(2) However, particularly
considering the stakes involved and the wider application, many of the
provisions had to be tested and interpreted repeatedly and several times. This
required appeal to the Supreme Court. Further, the repetitive and sporadic
amendments made the Regulations complex. It was also felt that these amendments
were fire-fighting measures to meet rather than a considered overview of the
whole subject.
(3) SEBI thus set up a
Committee with very learned members from a range of background to reconsider the
Regulations in light of experience of more than a decade and in light of several
complaints and contentious issues. The Committee, after due deliberations and
inviting comments from all concerned, submitted its Report on 19th July 2010
making major recommendations for amending the Takeover code.
(4) The Report is quite
detailed and it not only contains the recommendations for amendments but also
provides a draft of the proposed and rewritten Regulations. Thus, even in legal
terms, it is possible to see what the exact proposed amendments and examine
their implications.
(5) It is worth considering
some important recommendations here since it would help us understand the
existing Regulations better and would also give a glimpse of things to come.
However, while the Report is quite detailed and makes numerous recommendations,
only certain important aspects are discussed here, though we can consider the
amendments in far more detail when they are actually made.
(6)
Increase of threshold limit from 15% to 25% :
(a) Presently, if a person
acquires 15% or more shares in a company, then he is required to make an open
offer for another 20%. Earlier, this threshold limit was 10%. Now, it is
proposed to increase it to 25%. Thus, acquisitions till such holding will only
require disclosures at various stages but no open offer. The increased threshold
would make things easier for large investors such as private equity funds. A
concern widely expressed, however, is that this will make it easier for
‘predators’ to increase their holdings to a larger extent and threaten existing
promoters. However, I do not see what is wrong in an outside investor increasing
his stake, even if the existing Promoters feel threatened. An existing Promoter
seeking to retain his control may well ensure that he invests sufficiently in
the company so as to retain control.
(b) The 25% limit is
apparently derived from the limit beyond which it may be possible to veto
special resolutions. Of course, this is only theoretically true. In practice, a
25% holding would be almost always more than 25% since at least some
shareholders would not come to the meeting and/or would not vote.
(c) A practical significance
of this increase in limit is that significant shareholders below 25% can now
increase their holding up to 24% without having to make an open offer.
(7)
Requirement of making 100% open offer :
(a) It is proposed that the
acquirer making an open offer should offer to buy 100% of the shares held by the
public shareholders instead of the existing just 20% of the capital from the
public shareholders. Thus, for example, if an acquirer acquires the Promoters’
holding of 40% of the share capital, then under existing Regulations, he would
be required to make an offer of another 20% of the share capital from the public
shareholders. If the public response is higher than the offered quantity, the
acceptance is on a proportionate basis. To give an example, if the response is
of 40%, then only half of the shares offered by every such public shareholder
would be accepted.
(b) Under the proposed
Regulations, the offeror would be required to acquire all the shares offered.
(c) This proposal is
strongly criticised on the ground that it would increase the cost of acquisition
since, at least theoretically, the offeror would have be ready to pay for 100%
of the share capital of the company. However, on another plane, it is not
difficult to see the logic and benefit of such a requirement. The existing
requirement allows the Promoters to sell the whole of his shareholding but the
public gets a chance to sell only a lesser quantity of their shares. Often,
takeover of companies are at a price that is at a premium over the ruling market
price. In such a case, the Promoters get the full price for their shares but
shareholders get a partial benefit only. The price of the shares in the market
often falls to the pre-takeover position.
(d) The proposed amendment
thus restores the balance and allows the public also to get the benefit of the
higher price.
(e) Skeptics have also
pointed out that the concern that there would be a higher response than the
existing 20% is theoretical and is not borne out of past experience. In other
words, in the past too, only in a few cases, the response from the public was
more than such 20%.
On the other hand, the
seamless delisting procedure may encourage multinationals to convert their
existing subsidiaries or new acquisitions into wholly-owned subsidiaries. If
this is not done at a fair price, then this could be an unhealthy trend and
deprives the Indian shareholder of sharing in the growth of the target. Thus
these provisions as well as related delisting and buyback provisions need to be
reconsidered.
(8) Voluntary open offer:
If an acquirer triggers off any of the thresholds requiring a mandatory open offer, he has to offer to acquire 100% of the shares held by the public. However, in case the open offer is purely voluntary, then there is a special dispensation proposed. The acquirer can offer to acquire at least 10% of the equity share capital by way of a voluntary open offer. In such a case, the acquirer would acquire only that extent of shares that are offered within the limit he has proposed. In case of excess response, he would accept proportionately.
Minimum public shareholding:
An issue that comes up repetitively and is unfortunately covered by a diverse of provisions of law is that relating to the minimum public shareholding. It is worth reviewing the conceptual issue involved here. When a company makes a public issue, the law requires that a certain minimum percentage of the capital be issued to the public. This percentage has changed over a period of time and hence there are listed companies having differing initial public shareholding. In other words, different companies listed today on the stock exchanges have been subjected to differing initial public holding requirement. The matter is further complicated by the fact that owing to poor legal drafting and legal requirements, the holding of the public in numerous cases has fallen below even such initial public shareholding requirement. Where the public shareholding is very low, the purpose of listing may be lost.
Over several years now, the government as well as SEBI has been making attempts to ensure that the companies, whose public shareholding is below a specified minimum holding, increase such holding to such minimum level. These attempts have been generally unsuccessful.
However, while attempts continue to get all listed companies have a minimum specified public shareholding, in the meantime, steps are also taken to ensure that the existing situation does not get worse. That is to say, that existing companies do not cross this minimum shareholding limit and if they have already crossed such limit, they do not go further.
One such situation where public shareholding can cross such limit is in case of a mandatory open offer under the Takeover Regulations. To take an example, if an acquirer acquires the Promoters’ holding of 60%, then he is required to make an open offer of 20%. The post-open offer holding could thus go to 80%. The Regulations thus provide that in such a case, since the maximum limit of 75% is breached, the acquirer should dilute his holding in the specified manner to at least 75%.
Under the Report, the recommendation creates a situation where in every case, there is a chance of this limit being breached. The recommendation is that 100% of the public shareholding should be offered to be acquired.
The Report suggests a better solution to the problem. Firstly, it states that in case the limit is breached, then the acquirer shall scale down his acquisitions from the Promoters as well as the public proportionately, so that the final share-holding of the acquirer is not more than the maximum permissible percentage.
The alternative situation allowed is a case of delisting where the acquirer may actively pursue delisting of the shares. In such a situation he is permitted to acquire and retain shares beyond this limit. However, this is provided that he actually gets enough shares that are cumulatively beyond the 90% minimum holding required to permit delisting of the shares. If this limit is not reached, delisting is not permitted and the acquirer is required to scale down his acquisitions accordingly.
A valid criticism against this proposal is that it permits direct delisting and to some extent circumvents the normal delisting requirements. Under the current Regulations, there is an elaborate procedure for delisting whereby the offer price has to be worked out in a certain manner and approval from the shareholders is also required as per the prescribed majority and manner. Further, though the proposal is well intended, it does not alleviate the existing complexity of multiple provisions of law dealing with the same issue.
Having said this, in fairness, it must be also said that the Committee had to cover a situation where the maximum limit would be breached and within the scope of its mandate it has offered a reasonable compromise. However, ideally, SEBI should separate this issue and provide for a comprehensive solution at one place.
Creeping acquisitions:
Finally, an area that has seen numerous amendments in the past with the result that there is a complex set of provisions governing creeping acquisition. As readers may be aware, persons holding more than the threshold limit are permitted to increase their holdings by a specified percentage every year. In other words, they can increase their holding in a creeping manner without requiring an open offer.
The Report seeks to simplify the provisions relating to creeping acquisitions considerably. Firstly, a uniform creeping acquisition of 5% per annum for all persons having holding between 25% and 75% is proposed. Thus, the elaborate set of existing provisions governing creeping acquisition at various percentages is sought to be dropped. Secondly, even the complications, explicit and implicit, relating to how this creeping acquisition would be counted, are clarified.
Conclusion:
It seems to me that the Takeover Regulations are given an importance in the media that is far disproportionate to its actual relevance. There are other serious issues such as insider trading, price manipulation, corporate governance, etc. that need more attention. Having said that, the Takeover Regulations also have relevance directly or indirectly in many areas. Rarely can any financial restructuring, investment, etc. in relation to listed companies be soundly worked out unless the provisions of the Takeover Regulations are kept in mind. Thus, the auditors and even other Chartered Accountants who have some or the other concern with listed companies would need to keep track of these Regulations and amendments thereto.
