Revised Takeover Regulations Have Made The Industry Vulnerable

Competitive bids, offer pricing, disclosures, withdrawals have all been taken care of while drawing up a rather historic document. But what the Bhagwati Committee has also done is made Indian industry more vulnerable, particularly in the absence of adequate institutional funding of takeovers.

A top-of-the-line industrialist made a very pertinent comment just after the code was announced. The industrialist, Mumbai-based and going through a period of consolidation with hefty investments pumped into various core sector projects like steel and power, said most industrial groups would now want to get on to the 51 per cent controlling stake level following the new takeover regulations, since takeovers have now been made much easier and 100 per cent offers are also possible. But if the industrial group has 51 per cent, the remaining 49 per cent no longer bothers it, since the controlling power remains with the group.

The creeping acquisitions route stipulated by the draft code to allow existing managements to consolidate their holdings, industrialists feel, is going to be utilised by the managements to hike their stakes and ward off takeover threats. But the problem is, where is the money?, asks the industrialist.

Foreign corporations, Indian industry seems to feel, would have it easy to pick up Indian companies after the code is translated into formal regulations. This is so, since it is the foreigners who have huge funds at their disposal, and could easily target companies now which fit into their overall gameplan. Shades of Bombay Club, but realistic logic.

The Indian industrialists are also worried for another reason. Acquisitions under the present market conditions are going to be easy, since the stocks of many companies are quoting at lower-than-usual prices. The threat of regular bear raids looms large on the stock exchanges, and every now and again the Sensex threatens to go southwards. Under such conditions, it is very easy to acquire companies, says the chief of a large group.

It is in this context that the escrow account stipulation of the Bhagwati report needs to be viewed. While the stipulation itself is laudable, most observers and experts feel that the upfront deposit needs to be higher than the recommended 10 per cent of the offer. This is because the 10 per cent requirement appears to be skewed in favour of the larger companies and against the smaller ones.

The Bhagwati panel's logic was that acquisitions of high-priced companies would become very difficult if the escrow stipulation was higher than 10 per cent. But the industrialists' logic is: if the acquirer has to shell out Rs 500 crore overall, why should he face problems depositing, say, Rs 125 crore? He is bidding for the company, which obviously means he has the Rs 500 crore to pay.

The logic is that if he cannot even cough up 25 per cent of the total offer, how is he bidding for the company?

Besides, the smaller companies would be easier targets, since 10 per cent of a low-priced stock would be easier for the larger acquirers to shell out as escrow deposit.