Ensuring equal rights

They certainly make for bold headlines, peppered with interesting numbers, but mergers and acquisitions do not usually garner a lot of interest. After all, the only beneficiaries are promoters or big shareholders, so retail investors tend to ignore such activities. Until recently, that is. The acquisition of Ranbaxy Laboratories by Japanese drug maker Daiichi Sankyo and the subsequent open offer for its shares generated a lot of attention.

After acquiring the promoters' stake, Daiichi Sankyo made an offer to buy 20% of Ranbaxy's outstanding shares as per the prevailing law. The offer, made at Rs 737 a share, was 45% higher than the market price of Rs 499. The promoters offloaded their 34.8% stake for around Rs 10,000 crore. Though other investors held about 60% of the shares, not all of them were able to sell these at the offer price because the open offer was confined to only 20% of the outstanding shares.

Realising the skewed nature of takeovers, Sebi appointed the Takeover Regulatory Advisory Committee, which has recently filed its recommendations. The proposals, if implemented, will further the reforms agenda in the Indian capital markets. The key recommendation is to increase the open offer size from 20% to 100%, which is a positive step for small investors. "Sebi's proposal intends to provide each shareholder an opportunity to exit his investment on terms that are at par with substantial shareholders," says research firm Macquarie. If a non-compete fee is paid by the acquirer to the company, it should be included in the open offer, which means that instead of being limited to promoters, as is done now, all investors will get a share.

Also, the timeline for the open offer has been proposed to be reduced from the current 95 calendar days to 57 business days. Another key recommendation is to increase the open offer trigger. Under the current regulation, investors have to make a mandatory open offer if their holding rises above 15%. This has forced many strategic and institutional investors to cap their holding below this limit. So, even if such investors want to, they cannot increase their holding. The committee proposes to own a more substantial share.

Industries such as telecommunications, where companies are looking for strategic partners, are expected to benefit from the proposal. The increase in the initial trigger is also expected to be favourable for shareholders as it strengthens their hands and forces greater accountability on the part of promoters. "The existing takeover code provides a relatively easy environment for promoters, even weak ones. Big shareholders with limited stakes (15-25%) can control companies and potentially neglect the needs of the so-called minority, who are actually substantial investors (around 85% shareholding)," notes Kotak Securities.

The revised code, if implemented, is likely to force such promoters to shore up their shareholding to over 25%. Given the threat of potential hostile takeovers, Kotak Securities expects companies with low promoter holding to take greater cognisance of the needs and demands of the minority shareholders. "The companies with promoter holding below 25% are now at substantial risk. They may require shoring up their holding," says Macquarie.

Though the time line for implementing the recommendations is not yet known, analysts expect investors and promoters to hike their stakes once they become law. This would mean increased buying, which will inevitably lead to higher share prices. However, Kotak Securities believes that promoters with only a 15-25% stake may increase their holding even before the new code comes into effect. This is because the new norms will require the promoters to make a full-sized open offer to buy 100% shares of the company.

Promoters with 20-25% shareholding can easily cross the crucial 25% threshold as the existing takeover code allows them 5% creeping acquisition within a financial year. However, promoters with lower stakes may not have this option as their shareholding will remain less than 25% even with the creeping acquisition in the current financial year.

They may have to make an open offer of 20% stake under the existing law or hope a hostile takeover doesn't take place. "Promoters who are unable to shore up their shareholding above 25% within the stipulated time may become soft targets for acquirers, including private equity investors," says Kotak Securities.st