A laudable effort

The Achuthan Committee needs to be lauded for its efforts to re-shape the Takeover Code, which could usher in a sea change in public company acquisitions. Minority shareholders will be gainers in many ways. A mandatory offer for 100 per cent of outstanding shares will ensure fair treatment and brings the smaller shareholders at par with the selling promoters who can exit their entire holding through a negotiated transaction.

With the removal of the non-compete fee, minority shareholders will receive the same price as the selling promoters. The proposal provides an increased window of fund-raising for mid-cap companies, where private equity investors will now have the flexibility to invest up to 25 per cent (as opposed to 15 per cent currently) without triggering an open offer. Selling promoters would be losers on multiple counts. The removal of the non-compete fee provision (which can be up to 25 per cent of the acquisition price at present) is a potential significant loss for the selling promoters. Further, the control premium paid by an acquirer, which is currently spread over the selling promoters’ stake plus the minimum 20 per cent open offer shareholding, will now have to be offered to the entire 100 per cent. This could significantly impact the ability to negotiate a control premium for the selling promoters.

Promoters with minority stakes will now be exposed to hostile threats, as a bidder will have the flexibility to acquire up to 25 per cent before having to make an open offer. This threat will ensure companies operate efficiently and discover the fair market price of the share, otherwise they will face acquisition threats at sub-optimal prices.

Acquirers will have to deal with increased funding requirements for acquisitions. This could be particularly taxing.

We expect the combination of the above factors impacting M&A deal volumes in the near term till environmental constraints ease and strategic rationale takes precedence over valuation hurdles and deals progress on fundamentals. We also see an increased trend towards stock transactions and mergers to alleviate funding constraints.

As is to be expected with Indian laws, open questions persist. The increased threshold from 15 per cent to 25 per cent could again ignite the debate on definition of ‘control’. Several listed companies are ‘controlled’ by promoters owning less than 25 per cent and, in such cases, acquirers should be deterred from taking over significant shareholding up to 25 per cent without triggering an open offer. In summation, while the minority shareholders will be happy with the Achuthan Committee’s recommendations, existing promoters will need to work extra hard to keep their values intact.

The author is Head, Investment Banking Advisory, Edelweiss Capital