A panel formed by the Securities and Exchange Board of India, the market regulator, recommended raising the minimum level that would trigger mandatory open offers to 25 percent from 15 percent and ask acquirers to make an open offer for all shares instead of purchasing an additional 20 percent.
The panel, set up in September 2009, aims to provide guidelines that will shape acquisitions in India for the next five to 10 years. The panel included Tata Steel Ltd. Chief Financial Officer Koushik Chatterjee and YM Deosthalee, chief financial officer of Larsen & Toubro Ltd. Companies and other stakeholders are supposed to respond to the guidelines by August 31.
The proposal to make it mandatory for acquirers to offer to buy all shares of a company once the threshold shareholding level of 25 percent is breached may increase acquisition costs for companies. India’s market regulator proposed the changes to ensure equal treatment for all shareholders and align takeover rules to those overseas.
This is expected to auger well for the smaller investors in the company, since it makes them mandatory to buy the share from everybody and not from any preferred sources alone. While this is an advantage to the smaller investors in any company, they could also be in trouble if the company is getting de listed. If the acquirer corners enough shares to take his holding beyond the threshold limit of de-listing (90% of the paid-up capital), the company will be de-listed and the remaining shareholders will have no choice but to offer their holdings at the price decided by the acquirer.
The rules could be a dampener for acquirers in India. For both Indian and overseas acquirers, especially those paying huge premiums, the new rules will make acquisitions a difficult proposition. The guidelines may mean foreign acquirers with more access to funding will stand on higher footing than Indian acquirers.
However, if implemented, the new rules can attract private equity investors who will be able to buy up to 25 percent without having to make an open offer. Shareholders who own more than 25 percent can make a voluntary open offer of a minimum size of 10 percent, half the earlier minimum size of 20 percent.
Also, the acquirers making an offer can set the purchase price on 12 weeks, volume weighted average price. This is a change from the higher of weekly averages of market price for 26 weeks or two weeks. There is better chance that share prices spiking on takeover news will go away.
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