Decoding Sebi's new takeover code

Securities Exchange Board of India - India's capital markets regulator -has cleared the deck for the country's revamped takeover code to get effective.

While the formal takeover code has been in place since 1997, SEBI constituted a Takeover Regulation Advisory Committee in September 2009 to review the extant norms and make them more relevant for the present day scenario.

While the committee submitted its report in July 2010, SEBI has, subsequent to its internal deliberations, taken up most of the recommendations and made sweeping changes to the old norms.

To start with, the trigger point for open offer is increased from 15 per cent level to 25 per cent and the open offer size, after the 25 per cent trigger is hit, is enhanced from the current 20 per cent to 26 per cent.

With the new trigger of 25 per cent, a potential acquirer can continue making creeping acquisition of an additional 10 per cent stake in the target company.

What the committee proposed originally

Take the case of Hotel Leela Ventures, where ITC currently holds 14.5 per cent stake. Under the new norms, ITC can hike its stake by another 10 per cent and still stay away from making an open offer for additional 26 per cent as would be required now.

More interesting would be the case of EIH Ltd - the hospitality company which owns and operates the Oberoi chain of hotels - wherein Reliance and ITC are currently holding 14.5 per cent stake each.

However, if an acquirer acquires at least 25 per cent stake in a company, then he has to come out with minimum 26 per cent open offer. This will result in making an acquirer ending up with "controlling" 51 per cent stake in the target company.

"In the past, it was not easy for an acquirer to get controlling stake in a target company in India," says Jagannadham Thunuguntla, Strategist & Head of Research at New Delhi based SMC Global Securities. "The concept of buyouts is now a reality in India."

The intent behind a revised Takeover Code

The revised norms will change the dynamics of mergers and acquisitions in India. However, the revisions are not as dynamic as proposed by Takeover Committee, which proposed an open offer size of 100 per cent after the trigger was hit.

Had the 100 per cent norm been implemented, it would have freed up other shareholders off the company though the acquirer company would have had to be additionally "serious" and commit more money than otherwise.

However, even under the current norms the cost of acquisitions goes up substantially. Because earlier after the 15 per cent trigger, the acquirer had to seek another 20 per cent and hold a cumulative 35 per cent in the target company. The cost would now be higher as the acquirer needs to hold 51 per cent subsequent to the open offer.

What next? It would not be surprising to see promoters allotting convertible warrants to themselves, especially in companies where promoter holding is thin. There are 24 companies in the BSE 500 index where promoter holding is below 26 per cent, and the number of companies where promoter holding is 51 per cent or below is 210.

For smaller investors, removal of non-compete fees which is in line with Takeover Committee recommendations, is good news.

"That largely serves the purpose of protecting the interests of minority shareholders," says Thunuguntla. Going forward, we will not see the non-compete fees element in the mergers and acquisition deals, as we had seen in the case of Cairn-Vedanta deal, he adds.

In a mid-June interview to Business Today, SEBI Chairman UK Sinha said: "Why additional price be given to a promoter by an acquirer over and above the fixed price paid to the ordinary shareholder arrived at after the valuation."