Pyrrhic Victory For Lobby Against Takeover Reform
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Originally published in the Business StandardThe 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...
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