Why do acquirers hate mandatory open offers to buy equity?

Mandatory open offers to buy equity, required to be made to minority shareholders in an acquisition, are emerging as the most hated provision of security laws. Every other acquirer wants to be exempted from the provision.

The Securities and Exchange Board of India (Sebi) has been granting case by case exemptions to these takeover code requirements, based on merits, especially in cases of transfer between promoters. In recent years, though, there has been a flurry of exemptions on the pretext of distress.

First, over recent years, the regulator has exempted the central government from open offers for capital infusion in public sector banks. The occasions have been so numerous and frequent that such exemptions are now almost taken for granted. Then, in March 2015, Sebi had cleared a blanket exemption from open offers for companies covered by the Reserve Bank's strategic debt restructuring (SDR) plan. Two years later, as the SDR plan had not worked in several cases, RBI was at Sebi’s doors for another round of exemption — this time for companies referred to the insolvency process.

Apart from these, there have been cases like Diageo’s acquisition of United Spirits and Ajay Singh’s acquisition of SpiceJet where exemptions were granted under special circumstances.

The individual shareholder is often voiceless. He is dependent on the regulator to do the best for him. The regulator is supposed to be the protector-in-chief of investors’ interest and is well within its rights to take decisions in the larger interest of the economy.

Sebi normally issues discussion papers and takes the views of stakeholders on major policy changes. However, though these decisions to waive open offers have affected millions of small shareholders and hundreds of institutional shareholders, there has hardly been any consultation.

Even for the recent changes in the participatory notes regime, a discussion paper was floated, comments were sought and considered before the board took the decision. Companies and other intermediaries are vocal, and have mechanisms to ensure their voices are heard by the regulators, loud and clear.

Unfortunately, Sebi did not seem to have considered it necessary to take the views of the small shareholder while waiving his rights. The latest paper for public comments issued on the takeover code dates back to early 2016, when the regulator wanted comments on the ‘brightline test’ for control.

One justification offered is that if the open offer was not waived, the small shareholder would get nothing. Also, that an equity shareholder is last in the line in a company structure. Yes but the open offer was his parachute when he entered the game. Aren’t you shifting goalposts, now for the second time, by snatching away the parachute?

Why is the open offer of a few hundred crores the biggest obstacle in the way of the acquirer? Are his problems not much bigger? Is it the money or the lengthy and time consuming process that is scaring potential acquirers? The process after the public announcement in the open offer extends to around three months. Fourteen days for details of the offer to be sent to Sebi, which then takes a minimum of 21 days. The offer itself is open for about three weeks and so on. If the regulator works on ways to crunch this timeline and make it finish, say, in a month, that could offer a lot of comfort to the acquirer. 

While crunching the IPO timeline has been a theme of successive Sebi chiefs, not many have talked about shortening the takeover timeline. Doing so might make open offers less scary for acquirers. And, ensure that like everybody else, the small shareholder also takes only a haircut. And, does not get tonsured.