Sebi may allow higher stake for buyers

Corporate acquisitions in India could become costlier with market regulator the 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.

The 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 fiscal 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.

As per 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, such as any particular deal.

Experts have been saying that some parts of the code needed to be changed and 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 the companies, 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.

The demands for a higher open offer size, compared with 20 per cent currently, is mostly based on the fact that many shareholders get stuck in a company even if they want to exit in cases like change in control of a company.

As per the current regulations, an acquirer who intends to acquire shares which alongwith his existing shareholding would entitle him to exercise 15 per cent or more voting rights, can acquire such additional shares only after making a public offer to acquire at least additional 20 per cent of the voting capital of target company from the shareholders through an open offer.

The price for the open offer is derived after taking into consideration the negotiated price under the agreement which triggers the open offer and the price paid by the acquirer for acquisition.

Besides, it needs to take into account the average of weekly high and low of the closing prices of the shares of the target company during the 26 weeks, or the average of the daily high and low prices during the two weeks preceding the date of public announcement, whichever is higher.