New Take over Code 2010

8/7/2019 New Take over Code 2010

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New Take over Code 2010

-Highlights of Achutan Committeerecommendations

Prof.C.S.Balasubramaniam


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Why a Takeover code is necessary ?

Disciplining the capital market : Takeovers

help in disciplining the market as inefficient

and errant companies get taken over due to

their low book value and share prices . This

also helps in discovering the potential of the

acquired companies .

Consolidation of efforts & capacities :During

the license era, Government authorised units

to function below their minimum economic

size


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Why a takeover code is necessary ?

Such units were either incurring losses or

earning marginal profits. Also, due to stringent

control standards and emergence of MNCs,

small units have realised the importance of

conservation of resources &reduction of costs.

However, due to lack of proper infrastructure

and sufficient capacity they are unable toimplement their schemes efficiently. Under

such circumstances, takeovers can be effective

mode for consolidation & efficiency


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Why a takeover code is necessary ?

In the past, due to the restrictive licensing

policies ,large companies were not allowed to

grow and diversify. Rigorous MRTP posed

serious obstacles . Recent liberalization

environment and FDI amendments have

encouraged companies to concentrate on

their core competencies. M&A or takeoversoffer greener pastures and through these

strategies ,companies can rationalise their

portfolios and enlarge entity value &leverages.


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Members

The composition of the Committee is as under:

(a) Mr. C. Achuthan, Former Presiding Officer, Securities AppellateTribunal

Chairman.

(b) Mr. Kumar Desai, Advocate, High Court.

(c) Mr. Somasekhar Sundaresan, Advocate; Partner, J. SagarAssociates.

(d) Mr. Y. M. Deosthalee, Group Chief Financial Officer, Larsen and

Toubro Ltd.

(e) Mr. Koushik Chatterjee, Group Chief Financial Officer, Tata SteelLtd.

(h) Mr. A. K. Narayanan, President, Tamil Nadu Investors Association.

(i) Prof N. Venkiteswaran, Professor, Indian Institute of Management,

Ahmedabad.


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Members(j) Ms. Usha Narayanan, Executive Director,

Corporation Finance Department,SEBI.

(k)Mr.J.Ranganayakulu ,Director, Legal

Department, SEBI, and

(l) Ms. Neelam Bhardwaj, General Manager,

Division of Corporate Restructuring,SEBI


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Rationale for the new code

The earlier Take over code of 1997 were made

under the chairmanship of Shri P.N.Bhagwathi

which was again revised in 2002 under the

same chairmanship.

It was necessitated by steady increase in the

number of take overs from an average of 69

per annum during 1997-2005 and an average

of 99 per annum during 2006-2010


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Rationale for the new code

Increasing sophistication in the takeover

market

Decade long changes in corporate scenario Rise in judicial pronouncements

Reform of the corporate debt market

Change the threshold level

Pricing norm revisions

Public offer modifications


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Paradigm shift towards international

best practices

Initial trigger has been raised from 15 % to 25%:

a)the factual analysis of current shareholding patternsof listed companies show that promoters are

capable of exercising defacto control at 25% b)a shareholder holding in excess of 25 % has the

ability to block special resolutions .Promoters may beconcerned by the mischief that may be caused bypredators holding less than 25% who may exercisesignificant voting rights on account of multiplier rightscaused by absenteeism at general body meetings


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Highlights of Achutan Panel

New threshold of 25 % suggested by the

Achutan Panel wields the power to stop

special resolutions and acquires negative

control

Rise in quality of corporate governance and

disclosures

Raising the open offer volume to 100 %

Allowing the conditional open offers

Providing for delisting


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Highlights of Achutan Panel

Defacto control means both the right and the ability to control

A separate regime for voluntary offers consolidation offers bycontrolling shareholders .In case of unsolicited /hostile offer by anew acquirer does not seem to be permissible -is not justifiable

Mandatory exit to all (100 %) shareholders as against the currentnorm of 20% is a laudable move from shareholders perspective,though not investor friendly However ,public mergers andacquisitions will become more expensive and thereby detertakeovers . A combination of Indian rules against financialassistance by the target company and limitations on acquisitionfinancing by banks results in the creation of an unequal playing field

between Indian & foreign players Non cash payment option though available under the current

code has not found favor with Indian corporate.


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Highlights ..

A seamless go private has been made available

to the new acquirers who buy out more than 90

% in an offer a route has not been extended to

promoters holding above 25 %.

Promoters have to necessarily initiate delisting

procedures which may become expensive due to

higher price offers through reverse book buildingroute ,requisite approvals under SEBI procedures

stock exchanges and Company Law Board


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Highlights .

Facilitates leveraged buyouts and making the

financing of takeovers easier and convenient

to corporate rather than facing difficulties in

implementing

expansion/diversification/intensification

strategies

The pricing norm revisions would ensure thatminority shareholders of the target company

would not be cheated out of the price

obtained by strategic shareholders


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Highlights

The recommendations further raise a pointer

towards the haziness in extant regulations

such as the gap between the minimum public

holding threshold for a listed company (75%)

and the delisting threshold (90%) .

Speedy adoption of the new code would raise

the overall efficiency levels of the

implementation process for corporate

takeovers and mergers


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Highlights .

Promoters with low holdings may be forced to

raise stakes to pre-empt hostile takeovers

Minority shareholders will be able to exit fully Acquirer cannot acquire shares in target firm

for 26 weeks following completion of open

offer . This will prevent acquirers from under

pricing offers and later buying shares from

secondary market.


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Highlights .

Equal tax treatment on gains due to sale of

shares through open offer as well as those

sold in the open market would encourage

more people to tender shares in open offer

Acquirer to accept shares in open offer

proportionately ,if response exceeds

maximum permissible promoter shareholdingof 75% ,but fails short of delisting threshold of

90% ,could affect and dampen the complete

acceptance of their shares in open offer.


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Highlights ..

Efficiency drivers relate to buy in regulations

Bank financing of take over

Treatment of shares tendered in an open offeras an on market transaction for tax

purposes

FDI rules have to be suitably amended toinclude swaps under automatic route

However Indian businesses have become keen

to sell their stakes cashing on the recent boom

in stock market


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Highlights .

Open offer formalities need to be completed

within 57 days instead of 95 days as allowed

currently will help in reducing unnecessary

delays .

Ensures justice to minority shareholders in the

form of the mandatory offer of 100% of

outstanding offer of shares has to be the samefor all shareholders .


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Highlights .

Proposed changes would facilitate PE funded

promoters/foreign acquirers as they have

access to leveraged finance abroad/tax havens

at a lower cost than that prevailing in Indian

capital market . A combination of PE players or

Qualified institutional promoters (QIP),acting

as a concerted minority shareholders can nowhelp in improving corporate governance of

listed companies in India.


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Highlights .

The proposed changes in Takeover code

provide a legal framework for orderly

acquisition of shares and control.

Provides for equitable treatment to all

shareholders .

By increasing tender offer threshold to 25%

the tender offers will be triggered upon true

change of control than at relatively low

ownership levels. (Shardul Shroff of

Amarchand Mangaldas)


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Highlights .

The new take over code would facilitate

strategic alliances and minority investments

that can be equity accounted, and promote

greater ownership from private equity

investors . These changes will help

acquisitions by making it simpler to acquire

control and delist in one simple step . (RohitChatterji ,J P Morgan )


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New Take over Code 2010

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