New Take over Code 2010

-Highlights of Achutan Committee

recommendations
Prof.C.S.Balasubramaniam
 Why a Takeover code is
necessary ?
• Disciplining the capital market : Takeovers help
in disciplining the market as inefficient and
errant companies get taken over due to their
low book value and share prices . This also
helps in discovering the potential of the
acquired companies .
• Consolidation of efforts & capacities :During the
license era, Government authorised units to
function below their minimum economic size
Why a takeover code is necessary ?
• Such units were either incurring losses or earning
marginal profits. Also, due to stringent control
standards and emergence of MNCs, small units
have realised the importance of conservation of
resources &reduction of costs. However, due to
lack of proper infrastructure and sufficient capacity
they are unable to implement their schemes
efficiently. Under such circumstances, takeovers
can be effective mode for consolidation &
efficiency
Why a takeover code is necessary ?
• In the past, due to the restrictive licensing policies
,large companies were not allowed to grow and
diversify. Rigorous MRTP posed serious obstacles .
Recent liberalization environment and FDI
amendments have encouraged companies to
concentrate on their core competencies. M&A or
takeovers offer greener pastures and through
these strategies ,companies can rationalise their
portfolios and enlarge entity value &leverages.
 Members
The composition of the Committee is as under:
(a) Mr. C. Achuthan, Former Presiding Officer, Securities Appellate
Tribunal –
Chairman.
(b) Mr. Kumar Desai, Advocate, High Court.
(c) Mr. Somasekhar Sundaresan, Advocate; Partner, J. Sagar
Associates.
(d) Mr. Y. M. Deosthalee, Group Chief Financial Officer, Larsen and
Toubro Ltd.
(e) Mr. Koushik Chatterjee, Group Chief Financial Officer, Tata Steel
Ltd.
(h) Mr. A. K. Narayanan, President, Tamil Nadu Investors‘ Association.
(i) Prof N. Venkiteswaran, Professor, Indian Institute of Management,
Ahmedabad.
 Members
(j) Ms. Usha Narayanan, Executive Director,
Corporation Finance Department,
SEBI.
(k)Mr.J.Ranganayakulu ,Director, Legal
Department, SEBI, and
(l) Ms. Neelam Bhardwaj, General Manager,
Division of Corporate Restructuring,SEBI
 Rationale for the new code
• The earlier Take over code of 1997 were made
under the chairmanship of Shri P.N.Bhagwathi
which was again revised in 2002 under the
same chairmanship.
• It was necessitated by steady increase in the
number of take overs from an average of 69
per annum during 1997-2005 and an average
of 99 per annum during 2006-2010
 Rationale for the new code
• Increasing sophistication in the takeover
market
• Decade long changes in corporate scenario
• Rise in judicial pronouncements
• Reform of the corporate debt market
• Change the threshold level
• Pricing norm revisions
• Public offer modifications
 Paradigm shift towards international
best practices
• Initial trigger has been raised from 15 % to 25%:
• a)the factual analysis of current shareholding patterns
of listed companies show that “promoters “ are
capable of exercising defacto control at 25%
• b)a shareholder holding in excess of 25 % has the
ability to block special resolutions .Promoters may be
concerned by the mischief that may be caused by
“predators “holding less than 25% who may exercise
significant voting rights on account of multiplier rights
caused by absenteeism at general body meetings
 Highlights of Achutan Panel
• New threshold of 25 % suggested by the
Achutan Panel wields the power to stop special
resolutions and acquires negative control
• Rise in quality of corporate governance and
disclosures
• Raising the open offer volume to 100 %
• Allowing the conditional open offers
• Providing for delisting
 Highlights of Achutan Panel
• Defacto control means both the right and the ability to control
• A separate regime for voluntary offers –consolidation offers by
controlling shareholders .In case of unsolicited /hostile offer by a
new acquirer does not seem to be permissible -is not justifiable
• Mandatory exit to all (100 %) shareholders as against the current
norm of 20% is a laudable move from shareholders perspective,
though not investor friendly However ,public mergers and
acquisitions will become more expensive and thereby deter
takeovers . A combination of Indian rules against financial
assistance by the target company and limitations on acquisition
financing by banks results in the creation of an unequal playing field
between Indian & foreign players
• Non cash payment option though available under the current
code has not found favor with Indian corporate.
 Highlights …..
• A seamless “go private “ has been made available
to the new acquirers who buy out more than 90
% in an offer –a route has not been extended to
promoters holding above 25 %.
Promoters have to necessarily initiate delisting
procedures which may become expensive due to
higher price offers through reverse book building
route ,requisite approvals under SEBI procedures
stock exchanges and Company Law Board
 Highlights …….
• Facilitates leveraged buyouts and making the
financing of takeovers easier and convenient to
corporate rather than facing difficulties in
implementing
expansion/diversification/intensification strategies
• The pricing norm revisions would ensure that
minority shareholders of the target company
would not be cheated out of the price obtained by
strategic shareholders
 Highlights
• The recommendations further raise a pointer
towards the haziness in extant regulations such
as the gap between the minimum public holding
threshold for a listed company (75%)
and the delisting threshold (90%) .
Speedy adoption of the new code would raise
the overall efficiency levels of the
implementation process for corporate takeovers
and mergers
 Highlights ….
• Promoters with low holdings may be forced to
raise stakes to pre-empt hostile takeovers
• Minority shareholders will be able to exit fully
• Acquirer cannot acquire shares in target firm
for 26 weeks following completion of open
offer . This will prevent acquirers from under
pricing offers and later buying shares from
secondary market.
 Highlights ….
• Equal tax treatment on gains due to sale of shares
through open offer as well as those sold in the open
market would encourage more people to tender
shares in open offer
• Acquirer to accept shares in open offer
proportionately ,if response exceeds maximum
permissible promoter shareholding of 75% ,but fails
short of delisting threshold of 90% ,could affect and
dampen the complete acceptance of their shares in
open offer.
 Highlights …..
• Efficiency drivers relate to buy –in regulations
• Bank financing of take over
• Treatment of shares tendered in an open offer as
an “on market “ transaction for tax purposes
• FDI rules have to be suitably amended to include
swaps under automatic route
• However Indian businesses have become keen to
sell their stakes cashing on the recent boom in
stock market
 Highlights ….
• Open offer formalities need to be completed
within 57 days instead of 95 days as allowed
currently will help in reducing unnecessary
delays .
• Ensures justice to minority shareholders in the
form of the mandatory offer of 100% of
outstanding offer of shares has to be the same
for all shareholders .
 Highlights ….
• Proposed changes would facilitate PE funded
promoters/foreign acquirers as they have
access to leveraged finance abroad/tax havens
at a lower cost than that prevailing in Indian
capital market . A combination of PE players or
Qualified institutional promoters (QIP),acting
as a concerted minority shareholders can now
help in improving corporate governance of
listed companies in India.
 Highlights ….
• The proposed changes in Takeover code provide
a legal framework for orderly acquisition of
shares and control.
• Provides for equitable treatment to all
shareholders .
• By increasing tender offer threshold to 25% the
tender offers will be triggered upon true change
of control than at relatively low ownership levels.
(Shardul Shroff of Amarchand Mangaldas)
 Highlights ….
• The new take over code would facilitate
strategic alliances and minority investments
that can be equity accounted, and promote
greater ownership from private equity
investors . These changes will help
acquisitions by making it simpler to acquire
control and delist in one simple step . (Rohit
Chatterji ,J P Morgan )