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Thursday, August 5, 2010

Mergers & Acquisitions: New Norms for New India?

In a world of continuous redefinition of industry boundaries and commingling of technologies, businesses have to strive for ‘opportunity share’ in future markets. To catch up with such demands, mergers and acquisitions have become universal tools to attain greater market share; acquire additional brands; cannibalize competing brands; realize improved infrastructure; create new synergies; capitalize on efficiencies and economies of scale; globalize in shorter span of time, etc.

There is however a flip side to these acquisitions: the interests of minority shareholders in the target company are often lost sight of, besides the very pricing of the target company’s shares being questioned now and then. Against this backdrop, the Takeover Regulations Advisory Committee that has been constituted under the Chairmanship of C Achuthan to overhaul India’s takeover rules, must be complimented for treating an acquisition as a ‘commercial call’ and accordingly recommending a complete rewrite of existing regulations, which if implemented would have a far-reaching impact on India Inc.

The committee recommended for raising the threshold level for mandatory open offer from the present level of 15% to 25% which, if accepted, will automatically force the promoters of such companies which are being controlled with lower holdings to raise their stakes to pre-empt hostile takeovers. Secondly, it would enable promoters of the firms to raise equity through private equity participation or institutional investment. Indeed, the industry expects the PE deals in listed companies to rise if the recommendation is accepted by the Sebi. Thirdly, it would encourage overseas players who are interested in having a strategic stake in Indian companies to invest without triggering an open offer. Cumulatively, all this would lead to likely improvement in corporate governance in Indian companies, while of course, leaving the promoters in a little financial hardship. 

It has also taken care to uphold the underlying philosophy of acquisitions—equality of opportunity for all shareholders, protection of minority interests, transparency and fairness—by increasing open offer size from 20% to 100%; directing independent directors of target company to give mandatory opinion on the open offer; and asking the acquirer to add non-compete fee/control premium, if paid to promoters, to the offer price. Simply put, these guidelines would mean minority shareholders getting the same price that the promoters would get besides an equal opportunity to exit investments. The mandatory requirements of independent directors of the target company to comment on the offer and in the process involve themselves in the takeover process would enable minority shareholders to take well-informed decisions besides ensuring quality corporate governance.

The proposals, if implemented, would also make it easier for companies to delist the target company upon acquiring it—if the acquirer ends up with 90% holding on the closure of the offer, it can delist the company in one go. On the other hand, if the open offer results in the acquirer holding 75-90% of the equity in the target company, the acquirer can choose either to delist or may reduce the equity proportionately so that the holding remains within the acceptable level. This requirement for proportionate acceptance may act as a dampener, of course marginally, for the shareholders cannot be certain of their shares being accepted in the open offer. This is quite an acquirer-friendly regulation. But the provision that the acquirer cannot acquire shares in target firm for 26 weeks following completion of open offer will prevent acquirers from playing a foul game: underpricing of shares in the open offer and later buying them in the secondary market.

There is another interesting recommendation: inclusion of the ‘ability’ in addition to ‘right’ to appoint majority directors or to control the management and policy decisions in the definition of ‘control’. Which is why it could be said that open offer could be triggered if the acquirer obtains de facto control but not necessarily de jure control. Of course there is a downside to it: determination of de facto control may lead to litigation. Nevertheless, the provision offers clarity in understanding control of a firm.

Overall, the recommendations sound investor-friendly. There is of course an argument that the proposed increase in the threshold limit to 25% and offering exit opportunity to 100% public shareholders under the open offer will make acquisitions pretty expensive. India Inc. even argues that in view of non-availability of bank finances in general for acquisitions will place Indian corporates at a disadvantage vis-à-vis overseas companies. But the Chairman, Achuthan argues that “if one cannot meet the fund requirements in an acquisition process, then he should not acquire companies in the first place itself”, and it sounds pretty logical. In any case, if it is felt that multinational corporations who are known to mobilize capital from global financial markets on easy terms will be placed at an advantage vis-à-vis domestic companies in acquiring Indian entities, the regulators may think of facilitating availability of finance differently, of course, in healthy ways.

Despite these arguments, the proposed changes under M&A code that is in alignment with the global practices deserve to be implemented while of course, addressing issues pertaining to availability of bank finance for acquisitions in general with a progressive mind.
-         GRK Murty


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