19 July 2010

New SEBI takeover regulations

An advisory committee of SEBI has come out with a wholly re-written set of regulations for takeover of listed companies. While it is refreshing that the regulations simplify the dozens of convoluted provisions and numbers in the previous regulations into 2 or 3 numbers, the committee has taken its task too seriously. There was more need to clean up the regulations, than re-writing it ground up. A re-writing means the jurisprudence acquired over the past decade and a half will be lost and there will be new sets of court rulings. The American regulations have been untouched (except for form and some detail) since they were passed in the 1960s.

On the substance, the committee recommends that the existing provision of a compulsory 20% tender offer after crossing 15% be replaced by a 100% offer on crossing 25%. The logic of moving to a 100% offer seems compelling - why exclude shareholders from an open offer? But on a careful study, there are two fatal flaws with the increase.

First, takeovers will become incredibly expensive. While people had a committment to buy only a minimum of 20% after acquiring shares or control, they now need to shell out a multiple of that amount. This will chill takeover activity - there will be fewer takeovers. With fewer takeovers, shareholders (who are supposed to benefit from the 100%) will get nothing as most people will avoid crossing the 25% threshold.

Second, all statistics point towards a reduction of promoter holding percentage in India. Given that, it is illogical to raise the minimum threshold from 15%. If shareholders are getting more widely dispersed, there is logic for reducing the threshold, not increasing it.

There are many things the report gets right like doing away with the non compete fee (which permitted paying money for what is prohibited by the Contract Act) and reducing the timeline of the public announcement. But copying the regulations of more developed markets where capital is more plentify and where regulations are a lot more lenient to leveraging, will seriously jeopardise the number of takeover bids happening under the new proposed regulations. Given the presence of senior SEBI officials, it seems like SEBI will probably accept the recommendations which have been nearly a year in the making.

See SEBI press release and the TRAC report.

See also my working paper titled Indian Takeover Regulation - Under Reformed and Over Modified. One more on the list of modifications.

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