Revamping the Takeover Code

After consolidating the regulations relating to primary markets (as discussed in the previous post), SEBI has embarked upon the next exercise of revamping the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (popularly known as the Takeover Code). It has appointed a Takeover Regulations Advisory Committee (TRAC) to advise on changes to the made to the Takeover Code. I am pleased to note that Somasekhar Sundaresan, a contributor to this Blog, has been appointed as a member of the Committee.

Historically, SEBI has had to make signficant changes to the Takeover Code during its fairly short life span. The first Takeover Code, promulgated by SEBI in 1994, lasted all of 3 years. It was replaced by the existing Takeover Code of 1997, which too has been subjected to periodic amendments (nearly each year since 2002). Consequently, it has acquired a great amount of complexity in its provisions. Just to name a few, there are multiple thresholds for notification and mandatory open offers, principles relating to change of control have been subjected to differing interpretations, and provisions relating to delisting of companies have only added to the complexity. As a result, a large number of orders and informal rulings of SEBI, appeals dealt with by the Securitis and Appellate Tribunal (SAT) and also those that have gone all the way up to the Supreme Court relate principally to issues arising out of the Takeover Code. As readers of this Blog may be familiar, several of our contributors revel from time to time in identifying various lacunae and issues that are open to interpretation under the Takeover Code.

Given this background, a lot will be expected from the Committee. At a fundamental level, the Takeover Code will have to undertake the onerous task of maintaining a delicate balance among various interest groups – it has to facilitate acquisitions by fostering a market for corporate control, it has to protect incumbents (such as promoters) against abusive acquisitions and also (perhaps most importantly) cater to the interests of minority shareholders. Delving into the details, there are several issues that appear to have been highlighted for consideration by the committee. These include identifying the appropriate threshold of shareholding that triggers open offer requirements, specific rules regarding indirect acquisitions, treatment of non-compete fees, etc., as the following extract from an Economic Times report suggests:

A SEBI official said the regulator may look at increasing the trigger limit for open offers from the current 15%. Countries such as the UK have a trigger limit of 30%. The only issue the committee is likely to face is that a 26% shareholding in India gives the acquirer the powers to block special resolutions at annual general meets. Legal experts say that the committee may set about 25% trigger limit to avoid legal confusion.

The committee may also review the norms relating to indirect acquisition, when an overseas acquisition triggers a change in management of a local entity. Indirect acquisition has always been a controversial issue. Overseas transactions have often led to a change of control in local entities, a development that requires open offer as per SEBI regulations. But foreign firms have found fault with the norms complaining that they are too rigid. In some cases, such as BP Amoco’s takeover of Castrol Plc, the pricing for the offer has been controversial. The committee is expected to delve into the issue and suggest changes.

Another provision that is likely to have a close scrutiny is the non-compete clause. Under the current rule, a non-compete fee up to 25% of the deal size could be paid to the seller which will not be included in the open offer price. Several investors groups have raised objection to this, and SEBI may be looking at discarding this provision. Open offer pricing norms may also come under review.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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