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Rules of the M&A Game 2: Controls, Triggers & Open Offers

Published on Sun, Jul 19,2009 | 11:36, Updated at Wed, Jul 21 at 17:25Source : |   Watch Video :

The heart of any takeover code lies crucial issue on what it controls, and based on that should be the threshold limits or the triggers and what should be the minimum offer size and offer price.

In India disclosures are required when a share holder acquires 5-10-14% of a companyís shares or voting rights, purchasing 15% or more is considered to be substantial acquisition of shares making the buyer liable to an open offer of 20%, between 15 and 55% in every purchase of 2% or more requires disclosures and any purchase beyond the 5% creeping limit will trigger an open offer. Upon reaching a 55% share holding, the share holder is permitted to buy upto 5% from the open market but the acquisition of any shares of exchange triggers an open offer, depending on the minimum level of public share holding applicable, 75% or 90% are considered as delisting points and post open offer you donít have a control, when it is a complete open offer, you donít get a single share

Cyril Shroff, Managing partner, Amarchand Mangaldas, Anil Singhhi, Vice Chairman RNRL, Bharat Vasani, General Counsel, Tata Group and Amrit Singh, Head-M&A, Deutsche Bank (India) debate the issue in an exclusive interview with CNBC-TV18.

Hereís a verbatim transcript. Also watch the accompanying video.

Q: Do we need to re-look at control altogether and if we do then how do we define control in this country where you have different ways of looking at control, a recent FDI policy says control is 51% or so ownership and you have right to appoint a majority directors otherwise 25% is considered blocking ability or it is negative control, so how do we redefine control?

Shroff: You hit on the hear of the issue that hits upon the entire exercise on what is control and how it should be treated, the first proposition is that itís a very complex concept with many shades of meaning it doesnít have one single meaning and I think that has many shades and it needs to be analyzed and interpreted and the consequences should follow from what is the type of control that is being talked about in that particular situation, so at a very broad level I think there is a first hand difference between negative control and positive control and what do I mean by that, negative control at its very simplest is a right to say no and positive control comes down to a right to say yes to a particular decision to the company and leaving aside the takeover code for a second at its corporate level, the negative control could mean say 26% holding which allows you to block a special resolution and there is a whole lot of importance under the Companies Act for instance making an issue of capital, amending the article, having a restructuring of the company and things of that nature, so when you acquire that kind of negative right by share holding that is just one type of control that you acquire and we talk of financial investors with shareholder agreements, we often have Vito rights where unlinked with the level of share holdings or contractual rights, the rights which allow you to say more to something so that is one concept of negative control. Then positive control is where you have the ability to actually prevail on something and the most logical threshold for that is 51%, what can I do at 51%, the most important thing I can do is control the management, I have the right to the entire board, I can appoint the management of the company, I can sell an undertaking of the company and things of that nature, The biggest lacuna in our act today is that this concepts are not clearly enshrined and not other consequences nuanced enough at both these levels, so what has happened over the last 10-15 years that Sebi has currently treated both these concepts with same footing, negative control is treated as positive control, the open offer size and all the consequences are unnuanced in terms of this so we can discuss this in greater detail.

Q: What is wrong in looking at negative control and positive control in the same fashion, if you have some degree of control and if you have some ability to determine how a company makes its decisions, then whether itís negative, or positive, however you want to title it, its control?

Singhvi: I agree with you on this issue because finally what are we doing because this talks about a substantial acquisition of shares knowing who talks about there is a change of control which is a consequence of this, so when we talk about takeover codes which is not a takeover code, this is essentially a substantial acquisition of shares and once you arrive to a threshold, you were supposed to make a public offer and it has got nothing to do with control. I have had occasions where there was no control which was passed on but we still have open offer and post open offer you didnít have a control and when itís a complete open offer, you donít get a single share, have you got the control of the company.

Shroff: But you also have regulation 12 which talks of control, unfortunately itís underplayed.

Singhvi: Secondly the control deficit itself as far as this act is concerned and the regulation is concerned this is completely cockeyed because even if you look at the judgments arising of the SAT arising out of the control of whether there was a control or no control on that, enough debate, you can not have a situation, in few cases they say whether the control definition is inclusive or exclusive and there is no clarity on that and I have a judgment which talks about after talking everything on this that a controlled definition is an inclusive definition.

Q: Are you saying that this kind of code or regulation should only look at instances where control has been acquired not based on the number of shares you have or the percentage of stake holding you have?

Singhvi: It should result into acquiring control Ė thatís what we are talking about; we are talking about mergers and acquisitions. Merger of course is again a domain of Companyí Act and Sebi doesnít get into that but for acquisition it cannot be just substantial. Look at theoretically you own 15% or 14.9% and you go to 15% then 20% more shares and you should be going for a public offer. Now can it give you a control, the 15+20=35 Ė what Cyril talked about 51%.

Q: But 35 is actually a trigger limit in many countries which they consider as a definitive control?

Singhvi: Trigger limit and thereafter you must acquire practically all the shares. Here what are we talking about 15% we acquire, you have hit 10 and you go for it acquires another 20%. As far as Sebi is concerned they are completely over as far as your meetings with all requirements are concerned. You may not have got a control over company at 35% - not necessarily Ė actually it suffers from the fact that in 70s and 80s most Indian companies, the promoters or the people who are in control they had shareholding which was ranging from 2% in Tata Steel or 20% in most of the Birla companies. So itís actually a very antiquated act which has taken into consideration the 70s and 80s of the pattern and worked on that.

Vasani: On the broad issues I entirely agree with Cyril in terms of what needs to be looked at in defining control. But I want to add two additional points here Ė we this country need a very significant private equity investment and I find that one of the major concern when I negotiate with private equity guys that they are not wanting to run the company but they would certainly will not want the existing management to take certain decisions which they are not comfortable with. So they would want certain veto rights.

Q: But isnít that also in some form of control?

Vasani: Itís a negative control Ė thatís where I am coming from - if they want certain exit rights and if they want certain minority veto rights I do not think the codes would go an extent to say that make an open offer.

Q: Why not because as a minority shareholder to me it seems that there is private equity person on board this company that is at least has the ability to determine how certain basic important decision whether its capital restructuring etc or taken and therefore in some sense he is almost co-man in the company maybe not on day to day ops but he is determining the path of this company?

Vasani: I think what the codes would look at is the lasting change in the substantive control rather than this kind of negative control through certain veto rights and quite frankly if you look at the code this way then the private equity guys are certainly going to shy away the way the Sebi has consistently taken a view. Second problem I have is that in India we have multiple legislations dealing with the definition of control like for e.g. the new Competition Act as definition which starts at 26%. The problem I have is Sebi sometimes tries to take the definition from the Competition Act or the Monopolies and Restrictive Trade Practices (MRTP) Act for e.g.  The group as what is defined in the MRTP Act the objects of the two legislations are completely different. Sebi also Ė one aspect we needs to be clear Ė this is something we are dealing with constitution of India where even article 21 right to life in the supreme court will deal with it for 25 days and 9 judges and they will come out with new definition what is right to life. Itís an economic policy regulation; it has to be clearly defined. The persons who are dealing with it need to know when they would be treated as.

Q: You all pointed out that this is not necessary that the acquisition of a certain number of shares can give you control. So control is a subjective, qualitative idea as well so then how do you design a code or a takeover regulation that sort of play safe on both ends. It protects minority shareholders by ensuring that if someone is coming in and has some ability to drive a company then I get the opportunity to exit and doesnít put obligations on like private equity has in this country right now Ė if you have a veto even that simple veto can mean that you have to do and open offer?

Singh: If you look overseas for precedence as to how we see example certainly investment in Europe and some other markets that take after the UKís system of takeovers and the Companyís Act etc. You see that the concept of control is a single concept of control over which all shareholders tend to get the ability to put their shares or put their tender of shares into an offer as defined. However the Indian system does tend to be a bit complicated because of the history, because of the level of controlling shareholdings that have dominated our securities markets in the past and so on. Consequently I would actually agree with the views passed by Cyril whereby you do need to take a view at least at the moment where we are with our securities legislation and the overall point at which the securities markets in the country are of having negative and positive. I agree with you - itís very difficult to put a number to it and we have got some numbers to work with. The 51 or the 50+1 and the 25+1 frankly are very sensible thresholds to start with the Companyís Act.

Q: There seems to be some consensus on this table but if you were to create the boxes of negative and positive control in that sense then does that mean that the two would trigger different kinds of or there would be different thresholds attached to the two or there would be different open offer subsequently attached to those thresholds, do we need to make that differentiation in any fashion?

Shroff: Absolutely. I think that would be the real practical consequence of it. So at positive control, I think we should follow the international pattern where if you acquire 51% of control, the entire balance shareholding should be given an opportunity to exit without being subjected to any kind of proportionality. So, you have to make an offer for the entire 100% and the thing is morally also on a sound footing because if you have acquired majority control, you should be willing to acquire the rest of the capital. So that is one proposition.

As far as negative control is concerned, I think we will be caught a bit by our history as well as even the conditions that avail today. So personally I feel it is fair to go with 20% limit that we have today and that keeps you under 50% mark as well. So assuming we have upgraded our first trigger from 15 to 25 I think let us treat that as a given for a minute because that is where the negative control trigger kicks in. Then the question arises what should be the minimum size of the offer that you should make? It is always open to you to make offer in excess of 20% but if the law treats it as a mandatory trigger, I would say 20% that keeps you at 45% if you get full acceptances and that is sensible because you are under the positive control threshold, people get the same kind of exit that they are getting today and it is a good balance.

Q: So you are saying if I had a veto right, would I still trigger any sort of threshold?

Shroff: If veto right is treated as negative control, I think depending on the kind of decisions, yes.

Q: Should it be?

Singh: If we call it a veto right which necessarily implies your ability to prevent certain aspects, it should be.

Q: Then Sebi is fully correct in the interpretation it draws right now.

Shroff: Not anything and everything on which we have a veto right should be treated as negative control, there needs to be perhaps one more level of granularity in terms of important things and not so important things. But if the veto rights relate to thing which you could block at special resolutions so you could hold 10% and have the same voting rights as if you hold 26% ofcourse that is negative control.

Q: What if you have less than 15% or less than what we define as the best threshold and yet you have a shareholder agreement with the promoter on board that allows you to influence certain decisions, I am putting this vaguely but it is often happened in this country and otherwise, is that control then?

Singhvi: Definitely.

Q: So who is going to scrutinize what kind of veto it is or is it in the shareholder agreement?

Singhvi: According to me if you are looking at a control and you have to define it that you are looking to control the company then you cannot differentiate that I am there so long as you do a good job, if you donít do a good job then I will step in.

Q: So no positive and negative in your opinion?

Singhvi: Yes. I think one should be clear when you are getting into it that you want to have a control over the company. Management you can leave with somebody else, even a promoter can do it, he can own the company and a private equity guy is also saying that I donít want to interfere in the management but that does not mean that he is saying that I am not going to interfere in the control. He wants to control should things go wrong and that is where the control comes in. Every promoter would also like to have it so long as the company is doing well, he doesnít want to control it.

Q: Are you recommending that we should move to thresholds higher and if yes, should we move them for everything that constitutes control whether it is a certain amount of share acquisition or it is a veto or it is a special rights in a shareholder agreement?

Singhvi: I would go for a very simplified manner - increase the threshold from 15% to 25% because till 25% you cannot do much about it.

Q: So the acquisition of 25% of voting rights.

Singhvi: Till 25%, you are there, no code is triggered on that, after 25% acquire all shares. Then it cannot get into that I will stop it at 20% or 26% to have 51%, no, make an offer to every shareholder so there is no minority shareholder and there is no proportionate area and then you apply for Ė look at Ranbaxy.

Q: You are saying 25% voting rights?

Singhvi: 25% voting rights. Till 25% voting rights no takeover code is triggered.

Q: In voting rights is ADRs, GDRs warrants included?

Singhvi: All included. ADR and GDR is a complete nonsense, you cannot have a situation like this when you convert into a share then right will come in. So long it is an authorized share capital and issued share capital, no issues on that. How you converted it and given the depository receipt and all that is all mere technical issues.

Q: Do you agree with this, should we up the threshold at 25% and have this whole concept of positive and negative or just make it 25 and everything gets subsumed under that?

Vasani: I think that one limit should be better and the reason I am saying why there is a form out of empirical evidence for example Tataís at one stage controlled Tata Steel with just 4% shareholding, nobody would believe it in the present world but that was true and Birlaís had 6% in Tata Steel at that time. The 15% trigger when it came infact we felt it was a bit on the higher side because at that time most of the promoters control the companies with 15% shareholding but today if you look at Tata Sons, it is certainly having atleast 30% in most of all major companies. So we are not that uncomfortable with revising the basic thresholds and if you look at the international comparison which ofcourse we would have seen that India is the lowest when it comes to the takeover trigger. Our competition law would be world class as per the international standard but when it comes to takeover code, we want to have our own rules and say, no I donít want to go by international standards, my takeover code will trigger at 15%.

Q: So we need to stop protecting promoters simply because promoters have grown up and they have upped their stakes so now they donít need protection at that level, they need protection at a higher level?

Vasani: Though a lot of laws have changed and as a result of which promoters were forced for example, complete transferability of shares, removal of all those RBI restrictions has led to many foreign companies easily acquiring shares of the Indian companies, still I believe that the current law does not permit a foreign company to make a hostile bid on Indian company because the press note 4 still says that if the takeover code is triggered, automatic route is not available, you need FIPB permission.

Doshi: You are saying that threshold needs to be moved up to 25?
Vasani: 25 plus one share.

Doshi : And should the subsequent open offer be for all or half or should it depend on positive ---(Vasani interrupts)

Vasani: My view is slightly different here that it should be that at least the acquirer must make so much of open offer which would enable him to go to 51% in the company because then there is one person in control. I donít want two worrying group of shareholders coming together and each sitting with 35% each and then there are some public shareholding and nobody is in control

Shroff: But isnít that worse because then you have taken him from negative control to positive control with only a 20% offer and then the minority shareholders  are really in a tough spot where they might get only a; 20%  exit and not a complete exit?

Vasani: They will get an exit much higher for example he acquires 15% shares and then makes (all are speaking together) so there he has to make at least makes a 26% open offer to got to 51% and at least its better than current 20% and then we have 1 person in control then all these issues of RBI not permitting banks to finance the M&A transactions, to a certain extent that concern is taken care of.

Though personally I believe that instead of saying RBI is not permitting to we should restrict the size of the open offer, I would rather persuade RBI than request them to change the policy.

Singhhi: I have only one perspective to add to this that in 1997 court talked about 10% then got increased to 15%, in 1997 it as 10% and in 1998 it was 15%. The point about Tataís having 4% and Birlaís having 6%, I think it was in god old days when one could survive on this but not more on that. Second issue is that you have allowed the promoters to creep in shares for last 12 years under the code. Now if they have not reached to a stage where they can defend the turf, I think the turf should then be left open to people who can come and unsettle them because enough time isnít given and also creeping in acquisition of 5% should be stopped. You have given them window, the window was provided to them to move up who were at 15-20% and in case of Tataís- they have done it from 2% to almost 30% in most companies.

Doshi: If you stop creep in acquisition then how promoters can increase their stake?
Singhhi: Why should they increase, he is the biggest insider then, he is the insider, and whenever he wants he is creeping in, how can they that situation allowed.

Singh:  I think the issue at the heart of the situation is that if you look overseas there are very few if any precedence that have this concept of partial offers on an involuntary basis i.e you can certainly put it that back to the shareholders to whitewash a partial offer, in some specific situations most notably for instance South Africa. However the concept of allowing somebody to go from 26% to 51% and effectively giving them control by only coming up with 26% of the proceeds out to shareholders, I personally disagree with that because you either go all or nothing and to come back to the point that you either believe in the negative and the positive control thresholds being accepted or you donít. If you donít then happy to debate that.

Shroff: Maybe looking at this takeover code 10 years from now, India would have further grown up and India would have been right for just one threshold but at this point we have moved away from a 15% threshold, it is still work in progress.

Doshi: Why do we want to set up the case for another review 10 years now?

Shroff: this is always going to change.

Vasani: I have a slight disagreement to what Shroff and Singh is recommending. I think it is undoubtedly ideal world if RBI changes the rules of the game. If RBI permits financing of the M&A transactions, I am all for 100% open offer, so that entire minority shareholders get an exit. Even today they get an exit but through the market. (Doshi interrupts)

Doshi: Because stock prices tend to move up based on what the potential open offer price is.

Vasani: Also they are better of doing in the stock market because from tax point of view they pay only the STT and not the capital gains, that is one of the reason why you see the  empirical evidence the open offer, the tenders, because people would rather sell it on the stock  market and in fact I would recommend that Sebi should change the rule that whatever shares are  tendered in the open offer has to be deemed to have beentraded in the block window, which is upto 10:30 in the  morning.,

Doshi: You agree with that?
Singhhi: I agree completely on that and only one issue. RBI if it can allow 20% shares to be funded or banks are looking at 20% shares to be funded in whatever manner, they have been doing it Ė so why not 100%

The second issues, is which is limited arising due to the fact that if you look at all these triggers 10-15% which came in now we are talking of maybe 25% finally what are we looking at, we are looking at a situation where an acquirer really wants to acquire the company. He must fund himself completely as if he is buying the entire enterprise- he is not only buying the market capitalization, he assuming the debt as well on that. So he must have a company - that this is what the enterprise value is if I am willing to write that check today.

Even we donít have a situation abroad, all the loans have to be refinanced; here we take it for granted that whatever loans are there on the balance sheet they will remain even if I come into play.

Doshi: So to go back to your time in Gujarat Ambuja when you were this M&A demon, when you did lot of deals with bankers, sometimes without bankers and sometimes with lawyers and sometimes without them - would you have appreciated it then if these changes that you all are recommending now would have been made applicable then- that if you did a 15% purchase of shares, you would have acted full open offer. Despite the fact that you may be did not have access to financing in any form?

Singhhi- 100%, in fact Shroff can vouch of it- Two acquisitions which I had made and one sale I made, there would be very few guys who can talk on both sides of the table that is I was a buyer and a seller in that- that each time my opinion was that one was buying an enterprise and look at the enterprise value when you are buying it- you cannot fool yourself by just buying 20% and take it for granted that minority shareholders will remain with you and they will like you, they may not like you

What happened in case of Ranbaxy?  Ė The family got at Rs 750 per share and open offer was made only for 20% shares and today what is Ranbaxyís price, it is probably one-third.

Doshi: So you are saying every single share holder should have got the opportunity to exit?
Singhhi: Here in this case - all the shareholders should have paid this price and secondly Foreigners should not be allowed to have this kind of hostile, to my mind this is even more hostile than hostile because you are hostile to a common shareholder of Ranbaxy.

Doshi: If you had to buy all the a shareholders out assuming that the tax laws were changed so as to elicit or help you get better response and so you have gone out there and bought 75% of this company but the other part of this regulation which is the delisting norms of this regulations are not fully in place for you to go fully private. So what are you going to achieve Ė you have given all the shareholders exit but does that suit your purposes Ė we are trying to discuss a code that balances out all interestsí right?

Singhhi: I think right now delisting is there because the code is  assuming 15% as a threshold, 20% you give it there and then if you go from 55 then you go to 75 so if you look at the percentage, it will kill every guy who is very good in math, he will not even understand this.

Doshi: If you cannot delist would you still want a full 100% open offer

Singhhi: Delisting has not meaning thereafter, once you say I am making an offer to all shareholders those who decide not to will remain shareholder of an unlisted company. If I chose to remain there, I am then a shareholder of an unlisted company.

Singh: I would completely agree. I think a corresponding change has to be made to the delisting guys. That goes with out saying. The delisting guidelines have to work in parallel but there are other regulations as well that need to work in parallel. We spoke about financing for lending done. Listing agreements have to be looked at again. We have to really take a hard look about foreign direct investment thresholds as well. Currently for instance you are seeing a lot of activity in telecoms Ė 74% foreign ownership thatís it.

Singhvi: It may sound a bit repetitive because I was when you had earlier programme on this but I think this act is completely antiquated, it was written in 1997. We are taking the shareholding pattern (interrupted by the anchor)

Q: What would you think of the companyís law?

Singhvi: Particularly as Cyril said and I picked up from what he is saying that this time it should hold good for the next 10 years. In 10 years I think the business in India will change dramatically as it has changed in the last 12 years. The second issue which I have is that this act has been used, abused and it has become so outdated that it should be now rescued.       

Vasani: I would like to step back in on one comment which I disagree with my three panelist on this part. I think that is very unfair proposal to the existing promoters. You find that somebody is acquiring shares in your market somebody is making a hostile bid. You see his shareholding going up, you canít have poison pills in India and I canít even increase my shareholding by 5%. I would strongly like to disagree.

Shroff: There is a better solution to that is that you make voluntary offers between two persons it is much simpler. In fact it is better than creeping. Why confine a promoter to 5% if he is at 25.1 let him make an 20% voluntary offer. In fact we are going further and you can protect yourself and do not be constrain by this 5%.         

Vasani: Just to clarify a point that Singhvi made, I am recommending that this would be restrictions in foreign companies making a hostile bid I am saying that there are restrictions, I am not recommending. The restrictions are there.

Q: Why 25% and I am looking at all the other countries and the indications that we have. UK is at 30%, Germany is at 30%, Malaysia is at 33%, Hong Kong is at 35%, South Africa is at 35%, and in the USA there is not threshold, so why 25%, why not 30%, why not 35%, 

Shroff: The first question is whether one trigger or two so are we going to have a negative control trigger and a positive control trigger.

Q: So we do not have full agreement on this board between that? One trigger is enough.

Shroff: If only one then I would say 30-35% would be the logical limit. It is sort of somewhere in between.

Q: So we have one should be go for 30-35% why 25%?

Vasani: I think there is logic for 30% in UK does a lot of things with logic people. We had a huge experience on London code in the Corus transactions. We found out why they kept 30%. 30% effectively translates into 51% defect to control because all the shareholders do not attain the AGM. So if you are having 30% they found in UK that effectively you control 51%.

Q: So why are you recommending 25% why not 30-35%?

Vasani: So that there are more takeover transactions in India and there are people who can buy the shares of the company. There are private equity guys who can come in without being required to make an open offer. But effectively 30% shareholding would translate into easily 60% knowing the fact that today I have to persuade my institutional shareholders to come to attain the AGM, they are even reluctant to come to attain the Annual General Meeting. They are of the same standard shareholders holding 5-6%.

Q: So you still hold by 25%?

Vasani: I hold by 25%.

Q: You hold by 25%- you still (interrupted)

Vasani: 25 + 1 share.

Singhvi: I would like to call myself the author of 25.          

Shroff: I think we are not ready for one single trigger,

Singhvi: 25 on all shares.

Singh: If you do go by 25 with just one threshold it will probably be easier with todayís promoter set because you will find instances where their current holdings are south of 30 and that is going to be a one of the issues that they will have to correct themselves.

Q: South of 30ís is what I was looking at the Nifty-Fifty list and I could find barely 5 companies that are south of 30. There is M&M, that is south of 30, promoter stake is at 28% on, Grasim is at 25% and that is actually it. Almost all the other companies in the Nifty are above 30%.

Singh: But you are looking at the Fifty of the best companies. 

Q: Many of the houses represented in this Nifty-Fifty list were the houses that originally wanted protection?

Singhvi: I earlier worked for a company which was taken over when it was (interrupted)

Shroff: I think life is completely changed, that proves that.  

Vasani: Clear evidence in fact in this way. We are not uncomfortable with increasing the threshold but I would certainly note the comfortable taking away from the creeping part or allowing an open offer.

Shroff: Better than creeping by having a voluntary offer.

Q: How come the US does not impose any thresholds?

Shroff: Because they have more qualitative test which they apply. Two states in the US I think it works in a much more precise legal system which we do not have.

Vasani: Also the fact that US there is hardly a concept of promoter- there is no concept of promoter in most of the US companies.

Singhvi: Controllers are well defined.

Q: We already have promoter concept in our ability to go public even though we look upon it so good?

Vasani: Sometimes it pierces the corporate world to identify the promoter with the company.

Singh: But frankly on the US point the negotiation that you tend to have with a board which is facing a takeover situation is way more than worse then would have anywhere else.

Shroff: Our board here is passive.

Singh: That is exactly right. So the board plays a very active role especially when defending minority shareholders rights.

Shroff: Because the promoter and the companyís identities are fused over here whereas the promoter is distinct from the corporate entity.

Vasani: But the code is so lenient on the board of the target company that there is not even an obligation to make a recommendation to the shareholders which is a no jurisdiction in the world would say that you just keep quiet, today in India shareholders of the target company has no guidance at all from the board.  

Q: I will try to go back to a slightly more controversial issue, ADR-GDR-Warrants, should those be counted when you count an acquisition of voting rights, many countries do, in UK if there is a direct or indirect interest in shares including via options and derivatives it comes under the control thresholds, so does the same in south Africa?

Vasani: I think our regulations are spot on the particular issue.

Q: How can it not be accompanied by voting rights?

Shroff: The court provides that as and when you withdraw from the deposit arrangement it would be triggered then but in todayís time I think that is all done. So the logical way forward should be that this should be counted.

Singhvi: When company issues the shares all share are equal.

Q: Do you agree with that?

Singh: Yes I do and one of the other facets which we are trying or certainly my view would be that maybe we should try and simplify the overall system, so the moment you start thinking that this works if done differently etc, I think you are just increasing and you are just increasing the burden on Sebi and you are increasing our courts to do these things.  I think you should keep it very clear.

Singhvi: So what happens when you reverse it, the shares which are converted into GDR and GDR into shares and then you again convert shares into GDRís and so now you can say your shares are GDRs so how will this all work out.

Q: Some countries do provide for share holders to in a sense allow only for a partial offer even though the mandatory open offer is a 100%, is that something we need to weave in or do we still believe that in our company the share holder meetings, there is not the best of turnouts and if there is then there is not the most educated voting, posting ballots doesnít mean shareholder democracy and therefore we should not make this available because a promoter of family led companies can misuse it?

Singhvi: This is almost like a political debate because the class of people who vote are not educated but that doesnít mean that we change the system.

Q: I have done dozens of AGM meetings in my career, there are more songs sung and poetry read out as opposed to discussion on any kind of proposal whether its to appoint a new director on board or increasing salary or all of that, so I donít mean it towards the share holders but so I donít mean it poorly towards share holders but thatís the truth?

Vasani: Yes that is an unfortunate reality and the fact of the matter is that in this context I donít think that we can entirely rely on the share holders.

Q: So we shouldnít allow this?

Shroff: IF they are ready for a whitewash unless there is more share holder activism from institutional share holders.

Singh: Relying on the suaveness of the share holders to understand when to whitewash and when to not and how to price a white wash for a partial offer versus a full offer is going a step beyond the current.

Q: From my initial conversations with all of you, all of you seem to be on board with the existing pricing formulae or the setup that we have which the higher is off negotiated price which all of you seem to be priced in with or any acquisitions being made in the previous twenty six weeks and then you said the last one being the higher of 26 week or two week average, many of you want that changed, you are saying a three month average right?

Vasani: Weighted average because I donít see why the love for the regulators for the closing price doesnít really make any sense and it can be easily manipulated so people await the quantitative factor, three month price also but there are times when three month price may not be representative enough and the share holders may feel that they may not be getting the true value of the share because for three months the market is very bearish and they may feel that they are being short changed, so 26 weeks is a long enough period to cover that and this cannot be an ideal solution for this problem of pricing but this atleast would be better than the current system of closing price.

Q: So the moment you benchmark the series of a few months, a turning market can always put you at an advantage or a disadvantage?

Singhvi: Our court has essentially made out to protect the minority share holder, the man on the street who owns 100 shares and secondly the seller should be protected from that point of view but I think at the end of the day you have to look at it that there are no hostile takeovers in this country and somewhere to get a better value for that man on the street owning 100 shares, hostile takeovers will deliver him that value and you can have a situation where a seller company or a seller promoter can get away with a very chunk of a whole pie and the minority share holders because the share holder gets open offer and 20% offer and he will get the proposed share holding. So the point which I am making is that and the price which you pay should be very close to the price which is there and a premium there on and for all shares for somebody to really say that I want to acquire this company.

Q: So our regulations allow the acquirer to pay 25% more than the offer price as non compete fee etc, so that is actually the main seller who gets a higher price than everyone else participating in an open offer but you are recommending the other way around saying that the people participating in an open offer should get a premium?

Singhvi: What I am saying is that the price has to be as near as the price that has to be in the market capture that price and at that price no one will tender the shares, so by force you have to pay a premium and pay to all share holders and this whole transparency will come in. The pricing mechanism today is really trying to match that on which day should I make an open offer, the lawyers were working on it as lets say lets match the price. So to all that, do it when it is very near lot your pricing and then work out that 30-40% premium to the current price and then secondly it will encourage hostile takeovers which are going to happen. In US, most of the time it is the hostile takeover where a common share holder gets a much better price for the share that he owned. He did not own it only for the dividend, the dividend return in the US is so low.

Vasani: The only nuance which we need to add in the Indian context is that the outgoing promoter would certainly be slightly more than the market. The reason is that since I am parting with the control whether its right or wrong and unfortunately the RBI has also recognized it in the FEMA 20 that the foreign share holder which gives control, you can pay 25% more than the Sebi formula price and similarly here in the takeover code, we will call it non-compete.

Shroff: I think this should be called as a controlled premium.

Vasani: But I donít think Sebi is entirely comfortable with this concept also and they would want all the shareholders to be treated alike.

Q: You advocate being close to the UK law and the UK Law doesnít allow for additional premium to be paid to anyone, it says everyone should get the same price?

Shroff: That being said I think there is still some logic in control premium. 

Singh: You should be able to get control of the company only by paying a premium but I donít see a case why it should be split into promoters and non promoters.

Singhvi: If the promoter is selling only 25% and 75% you are acquiring from the market for it to go to 100%, who is giving control.

So if for Grasim, tomorrow Kumar Mangalam Birla wants to sell 26% will he get control? Thatís just an example but I am saying 74% of other guys were there who were holding that stake.

Vasani: The only worry is that if you donít allow the outgoing promoter to get a control premium he will be get it unofficially and that is the worry I have.

Q: I think we have gone through the issues we wanted to, I am going to ask each one of you in 15 seconds to recap what you want in terms of a threshold limit and open offer size as well as price?

Shroff: Negative control, 25.1 and positive control 51% and the balance entire 100%, thatís what I would go for.

Singhvi:  25% one share for all share holders and all should participate in it. As simple as that write in two pages and that is end of it.

Vasani: 25 plus one, persuade RBI to change the law and make an open offer for 100% for M&A financing and if they donít change then atleast 51%, so that one party is in control.

Singh: I would go with 25 plus 20 where 51% being the threshold for 100%. 


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