'Upfront Deposit Should'Ve Been On Graded Scale'

The Sebi draft regulations on takeovers per se acknowledge the crucial role that takeovers, mergers and acquisitions can discharge in a resource starved economy like ours and seek to set up a procedure which is fair, uniform and transparent.

On the positive front, the requirement for the raider to deposit 10 per cent of total offer amount in an escrow account, which could be forfeited in the event of a default, will deter any non-serious bidding. However, there should have been a graded scale with higher upfront requirement in case of small bids.

The panel has taken a pragmatic view by introducing the creeping concept and allowing consolidation of holdings at the rate of 2/5 per cent in a 12 months depending on the holding, whether it is less than 50 per cent but more than 25 per cent, respectively.

 

This requirement puts special emphasis on the concept of change in control which is though not clearly defined. The concept change in control is subjective and as such may lead to some litigations in initial stages.

But with passage of time and some legal decisions by competent authorities, this concept should become clear in its implication.

Other welcome features are clear deadlines for competitive bids, revision of bids by first bidder and disclosure of mode of financing of other.

In the Indian context, compulsory offer disclosure of mode of finance will lend credibility to such offers in the minds of shareholders and dispel any misgivings.

However, the code has certain grey areas which deserve a second look. The recommendations allow a raider to make offer of 100 per cent equity and in the process get the company delisted.

This may lead to situations where say 5 per cent of shareholders refuse to accept the offer then the raider would have to make an offer for sale as it cannot get the company delisted. There seems to be little rationale in the whole process.

I feel either the right should be given acquirer to compulsorily acquire 10 per cent of equity in case it has received 90 per cent against its offer or the offeror should be allowed to take only proportionate stake so as to keep the minimum public holding intact that is required for listing.

This will eliminate the possibility of the raider to first compulsorily acquire and then compulsorily disinvest under such a circumstance.

Proportional acceptance, after disclosure in takeover bid document (to the extent of acquiring maximum 75 per cent holding to allow continuing of listing) would solve this problem. I feel here we will have to go by the dictum that What is good for the majority is good for the minority as well.

In a nutshell, while the recommendations are aimed at protection of the minority shareholder, weeding out corporate inefficiency, curbing occurrence of frivolous bids by imposing stringent penalties and procedural uniformity, they need to be fine-tuned.

(This is a part of a series of views on the new takeover code)