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Rules of the M&A Game 5: Hostile Takeovers and Poison Pills

Published on Fri, Jul 17,2009 | 16:34, Updated at Wed, Jul 21 at 17:24Source : CNBC-TV18 |   Watch Video :

Control, triggers, open offers, size and price, exemptions, indirect acquisitions, de-listing, CNBC-TV18 takes stock of mergers and acquisition (M&A) activity that India Inc has undertaken. In a discussion, Zia Mody, Managing Partner, AZB & Partners; Bharat Doshi, ED and Group CFO, M&M; and Cyril Shroff, Managing Partner, Amarchand Mangaldas take stock on the special show, Rules of the M&A Game.

In an exclusive interaction, the trio discusses the Indian M&A scenario. Also watch the video.

Q: If I could open with a slightly broader maybe a little general question but what we ultimately want in this review of this regulation is maybe to create more enabling environment for M&A – is that anything like that? In this country with all of its peculiarities of family- run businesses, of businesses not wanting hostile takeovers to happen can we at all create an enabling environment for M&A activity?

Mody: I think in addition to the takeover code there are a lot of other surroundings regulations that need to be addressed but as far as the takeover code is concerned, as we will probably discussed in more detail later on. First, hostile takeovers, how difficult or how complicated is the environment, domestic hostile versus foreign hostile, regulatory philosophy on whether the hostile is actually a good thing. I think these are definitely factors in terms of making existing promoters be much more vigilant about their role etc. One concern is the competition act, which I think regardless of the takeover code being made more friendly in whichever way you go ultimately. Whether the competition act will have serious scale back issues on allowing takeover offers to proceed because in one hand you have a statutory time out for the takeover offers on the competition act you know you have a 210 day period in most cases which will probably be extended.

The third is I think if you really want a free flow and net competitive forces play out in the market place is to allow acquisition financing because without that you are putting people at a disadvantage and probably the smaller shareholder who could get a better management if you assume that takeovers are good thing in itself is to allow acquisition financing where the new person is willing to leverage, come in and prove better value.

Last thing for an enabling a competitive and good friendly M&A environment if you postulate that independent directors are a good thing which I do then you have to have, again we have been on this before an environment which allows them to function independently without the specter constantly of finger pointing and prosecution.

Q: You have played out the elements of enabling environment what do you clients tell you, do they really want one?

Mody: Oh yes. When the markets were down in the last one year we had many enquires about hostile takeovers because the valuation of the companies were just so low and people were seriously considering putting their hat in the ring where the promoters stakes were 25-30%. As we were discussing earlier India has cultural issues about going hostile. So quite a few were overcoming those frankly and I think that existing promoters as we have seen in the last episodes by and large most of them are in comfortable positions in terms of not having the 5%, 8% of just a year. So I think that promoters have less to worry about and acquirers have a challenging playing ground to cast their hat in. So I see a lot of interest both ways; promoters wanting to, existing promoters wanting to go and acquire competitors and people looking much more at getting value creation through hostiles.

Q: Would you agree with that, at M&M your promoters stake holding is roughly 28% just few percentage points above what is considered to be a control point so to speak – do you think that India Inc is ready for an enabling environment that allows all competitive forces to play out or are we still looking at a regulation that needs to be designed in keeping promoter interest in mind, keeping minority shareholders in mind, those kinds of interest groups in mind and skewed towards anyone of them?

Doshi: Let me just give it in context because you started with an M&M having 28% and many others have improved but even as far back as 1997-1998 we were around 21-22%. At different points in time whether regulations are changed for promoters security or whether for minority interest you will find balancing and trade of taking place all the time but when you talked about and when Zia talked about the hostile environment let me tell you that what is missing in today’s take over or legislation to prevent a hostile takeover there is nothing, nothing as is required for preventing a hostile takeover. The regulations exist but right now why they do not happen domestically is because of the culture. On the other hand if tomorrow the regulations and this is not the takeover code regulation but the side regulations whether it is foreign direct investment (FDI) regulation or Foreign Investment Promotion Board (FIPB) rules requirements then you have foreign takeovers, foreigners coming to takeover, more hostile takeovers will take place. At that point again the trade of will come that what is good for an economy, this countries growth post independence has been because of the entrepreneurship and the promoters interest and the way they pushed the various corporate over the period of time. While do you not see in the same way a promoter concentration at this juncture in an US environment. If everything is to go out and copy UK or go out and copy US you may get into a situation where you may stop one growth engine before having started another growth engine. So should just keep that in mind. The game of acquisitions, the game of takeover is all about value creation. If at any given point in time you have a situation that you are actually destroying value then halt for a moment, think am I doing a change for the sake of change or am I doing it for better value.

Q: So are you making the case that hostile takeovers are not as efficient as most people believe them to be because often if you look at M&A studies that are done across the world they will say that 3 out of 4 M&As fail the most efficient M&As are where it is hostile because there is no issue of managements trying to please each other across the two companies, the acquiring management that comes in knows very clearly what it wants to do with that company and how it is going to go about doing it. There is no nicety involved in the whole process and therefore not taking feelings into considerations it is very business like. I do not know if you subscribe to that view but...

Doshi: In theory hostile takeovers do create value in a way they are coming and read to pay a price which the promoter or the existing incumbent management is not doing. It wakes up the incumbent management to do something, not just do something in terms of getting more shareholding that is one part of it but do something in terms of continuously creating value that the shareholders would rather support you instead of supporting foreign party or any other party who is coming for the hostile takeover.

Q: How do you look upon this if nothing in the regulations prohibits hostile takeovers then is there something we can do to maybe enable them in a more friendly fashion or in a more encouraging fashion to allow for more competitive forces to interact in this market place and if that is the case then do we need to accompany that with some sort of corporate defense measures.

Shroff: With your permission I would like to broaden the question because hostile acquisition is just one dimension of it. The question which I ask in my mind is do we have commensurate with the aspirations of our country in the decades to come. In M&A regime particularly a public M&A regime that befits us as an economy. We talk of modernization, we talk of foreign investment, we talk of being one of the top three economies in the world and the quality question to ask is does your corporate law environment and the public M&A regime in particular reflect that kind of sophistication that is required, atleast in my mind the answer is a resounding no. Then I ask myself a question why is this the case. I think the problem arises because there is a lot of regulatory Skitsofrenia in our country on virtually everything. We have not made up our mind whether something is good or bad. Are promoters good for coporate India or are promoters bad for corporate India. We are always debating whether they are good guys or bad guys, are independent directors good for corporate governance or bad for corporate governance, this very discussion of hostile acquisitions good or hostile acquisitions is bad virtually any dimension of this there is no conceptual clarity so if we do want healthy sort of public M&A activity it will have to be based on a consistent philosophy.

Q: That is one aspect of the debate but if you were to go back to the specific conversation that we were having on hostile takeovers the only reason I ask is that they are looked upon as a country that blocks hostile takeover or does not allow for hostile takeovers to happen whether it is for cultural reasons or financing reasons or otherwise which seems like a country that is giving up on competition?

Shroff: Let me continue in the same chain. What is today in the takeover code that prevents hostile acquisitions almost nothing. It is the combination of social, financial factors which come for instance there is no acquisition finance available in India, however by contrast foreign acquirers will have access to global financial markets for acquisition finance. You have our FDI regulations which are not exactly friendly from a foreign acquirer’s point of view of making a hostile acquisition. You have sectoral limits and caps in a very complicated FDI structure other than just the need for permissions which makes it very difficult to get control. We also have this problem of almost a lakh of going private regime because when you are getting into a company and you want to take control and you want to take it actually take it all the way through and take a company private all these are huge missing gaps which collectively make it impossible to make a hostile acquisition.

Q: There is already considerable process dissonance you pointed out between the way competition commission will look at M&A. There are differences of opinions within the pending Company’s Bill that we have and the existing takeover legislation. For instance preferential allotments are to promoters at least are totally done away within the pending Companies Bills and just in the last episode we were discussing whether preferential allotment shares should come under exemptions automatic or otherwise. There are different points of view on this. Differential voting rights (DVR), a concept that was in or introduced in 2001 came into effect when the Tata company last year, has been done away with altogether in the company’s bill. What hope do we have even if we do review this takeover legislation we are going to come up with something that is robust enough to take us through the next decade and yet speak the same language as other laws do?

Mody: The only hope is that legislations will talk to one and other because at the end of the day the biggest disconnect that I see is that if under the code you are obliged to make an offer within four days and your competition commission ultimately says this is a merger with is disallowed you have taken a 100% position and put the escrow down and got into management under the takeover code. How do you unscramble this cookie?

That our regulators need to actually sit down in a high powered committee and see where and private India is more than willing to put the issues on the table as indeed they have because you cannot advice people, especially those coming in from abroad as to where their end position is going to be if there are so many disparate open ended issues. So then what you do is drive away M&A activity and that is not good for FDI. That is not good for environment and that is not good for the market.

So I think there are serious discussions that have to take place and pretty soon and an opportune time is when the takeover code is being looked at and reviewed. One of the things that the committee should be looking at is all the other hurdles and all the other inconsistencies in legislations, which is going to impact what they want to come out with.

Shroff: Whether they can do anything or not at least they should put it on the table so that somebody else looks at it at least.

Doshi: I am just giving an analogy that is like when water pipes are there and they are clogged there is a committee, which is removing that clogging. But simultaneously, if they break the telephone lines or if they break the electricity line or gas lines you have problem. So, taking a comprehensive view becomes very important. Otherwise today, happily for corporate India, the poison pills are not necessarily in the corporate articles etc. The poison pills are all around.

Mody: There is as you know an introduction of the National Security Bill. There are serious amount of sectors put in that bill. So how does the takeover code play out there so in the sense that if you even get the permission of the target company to make the offer if that is again subject to security approval and that security approval does not come for one reason or the other how do you deal with it?

Q: How does it work elsewhere in the world because I am sure they also have security concerns when it comes to foreign acquirers acquiring companies in their country? I am sure they also need to harmonize various rules and laws. Are you missing one authority that actually takes care of all of that, is that what we should be looking at because let us admit that the truth is that this takeover committee that is currently going to give recommendations to Sebi – we are not going to see Sebi have a conversation with the Parliamentary Standing Committee, which is currently looking at the company’s bill so there is not going to be no conversation much as we hope for it. That means in a year or so we may end up with a new takeover set of rules, we may end up with a new Company’s Bill and nobody has spoken in the process of that?

Mody: I don’t think the committee would be doing its job and would be creating more confusion in the marker place if they went of on a road of their own not recognizing that what they are doing to do is going to be incomplete dissonance with other legislation because all they are going to do then is have a code that does not work. So, I am sure when they are looking at it they will 100% maybe they won’t be able to capture what may happen in future bill or what may happen but they have got the Competition Act staring in their face it is not going away anywhere. So certain things they will have to look at.

Shroff: But to answer your question on why is it that it is such a special problem in India and does not have other markets faced this? I do not think the topics are very different from other markets. For instance for public M&A activity in any of the western markets whether it is UK or US or wherever else you still have to cross the competition law hurdle. So there is no wishing away that.

The problem is that how we implement it. This 210 day problem or the manner in which people think it might get implemented in terms of sheer process and working without talking to each other that is where the issues are. So it is not wishing away the topics but it is implementing them in a more efficient and a more transparent way. That is where the real issue is.

Doshi: I fully agree here with Cyril and Zia. The problem which comes, there are two kinds of constraints which come so one is all the legal interpretations, the loopholes and trying to plug them and therefore making law more and more complex and second is the timeframe in terms of when it can be implemented. If there is a time frame given of X days and last day you immediately get queries so that now there is a whole new time frame, which starts you will never be able to close the matter.

Economics matter if they are not closed what environment is changing all the time. So three months down the line whatever might have been valid today is not valid at that point in time. You face a very big challenge. So you come to this whole theory of legislation that should there be a principle-based legislation. Then the people who are giving the guidance, there is an independent panel who understand each case that is one kind of thing. Another is everything is tried to be put in black and white in each of the operating legislation and if they conflict then that is a problem go to the lawyers and try to find a way to do it.

Now these are two extremes and one can argue on both the sides. But the problem would be much easier if on related legislation there was a body, which looks at it together rather than separately.

Q: That is not going to be. We are all sitting here and asking for it. It is never going to happen so how do you get past that or is it better never to change this law at all?

Shroff: The more practical solution is for this new committee to anticipate as many as issues. I do not think they can go beyond their mandate in terms of looking at the legislation that they have been asked to look at. However, they can certainly put down a list of comments or a wishlist, which other policy bodies can look at, and they can keep that in mind when they are amending this. In the absence of a comprehensive body looking at the whole thing that is the next best thing that they can do and that is not too bad either.

Q: Look at this schizophrenia we have seen on DVRs. It is not really a big important issue at the end of the day it is one additional instrument so to speak for corporate India but we allowed it in 2001. Last year Sebi helped Tata Motors get the first DVR issue off the ground. In the same year the Company’s Bill that was presented in Parliament disallowed DVRs. Yes, you can put down all thoughts, you can circulate papers it is not going to happen the truth is that. So I come to the question of do we need a body that actually governs M&A outside of the existing regulatory body? You all spoke of process timelines. Now within Sebi itself right now we have a case where in two instances competitive offers for a company have been pending for a really long time. Orissa Sponge has been almost six months and more. Deals become economically unviable within months or weeks sometimes so within Sebi itself we are unable to get the process going faster. What is the solution to this?

Mody: That this is one of the things that the committee can put in to place, which is fairly reasonable tight time lines, which are not timelines for the sake of it.

Q: There is a timeline right now? They have to respond within 21 days they respond. They raise issues takes another few months to answer all of them.

Mody: But what is the solution other than a change in DNA because at the end of the day if the regulator believes Sebi is almost obsession is the minority shareholder. So if Sebi believes that the minority shareholder is being put to harm as a result of this immense delay because as you say in a hostile takeover, frankly one of the main issues which the hostile offerer would have an advantage of is higher price and financing.

The minute you give him six months the first guy has time to make up that financing which may not be for the betterment in that sense of shareholder value so I see this as I do not think it is an intended or any intension of Sebi to delay. But I think the process is such that if it gets speeds up observations on your letter of offer, making sure you have a dialogue not waiting for weeks to pass before you do not know what is happening – I think it is something that the committee can put some sort of insistence on just not sending out that letter the day before. It should help.

Q: Few months ago I am not trying to make this specific to a deal but I am just trying to illustrate using this deal. In the Bharti-MTN case we had informal guidance saying unless ADR/GDRs are converted to shares it will not trigger the code in any fashion. Within weeks we had a completely different interpretation of the rule itself changing so to speak. How do you explain that fact that not only does it take very long the regulator itself is changing its mind while the course of the transaction or transaction is playing out potentially? How do you deal with that uncertainty?

Shroff: That eliminates from this whole schizophrenia that underlies most policy making in India.

Q: That means the transaction is no longer on the table, is there some way for you to respond what it means?

Doshi: I just wanted to make a point that just now when we were talking about the time taken – we have to analyse is resources a constraint or is it the conflict of the schizophrenic approach by the regulators is that a constraint. If one identifies what the root cause is.

Similarly, let us say when the takeover panel which is going to look into whether changes are required. There would be X number of provisions where there is no controversy. There are provisions which conflict with other legislations and if they are sieved out the management approach to solution.

Q: The context of the complexity this skitsofrenia, the conflict between different laws - what would you prefer? This takeover regulation stays status quo or would you like it to change?

Doshi: In the interim there are so many things which can be done where changes are required. It’s not like a major overhaul.

Q: Did you not want a major overhaul?

Doshi: It maybe only one overhaul, but the moment you move the limit from 15% threshold to 25% threshold, it is major but it is one change. Obtaining consensus and working on that may not be difficult. According to me, when something is good for economy and corporate environment then do it. If there are bottlenecks like the Foreign Direct Investment (FDI) or the Foreign Investment Promotion Board (FIPB) those bottlenecks are not easy to solve or the whole financing issue. So keep that constraint in mind but take the first step.

Q: Are you in favour of the triggers or the thresholds being moved up?

Doshi: From 15% it is now comfortable to take it up to 20% or maybe 25% but not beyond that.

Q: Should that be accompanied by a limited 20% offer or 100% tender offer? I am getting your view because we have got collective views on this.

Doshi: I would say 20% offer at this time because there is a lot of valuable creation even with that. By bringing in 100% you are bringing in many other questions into play. One can debate that. So there is a view that if somebody crosses 51, so that you keep that minority shareholder view in mind and therefore go up to 100. If you are not crossing 51 then maybe a 25% as a threshold and 20% as open offer which is the situation today.

Mody: I am more in favour of tweaking rather than overhaul. Given that pervious episodes, we have seen that many of the main promoters have come to a respectable level. I don’t think that they need to be worried so much about hostiles in today’s environment because even with the respectable holding of 30-35% given the way our shareholders never attend and present voting is de facto, they are in control. Therefore, my fear is if we take it all the way up to 100% what we will end up seeing is many potential changes of management not happening because it will be too expensive.

Existing management may have lost interest or is actually a buyer, dissipating shareholder value by not being able to take it forward because the price of take out is too expensive. We have been seeing a lot of healthy changes. We have been seeing quite a lot of takeover offers in corporate India over the last five years. I would like a lot more research done. I am not saying my view is necessarily a right view but you need a lot of research done on the empirics of what has happened in India.

Our delisting as you knows, as Cyril says regulatory disapproval by and large. You have somebody who has to raise the money put it up for 100%. My concern is that we may see a lot of reduction in what is otherwise healthy corporate merger and acquisition (M&A). So needing to go up to 51% is I have never understood it.

Q: If there would be fixed delisting and they were to fix the whole going private process then do you think that a 100% offer will be looked upon favourably by India Inc? Will companies want a 100% offer option? They can actually be able to take that company private if they want. Do you still think that they will shy away from having to finance such a large offer?

Mody: Price of the cheque book will still scare them. If you look at it, most promoters have 25-28, as you say of the top companies. If you go over x-percent then are you limiting not having expensive takeouts to anybody who has more than 30% which most of them have according to your research, right? Then you are looking for the ones that are down the line which may not be attractive. If a promoter today has shored up his holding now wants to exit, shored it up decently to protect him. He cannot get out simply because he is 30%.

Hence, you take him to over 51% then you got the put up for the next financing of 70%. So we need a little more thinking on this.

Doshi: The financing subject keeps on coming quite often and that is one of major issue. Unless one has solved that you are going to have different views on this 15-20-30-35.

Q: Is it still available to those who want to do it?

Shroff: Not from the banking sector. That is where the problem is. Capital markets is always a lag because by the time you are doing your M&A deal your capital market transaction will take a long time to close. Hence, you need a bridge.

Mody: Then your takeover offer letters of observation do not come for one year.

Q: You are saying that you are okay with statusquo but you want to see a lot more data before we actually progress towards path of change?

Mody: There is a lot more commitment to legislative changes. Otherwise we will get the data. What have de-listing done but then is it practical just to change? I would see more takeover offers and healthy changes of management rather than only a few bigger ones.

Q: You had the belief all through that this needs change to a higher trigger and a larger offer?

Shroff: I am willing to take a new approach for India which we do not see in any other markets where we make a distinction for a 20% offer at 25% and a 100% offer when you acquire more than 50% which I think balances it well. We have to solve the financing issue in regardless of where we come out on this. I am all in favour of more conceptual clarity on the entire 0 to 100 zone. This is where I disagree with Zia. It won’t result in less activity but in a huge jump in M&A activity. That is my thesis.

Doshi: Yes because the promoters have been able to improve their takeover period move the trigger up. At this juncture before we talk about the financing getting solved let us assume that it is not solved.

Q: Is there any downside to just moving the trigger up and not addressing other company’s issues?

Doshi: I do not see any. I feel that if you have moved the trigger up you still keep the 20%.

Mody: Again it goes back to the philosophy at the end of the day. I can’t get around why 100% takeout is better. The market is there. The guys are accessing the market anyway. The first thing that happens when you have a takeover offer is people aggregating why they are aggregating. The price quickly moves upto what the offer price is anyway.

The tax advantage is better on the stock exchange. I am not sure if a minority shareholder can put his money in. One could study at Sebi that between the announcement of a public announcement and a closure how much trading is actually going on, enough.

Q: The market themselves provides for a good enough exit option.

Mody: Better exit.

Shroff: Tax is one of the reasons.

Q: Wouldn’t investor classes like private equity want a process that allows them to go the whole hog, from 0 to 100%? Wouldn’t they want an enabling process if you want to encourage more clarity?

Mody: When private equity come in they are pretty much control in the IPO process If they have come in as listed in any case they have an exit.

Q: Do you need to address those new emerging industry classes in any fashion?

Doshi: By saying that there should be a 100% offer we are still not solving that problem.  

Q: It seems that two of you are more in favour of the rules not changing until we know very clearly what the changes are likely to be why and what impact?

Doshi: We are in favor of tweaking a little.

Mody: Look at it the other way. You know that you have 35% or 40%. You are very expensive to be taken over. The foreign coming in rules has not been changed. You have a nice easy comfortable management. So how is that shareholder value? How are you being kept on your toes rather than being challenged because today even if somebody wants to come in an upset the apple card so to speak to get 26%  there are some offers where people have just in hostile situations come to 26% plus. The management can think honest about. If you have an all on nothing you might end up subject to empirics and end up actually creating more slothful managements. 

Doshi: As I visualize it, its not that it’s happening today. There would be a point in time where rest of the shareholders which will become more and more over a period of time institutional shareholder. Quite often people give an example of annual general meeting. I am not talking about those people. I am talking about activist, institutional shareholder, etc.

Q: How many are there in this country.

Doshi: This is not far away and when that happens it will be like a fire under management. 

Shroff: What you need for corporate governance is not to amend the governance code. You just need to enable hostile acquisition and governance in India will improve overnight.

Doshi: I agree with you. There is no problem on that but the question is does it need to be a 100% offer? Need not. 

Q: Assuming that this does change, that they have setup a committee that the committee does recommend some stuff, what are two-three of the things that you definitely want to see included in a new regulation and two-three of the things that you definitely want to see out? A couple of things that we haven’t discussed and maybe would fall into one of these list is do we need a more board recommended regime of sorts for M&A in this country, where boards play an active role between competing offers and something like that? The second thing is do we need consensus on whether differential payment should go like in all other countries all shareholders whether the promoter, minority institutional whatever get paid the same price and that’s how it works in the attempt of fairness?

Shroff: Triggers —25-50, I think that has to change because that lies at the heart of control and control lies at the heart of whole code. That needs to change. There needs to be more rationality in all these exemptions including how they would be implemented. As part of the broader discussion on price, there needs to be clarity on whether they are going to allow control premium to be paid or not. These are some of the issues, which I would like to see change. I think process needs to be simplified a lot as well to make it much more meaningful and quick. In the code itself, I do not see major hurdles on hostile acquisition. The code is not the real problem. So that hostile discussion is Red Herring in terms of a Takeover Code discussion. It’s fixing and making the process easier and more transparent; clear, simple regulation with less ambiguity and without too many provisos, a nice, neat instrument at the end of this is what I would say and that will jumpstart M&A activity enormously.

Q: Your thoughts?

Doshi: Let me first deal with question of uniform payment for everybody.

Q: I had suspected you would not agree with that?

Doshi: Definitely, I have a point of view that here is a promoter, who with his 30% shareholding is prevented now from doing the same business, there is a non-compete versus another shareholder, who may have 20% shareholding or 25% shareholding, who will get the full payment like the promoter. So in a way it is still unequal.

Q: How often is that truly a non-compete or is it just a premium to keep the promoter happy?

Doshi: Most of the time it is non-compete.

Q: How many promoters want to sell one business, in one sector, in one industry doing one thing and go out there and start the thing all over again?

Mody: They have enough money to do it.

Q: Non-compete is truly a non-compete nowadays?

Shroff: There is an argument for control premium as well that I am selling shares and something else.

Doshi: Apart from that argument, I am not making the control premium argument, first and making the non-compete argument.

Q: So you are saying a differential pricing should stay?

Doshi: Of course SEBI has this mechanism, which studies the non-compete clauses. So, to say that make a general rule that everybody will get the same price, it’s actually an unequal payment.

Q: And it also has a cap, you can only get up to 25%?

Doshi: That is one point, which I definitely would like that it doesn’t change, it remains and it is as objective as possible but it is required. The second important point, which relates to all the timeframes and what is required. So one wants the change in terms of how the implementation takes place because you need a faster response time and that is a very important change.

The threshold can definitely change from 15 to 25%. On the other hand the 20%, which exist today – that open offer can stay the same. There are so many small things. This highest of the price of 26 weeks and 14 day does create a whole lot of problems when you talk in terms of 14 day timeframe, which comes into play which one needs to think about.

Q: What did you want to change because its one of three prices whichever is highest, right?

Doshi: Just remove that 14 days reference. So you can still keep the 26 weeks or you can make it smaller than 26 week, you can make it 12 weeks.

Q: That is to some of the views that we have got saying make it 26 weeks, make it weight at average?

Doshi: Volumes weightage is very important, but that 14 days definitely can create a lot of problem and it becomes a possibility for manipulation.

Q: Last word to you?

Mody: I think I am an old fashion girl. I think what I am more interested in is genuinely quicker process, genuinely more robust implementation and a lot of times takeover panel exemptions have now become standard in certain subjects, those should be brought into the code so that we have less delay in having to go to the panel, come back. So where jurisprudence has developed make it part of the code. On the mandatory versus voluntary recommendation of an offer, to my mind what worries me is the obvious liability for misstatement or being sued by shareholders for making a recommendation that ultimately turned out to be right or wrong. I am personally very sensitive to the anxieties that boards go through and independent directors have right now.

Q: In a more litigious environment like the US, boards still take that risk. In a far less litigious environment like India where we do not have shareholders filing suits every second day?

Mody: We have SEBI issue show cause notices, right and that’s worse. Who wants to stay awake at night looking at some show cause notice for something you honestly thought you did in good faith but in hindsight turns out to be wrong. So I think worry about this whole role of independence and the board, I would put less onerous duty on them, specially in the case of hostiles where they may not be able to judge the environment right. Human nature is such that you go defensive any way in a hostile environment. So for me a lighter touch tweaking where the process is obviously wrong, using historic to set it right and getting more data before we start making wide sweeping changes.

So after 5 hours of debate and 11 different perspectives here is the final verdict.

“The Code should be amended and simplified to bring it in line with international practice. Focus should be on increased clarity and less complexity, especially by combining the takeover and delisting regulations under the same roof. The Tender Offer Trigger should be increased to 25% with a clear and practical path of getting to 100%. In combination, the financing guidelines should also be reviewed to maintain a level playing field between Indian and overseas acquirers,” says Amrit Singh of Deutsche Bank.

“Simplify to one trigger point with one creeping number of 5% per year applied equally to hostile, friendly or promoter acquisitions. Pare the exemptions, clean up the oddities – and most importantly don’t tinker with the regulations for the next 20 years,” says Sandeep Parekh of IIM (A).

“The existing thresholds are consistent with a market economy that is still maturing. At best, in an open offer, small shareholders (100 shares or less) can be given an exit option in addition to the 20%. Any incremental changes in thresholds will create an imbalance and hurt M&A activities. I don’t recommend wholesale changes to the Code,” says MR Prasanna of Aditya Biral Group.

“The threshold limit should be increased to at least 25%; and provide for a possibility of acquiring 100% with appropriate checks and balances,” says Amrish Shah of PwC.

“There is no need to rewrite the Takeover Regulations. Some changes are desirable – such as the trigger for open offer should be at 25% instead of 15%. Any changes recommended should keep in mind the availability of financing and the need to create a level playing field,” says Bharat Doshi of M&M.

‘Increase trigger threshold for open offer to 25% with minority protection clauses not being construed as control,’ says Amit Chandra of Bain Capital.

“Conceptually, the principles embodied in the Take Over Code are in line with objectives as also the current level of economic activity. A few grey areas leasing to interpretations deviating from the basic concept, like treatment of negative control, need to be rectified,” says Gautam Doshi of Reliance ADAG.

“I would like to see a comprehensive review of the Code, clearer drafting, increase in threshold for trigger of open offer to 25% +one share and higher open offer size to give exit opportunity to all minority shareholders. I also recommend that Sebi permit de-listing of companies through open offer after providing anti-abuse safeguards like exit only after 5 years of continuous listing and fair exit price to all outgoing shareholders,” says Bharat Vasani of Tata Sons.

“The Takeover guidelines should be written afresh. In synch with Companies Act the threshold needs to be increased to 25% accompanied with a compulsory purchase of all outstanding equity shares of the Target. With a minimum acquisition requirement of 50% plus one share for the takeover to be deemed successful,” says Anil Singhvi of RNRL.

“No need for sewing changes. Inconsistencies need to be ironed out. Increase the 15% threshold to 24% as the trigger. Define ‘control’ as positive and not negative control,” says Zia Mody of AZB & Partners.

“The Regulations need a complete overhaul to reflect the changes in the economy. We need a clearer definition of ‘control’ (positive and negative), higher thresholds and commensurate open offers and a clear path from 0-100% ownership. I wish the new code is bold, visionary and contemporary,” says Cyril Shroff of Amarchand Mangaldas.


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