India: Pyrrhic Victory For Lobby Against Takeover Reform

Originally published in the Business Standard

The new Takeover Regulations are upon us. Last week, the Securities and Exchange Board of India ("SEBI") notified the new regulations based on the draft recommended by the Takeover Regulations Advisory Committee ("TRAC"), but with fundamental deviations from the recommendations. While many may think this is now a pro-acquirer law, the reality is that the law just got worse for acquirers taking over listed companies. The fine print has provisions that will haunt acquirers who make open offers under the Takeover Regulations.

The central reform measure recommended by the TRAC was to require the acquirer to purchase every share that any other shareholder wished to sell to him. To balance this recommendation, the TRAC had sought to give the acquirer some fair leeway – he would have the right to delist the company if his post-acquisition holding were to cross 90%. Moreover, if the public shareholding were to potentially fall below 25% (the minimum required under other securities rules), with the acquirer's stake not rising above 90%, the acquirer would have a right to proportionately reduce what he would buy from the outgoing substantial shareholder, and from the public shareholders responding to the open offer.

Therefore, an acquirer who would end up at above 75% would have consciously done so despite having the option to stay compliant. Consequently, the TRAC recommended that he should not be permitted to make any offer to voluntarily delist the shares without unless he first ensures that the company becomes compliant with the 25% public shareholding requirement.

SEBI has rejected the framework on the size of the open offer entirely. However, inexplicably, the prohibition on attempting to delist without first increasing public shareholding has been retained. This is a classic example of the fine balancing of various stakeholders' interests achieved by the TRAC being distorted mindlessly.

SEBI's new law requires the acquirer to make an open offer to acquire at least 26% of the remaining shares – an increase from the current offer size of 20%. The acquirer cannot delist the company if he were to cross 90%. Nor can he ensure that the company stays compliant with rules governing minimum public shareholding by proportionately paring down his acquisitions from the substantial exiting shareholder and from the public shareholders.

For example, if an acquirer were to acquire 60% from an outgoing substantial shareholder, he would have to make an open offer of 26%, which would potentially take his post-transaction stake to 86%. Now that would mean public shareholding would be only 14%, well below the minimum 25% mandated under other securities laws. In this example, the acquirer would have no choice but to end up at 86%. Under the rules governing minimum public shareholding, such an acquirer has twelve months to bring his stake down to 75%, while under the Delisting Regulations he has a statutory right to attempt to delist the company. Therefore, today, the acquirer has a right to get the company delisted within the twelve-month deadline to ensure compliance with public shareholding requirements.

Under the new Takeover Regulations, the right to delist otherwise available under the Delisting Regulations, has been taken away. An express prohibition on attempting to delist has been imposed for such period of twelve months. In short, during such period, he would have to dilute his holding back to 75%. After an expiry of twelve months from completing the open offer, he may attempt delisting of the company afresh. In other words, there would have to be a yo-yo of securities offerings by the acquirer – first, to acquire shares under the Takeover Regulations; second, to sell shares so acquired in order to achieve minimum public shareholding; and third, yet another offer to acquire shares, this time under the Delisting Regulations.

This is bad policy. An acquirer's stake would cross 75% only because the mandatory provisions of the new Takeover Regulations would require him to buy 26% from the other shareholders. He is not being given any option to remain compliant with the minimum public shareholding requirement. Therefore, there is no logic for the Takeover Regulations to take away his entitlement to initiate delisting under the Delisting Regulations.

Such a framework is in fact a punishment to the acquirer for having done a transaction that triggered an open offer under the Takeover Regulations. The lobbyists who believed they had defeated reform of the open offer size have just learnt that theirs is just a pyrrhic victory.

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