The new Takeover Regulations are upon us. Last week, the
Securities and Exchange Board of India ("SEBI") notified
the new regulations based on the draft recommended by the Takeover
Regulations Advisory Committee ("TRAC"), but with
fundamental deviations from the recommendations. While many may
think this is now a pro-acquirer law, the reality is that the law
just got worse for acquirers taking over listed companies. The fine
print has provisions that will haunt acquirers who make open offers
under the Takeover Regulations.
The central reform measure recommended by the TRAC was to
require the acquirer to purchase every share that any other
shareholder wished to sell to him. To balance this recommendation,
the TRAC had sought to give the acquirer some fair leeway
– he would have the right to delist the company if his
post-acquisition holding were to cross 90%. Moreover, if the public
shareholding were to potentially fall below 25% (the minimum
required under other securities rules), with the acquirer's
stake not rising above 90%, the acquirer would have a right to
proportionately reduce what he would buy from the outgoing
substantial shareholder, and from the public shareholders
responding to the open offer.
Therefore, an acquirer who would end up at above 75% would have
consciously done so despite having the option to stay compliant.
Consequently, the TRAC recommended that he should not be permitted
to make any offer to voluntarily delist the shares without unless
he first ensures that the company becomes compliant with the 25%
public shareholding requirement.
SEBI has rejected the framework on the size of the open offer
entirely. However, inexplicably, the prohibition on attempting to
delist without first increasing public shareholding has been
retained. This is a classic example of the fine balancing of
various stakeholders' interests achieved by the TRAC being
SEBI's new law requires the acquirer to make an open offer
to acquire at least 26% of the remaining shares – an
increase from the current offer size of 20%. The acquirer cannot
delist the company if he were to cross 90%. Nor can he ensure that
the company stays compliant with rules governing minimum public
shareholding by proportionately paring down his acquisitions from
the substantial exiting shareholder and from the public
For example, if an acquirer were to acquire 60% from an outgoing
substantial shareholder, he would have to make an open offer of
26%, which would potentially take his post-transaction stake to
86%. Now that would mean public shareholding would be only 14%,
well below the minimum 25% mandated under other securities laws. In
this example, the acquirer would have no choice but to end up at
86%. Under the rules governing minimum public shareholding, such an
acquirer has twelve months to bring his stake down to 75%, while
under the Delisting Regulations he has a statutory right to attempt
to delist the company. Therefore, today, the acquirer has a right
to get the company delisted within the twelve-month deadline to
ensure compliance with public shareholding requirements.
Under the new Takeover Regulations, the right to delist otherwise
available under the Delisting Regulations, has been taken away. An
express prohibition on attempting to delist has been imposed for
such period of twelve months. In short, during such period, he
would have to dilute his holding back to 75%. After an expiry of
twelve months from completing the open offer, he may attempt
delisting of the company afresh. In other words, there would have
to be a yo-yo of securities offerings by the acquirer –
first, to acquire shares under the Takeover Regulations; second, to
sell shares so acquired in order to achieve minimum public
shareholding; and third, yet another offer to acquire shares, this
time under the Delisting Regulations.
This is bad policy. An acquirer's stake would cross 75% only
because the mandatory provisions of the new Takeover Regulations
would require him to buy 26% from the other shareholders. He is not
being given any option to remain compliant with the minimum public
shareholding requirement. Therefore, there is no logic for the
Takeover Regulations to take away his entitlement to initiate
delisting under the Delisting Regulations.
Such a framework is in fact a punishment to the acquirer for
having done a transaction that triggered an open offer under the
Takeover Regulations. The lobbyists who believed they had defeated
reform of the open offer size have just learnt that theirs is just
a pyrrhic victory.
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