Indulging the Big Fish

The Securities and Exchange Board of India's new takeover code for mergers and acquisitions has suggested some welcome changes, and in many ways aligns our regulatory framework with global best practices. I don't see the proposals favouring any one particular set of players in the game, whether acquirer, acquiree or investor. Yet, frankly there are some glaring shortcomings - and unless the policy makers realise this, the proposals will be seen only as half measures. Here I will focus on the two most radical suggestions of SEBI's C. Achuthan panel.

First and foremost, we need to make sure that the code necessarily aligns with the policy of financing takeovers in India. This is a big concern because global companies today have access to offshore financing whereas the Indian acquirers are handicapped because of the Reserve Bank of India's caps on bank funding of takeovers.

We need to make sure that the code necessarily aligns with the policy of financing takeovers in India

As things stand today, Indian acquirers will find it tougher to raise finances for a takeover bid, which is a concern. While you could say that this would only encourage the serious players, it could also mean that only the big Indian companies would be able to play the game now. Therefore, I feel we must make sure that our norms on takeover financing are eased in line with the global trends.

This would give the Indian banks some headroom to support mergers and acquisitions (M&As) in the country. Secondly, increasing the trigger limit for an open offer to 25 per cent from the earlier 15 per cent and also raising the statutory open offer to 100 per cent in the target company are no doubt steps in the right direction. It is pretty much in line with global regulations and would allow investors and shareholders to exit fully if there is a takeover bid. Let me illustrate this with the example of the Ranbaxy-Daiichi Sankyo open offer two years ago.

Here, the promoter family sold their entire 34.82 per cent stake at Rs 737 per share to the Japanese company, which needed to garner another 20 per cent from the remaining 65 per cent shareholding in the company based on the takeover norms. So, a small investor with 100 shares ended up tendering around a proportionate 33 shares at a price of Rs 737 in the open offer. The balance 67 shares remain with the investor as he's not allowed to tender more. So, today the investor would probably still be left with those 67 shares of Ranbaxy with the market price falling to between Rs 450 and Rs 500.

This is two years later! If the new code was in place at the time of Ranbaxy-Daiichi Sankyo deal, a shareholder would have tendered all his 100 shares at Rs 737 per share. And finally, there is another proposal that is a bit skewed in favour of the investors rather than the acquirer. The takeover code says if the acquirer ends up with between 75 and 90 per cent, it has to take necessary steps to sell down the stake in the open market to remain at 75 per cent. The acquirer may book substantial losses as it would have paid a huge premium in the open offer.

Uday Kotak is Executive Vice Chairman & Managing Director of Kotak Mahindra Bank

(As told to BT's Anand Adhikari)