The Securities and Exchange Board of India’s (Sebi’s) decision to accept most of the recommendations of the Takeover Regulations Advisory Committee (TRAC), almost a year after the report was submitted, has come as a breath of fresh air on the policy-making front. Several of TRAC’s recommendations amounted to a bold departure from the existing takeover regulations, with industry and merchant bankers lobbying strongly against some of them. Sebi, however, took an “all or nothing” approach. The perfect became the enemy of the good. The implementation of the report was pushed back by a year. This newspaper had then expressed scepticism about Sebi’s ability to take a pragmatic view and effectively implement the recommendations without getting into a confrontation. However, many of the recommendations by TRAC have now been accepted, and the stock market, industry and investors can finally look forward to a revised takeover regulation, which is simpler and largely in tune with the demands of the market. That is a plus.
The most contentious among the TRAC’s recommendations was the one for a 100 per cent open offer. Logically, it is the ideal way to make a takeover offer. It is fair, gives all shareholders equal opportunity and addresses several complications resulting from partial offers. But this recommendation had few takers and proved to be the biggest hurdle in the acceptance of the TRAC report. The Sebi Board has now worked out a pragmatic compromise. It has accepted TRAC’s recommendation to increase the threshold for an open offer from 15 per cent of the voting rights to 25 per cent. At the same time, it has largely satisfied the industry lobby by increasing the open offer size to 26 per cent, against the 100 per cent proposed by TRAC. However, speculation remains over whether this will get private-equity players to queue up, since they can now hold up to 24.99 per cent instead of 14.99 per cent earlier, or the existing promoters will attempt to shore up their positions, or there will now be more barbarians at the gates, since anybody can now hold a block of 24.99 per cent and be a thorn for the existing promoters.
It is clear that a variety of offensive and defensive corporate strategies will come to the fore. Investors should stand to benefit. The new rules will change the arena of play for companies. The Sebi Board has also done well to accept the important recommendation of the report to do away with the non- compete clause. This clause militates against fairness to all shareholders by giving only promoters a premium. Family-owned companies would not have liked it. Control has lacked a strong and clear definition in the Indian context. The definition in the existing regulations is complex to understand and cumbersome to implement. TRAC had found a way to simplify it. But the press release by Sebi says the Board has chosen to retain the present definition. This, coupled with the changes in the quantitative ceilings, will complicate strategies.
Further comment on Sebi’s announcement will have to await the legal fine print being published, since all we have at the moment is a press release. The actual implementation of the Board’s decision will require amendments to the existing takeover regulations in the light of the changes, and their notification in the official gazette. That should take a while. Hopefully, Sebi will ensure that the regulations are drafted unambiguously, since much has been lost between intent and implementation with regard to Sebi’s takeover regulations.