Taken Over

Earlier this week, the Indian financial regulator SEBI issued its new takeover guidelines for public opinion. These regulations were last issued some 14 years back and were amended several times, to make it appear like a huge nuclear reactor with band-aids all over. It makes for some interesting conclusions as far as first-generation entrepreneurs are concerned and in general to all promoters controlling a listed company, with a controlling or minor stake.

Open offer upon crossing 25 percent stake:
There are multiple listed companies promoted by first-generation entrepreneurs, where promoters own less than 25 percent. For those considering induction of large financial/strategic investors, it is great news as investor can buy up to 25 percent without any need to make an open offer. The promoter can continue to run the company and the investor remains what he had intended to i.e. be an investor without forced control or forced to acquire majority.

Non-compete fee regime over now:
Those familiar with even basics of Indian Companies Act would know that a single share above 25 percent carries strategic premium/value for its blocking rights to a shareholder with 25 percent plus one share.

Similarly, a single share above 50 percent stake provides absolute equity control and accordingly carries control premium/value. For the shareholders with these key thresholds, another important point to note is that they build the companies painstakingly and stay put as against public shareholders (minority) who have the choice to sell and exit at any time at any price. The new rules should have recognized this key distinction and retained the strategic/control premium in some form.

Level-playing in de-listing ignored:
An acquirer buying more than 25 percent will have to make an offer to buy out all remaining shares at the same price. It means the acquirer may cross 90 percent threshold for de-listing a company or may cross 75 percent threshold to remain listed but not cross 90 percent.

In either case, the acquirer is required to make his choice of de-listing clear upfront, whereas there is no such compulsion on the public shareholders. It makes life difficult for an acquirer. A better route was to say that the acquirer must offer to buy all the remaining shares and the company will get de-listed automatically upon completion of the offer if the shareholding of the acquirer crosses 75 percent threshold to remain listed.

A coordinated effort could have enhanced the efficiency of rules:
While the new rules make recommendation to bring tax treatment for gains from sale in open offer and sale in open market at par, sadly the jurisdiction for the final word rests elsewhere. While doing justice to protect minority shareholders by requiring the acquirer to make 100 percent open offer, practical issues on the bank financing being regulatorily unavailable for such acquisitions in India makes it onerous and difficult for the acquirers. What is within the realm of the regulator as partial remedy for issue of bank financing again needs to be spelt out more clearly.

All in all, this is a new and encouraging chapter in the Indian capital markets and for first-generation entrepreneurs, definitively a positive step forward!

The views expressed here are personal.

BHARAT BANKA is the MD & CEO of Aditya Birla Private Equity.

Tags:
Bharat Banka, SEBI, takeover