Historically, the response of public shareholders to takeover offers in Indian companies has been lukewarm. This is primarily due to the fact that the market price of the company’s shares following the takeover announcement tends to be higher than the offer price. However, a report in the Business Line contains a study of recent offers indicating that shareholders who did not exit in the offers may be worse off in the long run. For instance:
Of the 98 open-offers in 2010, 81 received poor response with acquirers in these cases managing to mop up less than half of the shares they targeted for. Yet 60 per cent of the stocks where investors rejected open offers are now ruling below the open offer price.
Apart from pricing considerations, taxation too has a role to play. As noted further:
The unfavourable tax treatment of shares tendered in open offers may also have played a role in retail investors not participating in these offers. For shares tendered in the open offer, short term capital gains is taxed at 10 to 30 per cent depending on the individual’s tax slab and long term capital gains is taxed at 20 or 10 per cent, depending on whether investors claim the indexation benefit.
However, for shares sold in the secondary market long term capital gains are completely tax exempt while short term capital gains are taxed at a flat 15 per cent.
Despite the data indicating low responses to offers, the Takeover Regulations Advisory Committee (TRAC) in its report considered it appropriate that the minimum offer size of 20% be done away with. However, SEBI did not fully accept the recommendations and instead increased the offer size to 26%. Given the track record, this change is unlikely to significantly impact the size of responses to offers unless the price of the offer is at a significant premium to the market price prevailing during the offer period.
Sale of Business & Takeover Offers
On a related matter, it has been reported that the Ministry of Corporate Affairs is considering the introduction of open offer requirements in transactions involving sale of a business by the company. This move is somewhat surprising because the sale of a business is a corporate action and does not amount to a change of control that should entitle minority shareholders to exit a company. Shareholders do have the requisite protection by way of section 293(1)(a) of the Companies Act, whereby they can veto such a sale if they are able to muster the requisite support to block a proposal. At most, one may consider a scheme of arrangement such as a statutory merger that falls within the purview of takeover regulations in other jurisdictions such as the UK and Singapore, but under the SEBI Takeover Code schemes of arrangement and reconstructions are generally exempted from mandatory offer requirements.
UK: Revised Takeover Code
The Takeover Panel in the UK has published a new edition (10th) of the City Code on Takeovers and Mergers that comes into force on 19 September 2011.