SEBI's fine balancing act
The main objective of a code to govern takeovers of listed companies is to ensure that the interests of minority shareholders are protected. This was the key premise on which the Achuthan committee had based its recommendations . There, however, was afeeling that perhaps in a few areas the committee had tended to ignore market realities while trying to protect the minority shareholders. Take for example the committee's original recommendation that an Open Offer should mandatorily be for 100% of the outstanding shares. The report pointed out that a partial open offer provision allowed for promoters to sell 100% of their holdings in a company. But if this sale triggered an open offer and it was partial, the other shareholders may not get an opportunity for a 100% exit. Though minority investorfriendly , this would have been too onerous and made any control stake acquisition very expensive. It would have also put Indian acquirers at a disadvantage as they do not get bank funding for takeovers would have found it very difficult to fund 100% open offers. On the other hand, international companies who can raise funds cheaply would have been at an advantage. The committee discussed this point but held that "philosophy of equitable and fair treatment of all shareholders should have a primacy over other considerations." Sebi while deliberating on the issue has taken a more considered approach and taken market realities into account. Its decision, therefore , to raise the minimum offer size to 26% from 20% but not to accept the decision of making a 100% offer mandatory is a welcome step. In fact, this change should be read in conjunction with the other decision of raising the trigger threshold level from 15% to 25%. The earlier provision of 15% was too restrictive and made it very difficult for private equity funds and other strategic investors to invest in small or medium cap companies. Also the trigger of 15% was not in sync with any legal threshold status as the key legal threshold holding in any company is 25%, 50% and 75%. The recent changes make the whole thing much more logical. If one entity or group of entities holds 25% shares of a company, then it can block any special resolution . Therefore, it seems logical that an open offer be triggered only when someone acquires such powers. And by ensuring that the open offer is for a minimum of 26% of the outstanding shares, the regulator has ensured that the acquirer needs to aim for at least majority control . This is far more logical an arrangement. This would also make hostile takeovers more likely in India. Sebi had a more difficult task to perform when it came to the issue of non-compete fees. True, the provision has been misused often and is prima facie against the interest of minority shareholders . However, when a controlling stake is sold and certain non-compete clauses are imposed on the seller, these have certain economic value beyond the share price.
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