Changed trigger points

Although SEBI has taken its time to rewrite the Indian takeover regulations after the an expert committee submitted its proposals last year, the changes introduced represent a fine balancing act. The amendments focus on the fact that the size of stake acquired in a company signals the level of interest on the part of an investor.

If the trigger point is pegged too high, minority shareholders may be kept in the dark about a looming takeover interest as disclosure of such intent may be delayed just that bit longer. And set too low, it inhibits investors who have no intention of taking control of the company's management but merely see it as a good investment. They should have the freedom to limit their investment without having to acquire additional stake from public shareholders. The existing threshold, pegged at 15 per cent of the total paid-up equity capital in a company, is out of tune with reality. It was set at a time when incumbent managements of India Inc. had only modest stakes in companies. A potential threat to their hold over the companies under their control would have been a needless distraction from the larger purpose of shoring up the competitive capability of their companies. That is no longer the case. A higher threshold for triggering an ‘open offer' now opens up the possibility of India Inc. attracting greater investments from private equity funds and qualified institutional investors as it would be freed of such an additional financial burden.

An equally contentious issue has been the size of the ‘open offer' an acquirer is required to make once he has acquired or signalled his intention to pick up substantial stake in a company. No doubt, the present limit of 20 per cent does prevent minority shareholders from exiting at one go, should they desire. But this ignores the fact that in a well functioning stock market the act of an investor mopping up significant chunk of stake at whatever price he thinks the shares are worth is automatically impounded in the secondary market transactions. A stipulation that the acquirer must buy out all outstanding stock in a company could potentially place overseas investors at an advantage in a takeover battle vis-à-vis their local counterparts as the former undoubtedly would have better access to liberal funding from the banking systems abroad. SEBI has quite rightly rejected the expert committee's recommendation of a 100 per cent buy-out as that would only end up inhibiting the development of a vibrant market for ‘corporate control' without enhancing minority shareholder protection. The market regulator also deserves praise for having done away with the facility available to incumbent managements to secure a better price for their own stake through the device of a ‘non-compete' fee. The notion that a few individuals in their personal capacity add value to a company ignores the overwhelming evidence of corporate success as stemming essentially from good systems, processes, organisational culture and, above all, the efforts of a team of dedicated workers.