were held by non-promoters.
So, even though the open offer was made at a higher price, all shareholders were not able to take advantage of the takeover. Effectively, it was only the promoters and a few major investors who cashed out at a higher share price.
The other key recommendation by the committee is to increase the open offer trigger. The current regulation warrants investors to make a mandatory open offer if their holding is raised beyond 15 per cent.
This has forced many strategic and institutional investors to cap their holding below the offer trigger of 15 per cent. Therefore, even if such investors continue to be positive on the company or stock, they refrain from increasing their holding beyond the trigger point.
Now, the committee proposes to increase the offer trigger to 25 per cent. With a higher trigger limit, Indian companies will find it easier to get funding from strategic partners as they can own a more substantial share of the firm.
The industries where companies are looking for strategic partners, such as the telecommunications sector, are expected to benefit from this proposal. The increase in the trigger is also beneficial for individual or retail shareholders because an increased ownership will strengthen the position of strategic investors and, in turn, will force greater accountability from promoters.
An increase in the open offer size from 20 per cent to 100 per cent has been recommended by the takeover committee. It's likely to be implemented in the next financial year.
THE INTENT
Through its proposals, the Sebi committee intends to help small investors gain from takeovers, bringing them at par with institutional investors. This proposal is also expected to further the reforms agenda in the Indian capital markets.
THE IMPACT
The key recommendation of the takeover committee is to increase the open offer size to include all shareholders of the company.
Currently, this size is a minimum of 20 per cent of outstanding shares. "Sebi's proposal intends to provide each shareholder the opportunity to exit his investment on terms that are not inferior compared with those for institutional shareholders," states Macquarie, a research firm.
Also, a non-compete fee, if considered, is to be included in the open offer. This would be paid to every shareholder, not just to promoters. There is also a proposal to reduce the period to complete the process from 95 calendar days to 57 business days from the date of announcement of the offer. The proposal will also further the reforms agenda in the Indian capital markets.
No power of attorney Sebi has barred the use of the power of attorney between brokers and investors to prevent unauthorised use of stocks and funds lying in the accounts of clients. |
After acquiring the promoters' stake as per the prevailing laws, Daiichi Sankyo made an open offer to buy 20 per cent of the outstanding shares of the company.
The offer, made at Rs 737 a share, was 45 per cent higher than the market price of Rs 499. Since the promoters offloaded their entire 34.8 per cent stake for around Rs 10,000 crore, not all individual investors were able to sell their shares at Rs 737. This was because the open offer was confined to only 20 per cent of the outstanding shares, while more than 60 per cent of the company's equity shares were held by non-promoters.
So, even though the open offer was made at a higher price, all shareholders were not able to take advantage of the takeover. Effectively, it was only the promoters and a few major investors who cashed out at a higher share price.
"The purpose was to protect the interest of all shareholders... In such cases, the focus is mainly on ordinary shareholders and our perception is that we have done a fair job." C. ACHUTHANChairman, Takeover Regulatory Advisory Committee |
This has forced many strategic and institutional investors to cap their holding below the offer trigger of 15 per cent. Therefore, even if such investors continue to be positive on the company or stock, they refrain from increasing their holding beyond the trigger point.
Now, the committee proposes to increase the offer trigger to 25 per cent. With a higher trigger limit, Indian companies will find it easier to get funding from strategic partners as they can own a more substantial share of the firm.
The industries where companies are looking for strategic partners, such as the telecommunications sector, are expected to benefit from this proposal. The increase in the trigger is also beneficial for individual or retail shareholders because an increased ownership will strengthen the position of strategic investors and, in turn, will force greater accountability from promoters.
