Changes put new premium on performance, governance

Promoters with less than 25 per cent stake in their companies may feel vulnerable to takeover threats with the new changes in the Takeover Code. However, experts say the threat would be limited to those who had been showing indifferent performance.

The impact of the new code should also result in gains for minority shareholders by way of better governance and performance, experts said.

The measures announced by the Securities and Exchange Board of India, including raising the open offer trigger from 15 per cent to 25 per cent and in the open offer size from 20 per cent to 26 per cent, effectively means non-promoter investors can now increase their stake in a listed company to almost 25 per cent without triggering the open offer.
 

VULNERABLE?
Company	Promoter stake (%)	Share price	% change in price*
Prraneta Inds.	4.8	75.7	0.7
Sh.Ashtavinayak	5.3	4.1	-2.8
IVRCL	9.5	62.2	-3.9
Subex	11.7	58.3	-7.5
Essar Oil	16.0	116.6	-3.2
Infosys	16.0	2766.8	-1.0
Moser Baer	16.3	36.7	-4.3
Karuturi Global	18.2	11.7	0.3
NCC	19.6	73.0	-4.4
Firstsour.Solutions	19.9	17.5	-4.1
3i Infotech	20.3	40.9	-3.2
ICSA (India)	21.8	91.7	-3.0
Infotech Enterp.	23.0	136.1	0.7
Geodesic	23.2	64.7	-1.8
M & M	24.9	718.3	0.2
* Share price is as on July 29 and % change is over July 27, a day prior to the takeover code announcement; Promoter's holding, which includes stake held by group companies, is as on June 30;  Financial services and Banking companies have been excluded  Source: Capitaline

The rise in these limits will increase the takeover threat for promoters with a small holding. However, says Rahul Bhasin, managing partner, Baring Private Equity Partners (India) Pvt Ltd, “I fundamentally believe that if promoters are running the company well, with good corporate governance practices, then even if they hold a small stake, they need not worry (about a takeover).” Adding: “But for companies e not being run well, you could see people coming in and looking at it seriously (as a target), which is a good thing.”

Also, traditionally, institutions which have been substantial shareholders in Indian companies have backed the existing managements.

Pavan Kumar Vijay, managing director, Corporate Professionals, says, “It will keep the promoters always alert, as due to very thin participation of public shareholders in voting, an investor with 24 per cent can cause obstacles for all major decisions.”

In the scenario, promoters of such companies have a choice. One is that they will try and increase stake in the company. Or, they will have to improve governance and, more important, performance, believes Bhasin.

On the whole, the move by Sebi has been welcomed and experts believe some of the anomalies like minority shareholders getting a lower price than promoters (who also got non-compete fees in many cases) have been done away with.