Mandatory open offer for 100% stake in the works

Corporate acquisitions in India could become costlier, with market regulator Securities and Exchange Board of India (Sebi) mulling making it mandatory for acquirers to make an offer for up to 100 per cent stake in any listed company.

As of now, an open offer for a minimum of 20 per cent in the target company is required to be made by any entity that has purchased 15 per cent equity, either from the promoters or the open market.

Sebi has set up a Takeover Regulatory Advisory Committee, with former Securities Appellate Tribunal (SAT) presiding officer C Achuthan as Chairman, which is looking into suitable changes in the existing takeover regulations.

While any changes are expected to take effect from the next financial year only, the committee is said to be seriously looking at increasing the open offer size from 20 per cent to as high as 100 per cent, while it might also increase the open offer trigger limit from 15 per cent, sources said. While an increase in open offer size could mean larger cash outgo for the acquirers, the step is being considered in larger interest of retail and other public shareholders.

According to the current practice, all the public shareholders do not necessarily get an exit option even if the ownership of a company changes hands, as the open offer size need not be more than 20 per cent.

In most of the M&A deals, the promoters sell off their stake to the acquirer, which later makes a 20 per cent open offer for public shareholders. Accordingly, an acquirer can get away with acquisition of just 35 per cent stake in a listed company — 15 per cent from promoters or open market and further 20 per cent from public open offer — thus leaving as much as 65 per cent equity holders without any option to sell their shares.

The Sebi committee is currently holding talks with various stakeholders on the issue, sources added. The acquisition of shares and control of a company are currently governed by the Sebi (Substantial Acquisition of Shares and Takeover) Regulations, 1997, commonly known as the Takeover Code.

While there have been many amendments to the code whenever there has been any need, experts have been saying some parts still needs to be changed. An urgent attention was needed in the open offer trigger and size-related provisions.

They have been asserting that an open offer trigger of as low as 15 per cent restricts investors, mostly private equity firms, from making any larger investment in a company. The current rules restrict any investment to below 15 per cent, unless the investor is willing to go for as high as 35 per cent investment.

Globally, many countries such as the UK, Hong Kong and Singapore, have a higher open offer trigger limit.