Gentlemen at the gate

Towards a mature market for corporate control

The report of the Takeover Regulations Advisory Committee (TRAC) deserves to be commended on several counts. First, it is an endeavour to deal with the complex subject of acquisition of shares for substantial control and takeovers on a much more mature footing than the regulations currently in place do. The Securities and Exchange Board of India (Sebi) Regulations for Substantial Acquisition of Shares and Takeovers, notified in 1997, was the country’s first attempt at significantly regulating the market for takeovers. Over a period of time, the initial regulations had become complicated by attempts to incorporate into it provisions to plug every loophole and to provide for every situation and nuance of takeovers. The TRAC’s report removes many of these complications. For example, “control” and its definition under the present regulations complicated corporate strategy much to the advantage of the legal profession. By emphasising a simple approach that acquisition of de facto control, and not just de jure control, should expressly trigger an open offer obligation, the report makes for clarity. This is a second good thing about the report. Third, it calls upon the corporate sector to look at the market for corporate control as a serious and mature alternative growth strategy. Though international experience of takeovers and mergers, and amalgamations is varied, the votaries of a free market for corporate control argue that this market essentially helps improve valuation of companies and, to that extent, benefits the shareholders. The report makes a case for it when it recommends both the requirement of 100 per cent open offer and raising the threshold limit to 25 per cent. The rationale for increasing the offer size to 100 per cent offer is not that “it happens elsewhere” but that it is necessary in the interest of fairness to all the shareholders. The 25 per cent requirement will help harmonise the delisting requirements with the takeover regulations — a step which was long overdue. The common positive outcome of both will be an improvement in valuations, which benefits the shareholders. These two changes, if implemented, would have a far-reaching impact on India’s corporate sector. The corporate sector knows this and hence the apprehension that these may be shot down or diluted on some trite pretext, like corporate takeovers becoming expensive.

There have been other attempts at weeding out some of the definitional and procedural complications which had crept in the existing regulations. These measures should help in reducing the cost of takeovers and market uncertainties. Exemptions from making offer have been made simpler; the timeline for the offers has been reduced and the offer price calculations should hopefully become more practical. More importantly, the proposed mandatory requirement of a committee of independent directors of the target company to comment on the offer and, in the process, to involve the whole board in the takeover process is a progressive step in corporate governance. The codes and regulations for takeovers are predicated on certain cardinal principles like equality of opportunity to all shareholders, protection of minority interests, transparency and fairness. It is good that the TRAC report, while proposing the changes, has maintained these principles, like the 1997 Sebi report. What remains to be seen is how many of the recommendations are in fact implemented. One can expect some lobbying against some of these ideas from vested interests. Sebi will have to take a pragmatic view and effectively implement these recommendations without getting into another confrontation.