Rules of the M&A Game 3: Exemptions
Itís been a decade of intense deal making for India Inc. On Rules of the M&A Game; we are debating the changes needed to
Q: Why do we need a new law?
Cyril Shroff: The levels of promoter holding are vastly different
Gautam Doshi: But I don't think we really need to rewrite the entire Takeover Code
Q: Minor tweaking or major rewrite?
Cyril Shroff: Major rewrite
Q: Where do you stand in this, Amit?
Amit Chandra: First written, 15% was set as a major threshold. I think there is a very good case to discuss whether that 15%- which is the cornerstone of the law- whether that's the right threshold, whether that threshold needs to be changed.
Cyril Shroff: I think there's a difference between negative control & positive control
Anil Singhvi: Control definition in itself, as far as this regulation is concerned, is completely cock-eyed!
Q: What do you want in terms of a threshold limit, an open offer size as well as price?
Cyril Shroff: Negative control, 25.1, 20%. Positive control, 51% and the balance entire 100%
Anil Singhvi: 25%, 1 share. All shareholders- they all should participate. It's as simple as that. Write it in two pages and that's enough!
Bharat Vasani: 25 plus 1. Persuade RBI to change the law and make an open offer for 100%
Q: Change the law for M&A Financing?
Bharat Vasani: For M&A financing. If they don't change, at least 51%.
Amrit Singh: I would go with a 25% + 20%. With a 51% being the threshold for 100%.
If control is the very heart of a take over regulation then its spirit is tested when providing shareholders a fair exit in the face of changing control. But then, there are exemptions. Once upon a time when the world was less protectionist and Bharti Airtel and MTN was seriously considering a deal it was to be structured via Global Depository Receipts (GDRs) and under a scheme of arrangement both of which are exempt from take over regulations thereby potentially sparing Bharti from a very expensive open offer. Exemptions that raised many eyebrows and make for our first discussion topic in todayís show and to discuss that we have Cyril Shroff, Managing Partners at Amarchand Mangalsas, Amrish Shah, ED of PwC, Sandeep Parekh, Former ED of SEBI & Visiting Faculty, IIM (A) and MR Prasanna, Group General Counsel of Aditya Birla Group.
Q: Starting with very long list of exemptions that we seem to have which brings me to the very first question Ė donít we need to prune the existing list for instance Ė
-IPO and rights issues allotments have exemptions.
-Allotments to underwriters have exemptions.
-Inter-se transfers between promoters/ relatives/ PACs have exemptions.
-Acquisition of shares in the regular course of business for such, such as for brokers, market makers: exempt
-Transmission on succession or inheritance: exempt.
-Convertibles, ADRs, GDRs, as long as they are not converted: exempt.
-Creeping acquisitions: exempt
-Preference shares Ė itís a really long list.
Q: Donít we need to prune this list especially issues like why should financial institution purchases be exempt? Why should inheritance be exempt?
Shroff: Two questions; first Ė is the list too long? I do not think we need to take a quantitative approach to this and we should take a qualitative approach to this. What the committee I guess should do is look at each exemption on merits and see whether it has any ongoing relevance for the future including some other ones that you just mentioned and we can discuss that in more detail as the conversation processes.
Q: Does anyone disagree with that. I think itís a very long list?
Prasanna: I think the way you look at the exemptions is to look at each constituency that is been addressed in each exemption. It is not as if one constituency is getting all of those exemptions. So we will have to test it with respect to the constituency.
Shroff: There is a purpose.
Parekh: I would support Cyril in saying that lets look at each one specifically instead of kind of saying that letís move all of them out particularly I would want to get rid of exemptions for the government and for multilateral organisations...
Q: So then financial institutions is what you would like to get rid of?
Parekh: We do not have too many public financial institutions as per the definition but we do have specific names of international multilateral organisations.
Q: Like ADB etc which are exempt if they were to acquire more than 15%?
Q: And they do not have to do a tender offer?
Q: And you are saying that should be done away with?
Parekh: It should be relooked at.
Q: A broader view and a comment on that?
Shah: The comment is that do we need to look at those exemptions in light of any threshold limit changes that we are going to look at and therefore do we need to relook also from that perspective. I think thatís the additional point that one will have to factor in.
Q: Can you explain that to me?
Shah: For example, if you are looking at changing the threshold limit from 15 to 25 or 30 then should we need to look at exemptions in light of that because some of those then exemptions may not merit to take forward.
Q: For instance if were to increase threshold limits which seems to be the consensus across many people in corporate
Shah: Probably some of them like the underwriter thing and probably...
Q: All of those would become irrelevant in that sense because the list would get pruned in terms of numbers?
Q: But there are still big exemptions there that one could have objections to, Sandeep said that he wanted the financial institutions one gone. Any one of you disagrees with that?
Shroff: He mentioned government and I agree - why should government which is operating in the private space now as commercial entities whether directly or through public financial institutions who are fronted, who are sort of owned by the government, I think all those are up for review as well.
Q: What is the government for instance if SAIL which is a public sector undertaking purchases 15% of JSW and more then will it be exempt from an open offer. Is that what it means?
Shroff: It could mean that.
Q: It could mean that?
Shroff: Yes, so I think there is now question of making sure that when you operate in the private space, the fact that you are a government company should make no difference.
Q: The other exemption that seem little odd to me is the whole one that comes via transmission on succession or inheritance in that sense. I can still swallow it if it was a succession or inheritance within the family, a promoter father passing it on to a promoter son in that sense promoter family son. But what if he was to will it to some one outside the family? Technically that means a change of control in that company. So as a shareholder should I have not right to exit?
Prasanna: It basically goes to the law of wills. A person who dies actually leaves something to somebody. He should not be completely bound by regulations as to what would be the consequence of his bequeathing.
Q: Why not?
Prasanna: Why should he be? Because ultimately the law recognises the wish of the person who is dead and gone and if he has left his controlling interest to someone else, it has to flow to him. Its not the personís making, it's not the person who receives.
Q: Look at it from a tax point of view. For instance in many developed countries if you do no will away your estate to a charitable cause in that sense or a not-for-profit cause, you would end up paying large amount of tax on it. Of course that may influence how you decide to leave your estate to your inheritors but thatís the reality of the situation. In this case if the succession is actually meaning a change in control in some fashion in the company why should there not be an exit clause?
Parekh: Let me try to answer that. There are jurisdictions which do have that estate duty kind of tax and there is jurisdiction. So either you do it for both your kith and kin and for other people you will your properties to or you donít.
Q: I am saying for both... whether you do for your kith and kin or its someone outside your family thats inheriting, why should it not mean a change in control?
Parekh: Let me answer that second question- if I am an inheritor of a large chunk of shares, somebody just pops it and I get it either by way of bequest or otherwise, you cannot expect me to shell out Rs 5,000 crore one fine morning.
Q: Donít accept it, no?
Shroff: I think itís a bigger issue Ė just for creation of wealth there needs to be seamlessness in terms of how it moves from generation to generation and that has to happen because the manner in which inheritance process works, so this is more to do with the process rather than who it goes to. You will create a very onerous obligation on anybody who acquires an inheritance who could be outside the family. If they are going to be stuck with large bills of making an open offer....
Q: Moving on to a far bigger and a more contentious issues like convertibles, ADRs, GDRs Ė in most foreign jurisdictions there is no distinction made between regular shares with voting rights or voting rights and converts but in India unless you donít convert it doesnít trigger an open offer. It is an issue that has been in focus of much debate over the last six months, so what do you think?
Prasanna: My simple take is that any ADR/GDR is a faceless instrument and we do not know whether you hold it or I hold it, it is only when you establish the identity and seek to actually exercise the underlying voting right it gets to be counted otherwise until then it should not be.
Parekh: What most people donít understand is that the disclosure regulation under these takeover regulations do no exempt ADRs/GDRs from disclosure, the exemption is only for the tender offer.
Q: We have been arguing this for a long time and every investor banker I talk to says no they donít apply!
Parekh: If you look at the regulations it is very clear, I donít know if Cyril Shroff disagrees with me -- there is no exemption from the disclosure requirements.
Q: So what you are saying it is not faceless?
Parekh: one is not faceless; second there is no conversion involved. It is the same thing as a Indian Depository, you are just converting it to electronic form- it is like one person is holding the shares...
Q: You are saying the issues ADR/GDRs come with voting rights and therefore they must come. Would you say that for warrants as well or any kind of convertible instruments?
Parekh: Warrants are different because they are not yet that instrument. Shares and ADRs are identical, they just look different.
Prasanna: Let me clarify Ė when I say faceless, what you must understand is that, is that ADR/GDR holder entitled to be on the member register, is his name appearing on the members registration.
Q: Can he vote? Can he come to the shareholders meeting and vote?
Shroff: He can actually vote through the depositoryÖ.
Parekh: Yes. Exactly the way National Securities Depository Limited (NSDL) and Central Depository Services (
Q: So it comes back to the issue which has been the heart of this is the depository agreement and whether it gives the ADR/GDR holder the right to specifically determine which way his vote is going to go or whether its general but that just leads to more confusion- Sebi is not going to be able to whet every single agreement on a subjective basis and say this is clear of the law, this is not clear of the law, isnít it just creating more gray areas, shouldnít we just be absolute in this?
Shroff: Itís actually a very simple issue Ė unless GDR arrangements are excluding voting rights in all other cases which would mean that voting rights are exercisable through the depository, itís really no different in terms of acquiring shares or voting rights through GDR and it only stands to reason that they should constitute a trigger. So if you are acquiring some of your voting rights through acquiring GDRs, itís really no different from shares.
Parekh: I would go a bit further than that whatever you do with your depository you have a private agreement with that depository, its not even an institution it can even be a local bank who is your depository. So I would not exclude just based on a private agreement with the depository, exclude an entire instrument from the takeover regulations.
Prasanna: That would defeat the purpose of ADRs/GDRs for example if I have got acquired ADRs and GDRs and also I have got a chunk of equity shares and if you compute both and actually trigger an open offer, then it will be too bad. According to me till such time I convert that into an underlying share I should not be seen as triggering it because I donít have the voting rights.
Parekh: That issue brings out a whole perversity - I am an Indian promoter holding ADRs just to evade the takeover regulations and I have seen at least two cases where it has happened
Q: We will agree to disagree on this, I have had many debates on this show and no one has agreed on it- so a quick word from each of you Ė should they come with voting rights or not come with voting rights?
Shah: I agree with what Cyril is saying you need to look at whether they are giving the voting rights to the GDR holder.
Q: Does that mean Sebi has to scrutinize every agreement?
Q: What if agreements change post scrutiny?
Shah: Obviously at that time it triggers it.
Q: So Sebi will have to rescrutinize it?
Shah: There is no question of rescrutinising at that time because if you are changing - itís like this today you issue a convertible instrument, Sebi is not going to come back and say when you have to make the open offer because you do it when you convert it.
Q: Sandeeep, you disagree with that?
Parekh: Shares is equal to ADRs and your private agreement is your private agreement, you an change agreement everyday if you want.
Prasanna: I stay with my view- it is something which has to be counted differently.
Q: So it must come under an exemption?
Shroff: If there are voting rights it should be included as a trigger.
Q: How do you determine if there are voting rights?
Shroff: If the agreement is there.
Q: Agreement can change, who is going to disclose the agreement if it changes, if you donít disclose it Ė is Sebi going to keep track of every single ADR/GDR agreement?
Shroff: Its not a problem at all, its very simple, the obligation is on me since I am relying on the exemption to make a disclosure, if I am saying my GDRs are excluded from the trigger, I have to prove that there are no voting rights. If I cannot prove it, it is part of the trigger.
Shah: Just to take an example Ė you have 18 months period generally for convertible securities. That doesnít stop you form converting at the end of 12 months because then your trigger is at the end of 12 months, not necessarily 18 months. So you are voluntarily taking it on you to then make the compliances under the takeover code and that is what it should be.
Shroff: That change has just plugged a loophole
Q: The automatic assumption that you get under in the Companies act... isnít there some way where we can make this more specific as supposed to allowing any kind of corporate action that takes place under the scheme of arrangement- I know it gets high court and share holder approval etc - but should it be exempt from takeover code requirements or mandatory tender offers?
Shah: I would think yes primarily because as you said there is a process laid down which is very well laid down under the Companies Act and it goes through several rounds of scrutiny and first in case of listed companies it goes through BSE itself and from there you start off and when BSE clears and the shareholders clear it and then it goes to the ROC...
Q: We are not very well known in this country for a great amount of shareholder democracy, superb attendance in shareholder meeting, very well-educated shareholders who know what they are doing. So lets be honest, we donít have activist shareholders, institutional shareholders are mostly mute on most boards or in meetings. So I am not really sure whether this system... its designed for a perfect world, we donít live in a perfect world!
Shah: I agree and it has been a change and if you see most of the schemes now, people do come to court and object to something which is not correct.
Parekh: Partly this philosophy is coming from there and partly it is also coming from the fact that SEBI is deferring to the courts and the regulations are deferring to the Companies Act because they are lower quality regulations.
Q: Do we need to change that?
Parekh: Sure you can but its open to debate.
Shroff: I think the process in India works rather well because there is a court which is looking at it and it takes into account the various interests and secondly there is a pre-scrutiny before any scheme goes up from the stock exchanges and they doing a good job in screening out a lot of things especially after the Sterlite case many years ago. I donít think the real problem is in
Prasanna: I think that is going to put a lot of challenge on the system to actually monitor what a foreign scheme does and what an Indian scheme does and how those two have an interface. That is going to be challenging and according to me and current scheme of things, Section 391-394 it gives flexibility and any arrangement is possible with the share holders.
Q: That is the problem... ANY arrangement is possible!
Prasanna: The point is and we cannot simply wish away simply because our shareholders do not constitute a mature constituency. We have to live with it and things are improving and shareholders are showing greater and greater activism, the 2009 Companies Bill is actually giving a right to class action, so we better behave and we just cannot wish away all these things, we have to make sure any scheme that is proposed passes the acid test.
Shroff: We are saying continuous exemption for Indian schemes but conditionality on foreign ones?
Q: Give me an illustration of what conditionality?
Shroff: A foreign scheme that has gone only through a court. Secondly there are minimum standards raised out for considering public interest in India for instance an Indian court would look at public interest in a broader sense and there is no such obligation for a foreign regulator to worry about Indian public interest. So add that as a condition.
Prasanna: I disagree. Cyril knows about enforcement about foreign awards and all, he is going to create a Pandoraís Box!
Parekh: I agree with Cyril. Because we donít know that the black box which is maybe a Pandoraís Box or maybe just a black box which actually has demons living inside it.
Prasanna: I cant understand the provocation for your desire to distinguish between the two.
Q: Exactly what Cyril said... in countries outside
Prasanna: You are saying that the Indian system has more transparency than the foreign ones.
Shah: If we look at what is going to happen in India also, we are going to move to non court approval mergers if we look at the companies bill in that sense. So what are we going to do at that point of time? Because we want to go and develop our laws based on and then how do you have these distinctions between the two so that is going to be an issue.
Q: So what should we do?
Shroff: So I believe that so long as a court has looked at it whether its Indian or whether itís a foreign court or whether itís the shareholders of the company because if you are going to tomorrow allow in India, merger with only shareholder approval and therefore contractual mergers as its known, then why not foreign contractual mergers?
Shroff: Unless you donít extend the exemption to Indian contractual mergers. Because the original logic at the time of the Bhagwati Committee was that we are deferring to the courts. Hands off the courts, was what the logic
Q: Mr Shroff, three boxes?
Shroff: So still two boxes: court-approved, give the exemption; non court-approved,
Q: Since we are talking about shareholders approval for schemes for arrangement and therefore them being exempt, let me come to the other space where shareholders can actually save you from a tender offer and that is what is commonly referred to as whitewash across the world Ė now I am coming to exemptions or additions to the exemption list so to speak. We already seem to have a whitewash clause. Why is it still then on the wish list of many firms or many business groups in terms of changes in this takeover regulation?
Prasanna: I think there is really no justification for additional whitewash. I think the regulations already recognize a number of shareholder actions which would prevent a trigger from actually taking place. I do not particularly see a good case for expanding that particular class of exemptions.
Parekh: We need to explain to the viewers what whitewash is. Whitewash is basically, shareholders kind of saying, that approving a particular takeover and the process not going through a tender offer.
Q: So exempting the acquirer from tender offer?
Shroff: Just to supplement that: the scheme of the takeover code is to protect the minority shareholders from sort of not having an exit. So when 75% of the company says that we are fine with this we do not need an open offer.
Q: Minimum 75% non-promoter vote?
Shroff: We can debate that threshold. It could be 75% totality or...
Q: What does the law say right now because whitewash is embedded?
Shroff: it is only embedded for the takeover of control for regulation. It is not broad based in terms of a general exemption. When the shareholders are saying we do not want this, you respect their majority and if they do not want it why are we forcing down their throat? That is the concept of a whitewash.
Parekh: Just to back track, this exemption was there till 2002...
Q: And then it was taken off?
Parekh: It was taken off in 2002 and the reason was you're building this house for protection and you got the doors which are very nice but you do not have walls. 90% of all tender offers go through this.
Q: So we come back to shareholder democracy? The reason it was taken off was because you thought that shareholders do not necessarily participate enough or the vote does not reflect the true wish of the shareholders?
Parekh: That plus another issue is that you discriminate between hostile takeovers and friendly takeovers. Why should a hostile acquirer have to face a different regime compared to friendly takeover?
Shroff: I do not agree with that because if 75% of the shareholder - we should presume that they know what they are doing which is where the part of the problem is, but for the moment let us assume that they know what they are doing - why should it make a difference whether it is friendly or hostile? Shareholders are saying I do not want this so it is whitewashed and therefore by necessity from the companyís point it becomes consensual.
Parekh: The reason is simple because 75% is owned by the promoter!
Shroff: So disqualify the promoter perhaps that may be the part of the answer.
Prasanna: I think you're virtually rewriting the Code in this episode! I think you should stay with the 75%. It does not matter whether the promoter participates or does not participate, financial institutions participate because you can keep on excluding classifications. Ultimately you can say we will only take small shareholders and bring them into a constituency and take their vote. That does not really work. 75% is what is required for a special resolution
Q: That exists right now but it only exist in the case of change in control not for substantial acquisition. You're saying broaden it to both?
Prasanna: Please remember ...Cyril will vouch for it ... there is also a number issue it is not just the 75%. There is also 75% of the people who are present andvoting in physical.
Parekh: We might as well tear up the takeover regulations if you want to put in that regulation...
Q: You are saying that existing whitewash that we have which is right now conditional- even that is not good enough?
Parekh: It is very limited right now. I think it was a mistake not deleting when you deleted the preferential share allotment.
Q: So no whitewash at all is what your stance is on this?
Parekh: Absolutely. Then you might as well as tear the regulations up.
Shroff: I do not agree with that because the whitewash is something which is also globally used in the number of jurisdictions. What you probably need and maybe a good balanced outcome is to have 75% of all shareholders so the promoters can vote as well and add another condition which we have, saying scheme of arrangement of 51% by number. For a 391 scheme you have to satisfy dual test - 75% in value and 51% by number. So if you meet this dual test it is a very fair outcome and that is actually the suggestion.
Parekh: You're outlawing hostile takeovers in my opinion!
Q: Do you agree what Shroff is saying because you were nodding your head?
Shah: Yes. I think it is a balanced approach in that sense , if we have to take care of both sides.
Q: But you are saying that it should expand the existing whitewash we have to the substantial acquisition of shares as well and we have put in some kind of anti abuse or safeguard into it so it is fair to everybody?
Shah: If you look at SEBI they may look at the delisting regulations where they have put in a different type of a condition where you need to get 50% of the balance shareholders to approve it also. So probably they may draw towards that.
Prasanna: The last word is that you stay with the current regulation.
Q: You do not want to expand the whitewash?
Prasanna: No. I do not think the current whitewash provisions are required and they must stay on record. There is no need to expand them further. That is the opinion.
Q: You do not want the whitewash to extend to substantial acquisition of shares Ė you are happy with going to shareholders only for a change in control?
Prasanna: Only for change of control.
Q: So you want status quo?
Prasanna: Yes, Status quo.
Q: There are some other demands that have come in on what should be included in the automatic exemption list, it's already provided for in the law but can we make it automatic. And those two things that are preferential allotments only to third parties and no change to control with full disclosure and explanation so you put in anti-abuse conditions and buybacks... so does the full panel agree that those two things need to come in the automatic exemption list?
Parekh: Not at all. Buybacks are worse than preferential allotments because you are using company money to buyback shares and the only reason the promoter shareholding is going up is because the promoter is exercising his discretion not to tender into that. So its not involuntary.
Q: So that is a company decision and company board decision and a board is almost often in this country run by promoters in that sense?
Parekh: And its company cash, remember in a preferential allotment!
Shroff: One additional comment is that if you look at the recent history of panel exemptions that have been given and most of them have been things like buy backs and employee trust etc. So if you are issuing ten exemptions on every quarter on the same subject, why donít make it automatic?
Parekh: But it's wrong, so why put it into statutory form?
Shroff: That is a different issue.
Q: But do you think itís wrong?
Shroff: I think it is a debatable one and I donít think that is absolutely correct and I agree with Sandeep that you are using company cash for this but there are a number of bonafide cases as well, where people are 14.9% but because of some involuntary action, because the company genuinely needs a buyback, there is somebody without doing anything at all crosses the 15% threshold.
Parekh: That would only happen if promoters are not tendering into the buyback and that is the only condition.
Q: If the promoter tenders into the buyback an equal number of his shares get extinguished right?
Shroff: Maybe this could continue as a panel thing and one has to look at the bonafides of it on a case by case basis.
Parekh: There is creeping thing also which has come in the amendment. Which is that 5% you can do via a buyback but that is only upto 70%.
Shah: I have a different point of view. Its a company which initiates the buyback but itís the shareholder who takes the action of putting the shares in that buyback. If they believe that they want to continue with the same promoter and if he is going to increase the shareholding lets say from 50-55% as a result of the buyback they should not tender- it will go up only to 52%. Why is the share holder participating? Because he either doesnít believe in the promoter or the company or he believes that the price in which the company is buying back is right.
Prasanna: I agree with that and also please understand that this is a certain amount of corporate Independence that a company has in initiating a buyback, it is not always be seen as it is motivated and it is being done at the behest of promoters and all that stuff. I am a very passionate believer that all our laws are intended to evolve in this situation and the more we change it the more we are going to pull it back.
Q: So move it to automatic exemption and not panels, subjective case points?
Prasanna: I donít think so. Why should you? Itís a corporate action.
Parekh: This is subject to abuse because there is discretion involved of the promoter
Prasanna: Is he happy if the promoters are compulsorily made to tender? I dont think so. Even that will not make him happy
Parekh: They are the people who are initiating the buybacks!! They are in control.
Q: What he is saying is that buybacks should not be exempt at all. In a worst case they should be exempt by a case by case panel basis where the panel can determine what is the true nature behind this?
Prasanna: Then we are moving from abuse to discretion.
Q: It already is discretion! So we are saying status quo.
Parekh: If the promoter is tendering his proportionate number of shares into the buyback tender offer, the trigger doesnít happen. So there is no need for anti abuse!
Q: So what you are saying is status quo. Donít definitely bring into the automatic list and actually what you want is to take away the exemption that is available to buy backs altogether.
Shroff: But Sandeep is saying further. He is saying not only dont have it in automatic list but he is saying the panel should not grant any more. I disagree with that. I think there are a lot of bonafide. cases which should be allowed so the only debate is that if it should be automatic or panel based?
Q: And all of you have different view on that?
Shroff: Anti-abuse provisions can be included in the automatic but there will be a big discussion on what those provisions should be.
Q: Should preferential allotments exempted or not on an automatic basis or case by case panel exemption?
Parekh: As I said, you are creating doors but no walls for securing yourself. It was abused 90% of times and it was removed in 2002 after much thought by SEBI.
Q: Its on your wish list saying that preferential allotments should move?
Shroff: For example its 75% plus 51% could be there so you have some speed breakers there.
Q: So share holders get to vote on whether they want preferential allotment to go through or not?
Shroff: Thatís an extension of whitewash
Prasanna: I am happy to agree with you.
Shah: I would also agree!