Takeover Code: Some promoters may be uncomfortable

The provision which is likely to have the maximum impact on deal activity is the decision to raise the open offer trigger from the current level of 15 per cent to 25 per cent. This change should facilitate increase in stake by financial sponsors and other investors in listed companies. This change may also immediately trigger M&A activity in listed companies where strategic investors are currently holding just below 15 per cent.

The perennial  debate around 'veto rights', 'negative covenants' etc which were desired by private equity investors to protect their investments but were looked upon as 'control' by regulators, will subside as private equity investors would be better positioned to protect their interest using their substantial (i.e. close to 25 per cent) shareholdings.

On the flip side, this provision may make promoters, who are not holding a majority shareholding in their listed companies, slightly uncomfortable as hostile bidders can potentially accumulate significant shareholding without the need of making an open offer. Let us remember that in a widely held company, a shareholder with 24.9 per cent shareholding can exercise substantial influence on the company's affairs.

The decision to do away with non compete fee related headroom within the regulatory framework will certainly bring parity for public shareholders and is therefore welcome. However, given the fact that a non compete undertaking is integral to most strategic M&A transactions, an inability to pay a consideration towards that, without raising overall acquisition cost, may pose some commercial challenges in future transactions.

Given that the last set of major amendments to the Takeover Code was announced almost ten years ago, this event is a right step to keep up with the changing economic scenario.