New Code increases investor shareholding options

Author: | Published: 1 Aug 2012
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In an effort to increase transparency in, and strengthen corporate governance around, the investment process, India's regulators decided to revise the country's Takeover Code. In September 2009, the Securities and Exchange Board of India (Sebi) established the Achuthan Committee to draft the Takeover Code regulation. The Committee submitted its report to the Sebi in July 2010 and, after reviewing and incorporating public opinion, the Sebi notified the new Takeover Code on September 23 2011.

Of huge significance to investors is the change to the initial threshold limit for triggering an open offer, which has been increased from 15% to 25%. This new regulation allows foreign strategic investors and minority foreign partners to increase their shareholding without triggering the costly takeover regulations. Target companies can also now raise capital without triggering an open offer until the 25% stake has been reached.

Khiatan & Co partner Rabhindra Jhunjhunwala says: "The new Takeover Code has increased the threshold for triggering of a public offer post acquisition of shares in a listed company, which may now provide many private equity investors with breathing space for making significant investment in public listed companies."

Meanwhile, MV Kini & Co partner Sumit Gupta says: "Revising the percentages of the mandatory open offer and the takeover requirements reflects the Sebi's intention to liberalise the investment market in India. This also reflects the initiative to create an FDI friendly environment."

The Code

The level of permitted activity in listed companies by strategic and private equity investors has now increased up to 24.99%. This is considered a much more significant, material stake compared to the previous 15%. Considering that promoter shareholding in most Indian companies ranges from 20% to 40%, this new threshold limit allows investors to take a much more influential stake in a target company. This increase in voting rights has increased the likelihood of acquirers blocking special resolutions, particularly as the presence of minority shareholders in shareholder meetings is normally minimal.

The new Code has also strengthened certainty for acquirers to take controlling stakes in companies as they trigger the takeover regulations. Under the new Code, the new open offer requirement has increased from 20% to 26%. In combination with the original 25% of shares held, the acquirer can now obtain a guaranteed 51% of shares when the open offer requirement is met. Previously, with the initial shareholding of 15%, an acquirer could only obtain a guaranteed 35% of shares.

As investors now have greater certainty to take more than half of a company stake when an open offer requirement has been met, they also now have more comfort as the voting rights they hold allow them to pass simple corporate law resolutions on their own. The Sebi has also cancelled the non-compete fee that an acquirer pays to a target company in the new Takeover Code.

While the new Code has generally been welcomed by investors and target companies, some Indian companies have expressed some concern that they may now be more exposed to hostile bids than ever before. Acquirers can now carry out hostile acquisitions more easily by, firstly, acquiring a 25% stake in the promoter company and then, secondly, acquiring 26% in the open offer. Maintaining corporate governance standards as well as a high degree of transparency is therefore crucial for promoter parties in order to protect themselves from hostile bids.

Prior to the Sebi notifying the new takeover regulations, the Takeover Regulations Advisory Committee (TRAC) had recommended increasing the open offer requirement to 100%, which would have placed the Indian Code in line with the UK Code. The proposal was ultimately not adopted because it could have made the takeover process unaffordable for acquirers, particularly for Indian acquirers who are not able to access capital from Indian banks for acquisitions. But the decision not to adopt the 100% open offer size could have repercussions on the exit options of public shareholders, who may now find themselves stuck in target companies.

Some provisions of the new Takeover Code are in conflict with India's merger control regulations, which came into effect on June 1 2011. Please see the M&A chapter for more on this.

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