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Price to trigger takeover code

BS Markets Bureau

The the Securities and Exchange Board of India's panel on the takeover code has proposed that transfer of shares from one promoter to another at a premium in excess of 25 per cent of the market price will no longer be exempt from the takeover code. It would trigger the 20 per cent open offer clause.

This is among a number of crucial changes proposed by the Sebi panel headed by former Chief Justice of India P N Bhagwati.

In other words, it is the pricing, and not only the quantum of equity sold, that will determine whether such a transaction will attract the takeover code. "Other shareholders should also get the benefit of the higher price," said Bhagwati.

He was addressing a seminar on the capital markets organised by the Federation of Indian Chambers of Commerce and Industry in Mumbai on Tuesday.

Bhagwati said the definition of a promoter - which continues to be a contentious issue - has been further narrowed. It would mean a person or persons who are clearly in control of the company as declared in the prospectus at the time of listing and those who hold 51 per cent or above in the company, among others.

Another important change relates to the breach of the takeover code. If an acquirer now picks up a 15 per cent or higher stake without disclosing it, thereby breaching the takeover code, the transaction would be declared null and void.

Earlier, Sebi regulations required the acquirer to only make an open offer for a minimum 20 per cent of the company's shares.

"If there is a breach of the code, why should the violation be compounded by asking the acquirers to buy a further 20 per cent in the company," asked Bhagwati.

The move could deter companies that pick up sizeable stakes in rival companies at a large premium and influence their business decisions.

In recent times, Grasim picked up a 10 per cent stake in rival cement maker Larsen & Toubro at almost double the market price, while Gujarat Ambuja bought out the Tatas from ACC at three times the ruling market price.

While Grasim and Gujarat Ambuja have claimed they will not take management control of their rivals, both have directors on the boards of L&T and ACC, respectively, and have publicly stated they are actively seeking to maximise pricing and production benefits by working together.

Outlining other recommendations, Bhagwati said any existing stakeholder with a 15 per cent or more holding in a company would now be required to make disclosures of sales and purchases worth 2 per cent of his or its stake.

Inter-se transfers among group companies, too, are set to see a number of changes. According to Bhagwati, group companies "must have declared themselves as group companies under regulation 8 of the takeover code. It must be transparent".

Exemptions will only be made for transfer of shares, provided the transfers amount to more than 15 per cent of the equity of the target company.

So far, transfers between promoters were exempt from the takeover code only if both the promoters held 5 per cent and above each in the target company. However, with the disclosure norms being tightened, this 5 per cent proviso is being removed.

Preferential allotments where the allottee ends up acquiring a 15 per cent stake and more of the equity of a company or gaining management control will also come under the purview of the takeover code with the allottee having to make a public offer. So far, these were exempt.

"This is to discourage backdoor takeovers," Bhagwati said.

Non-resident Indians or foreigners who hold a 15 per cent or higher stake in a company will now be able to make additional purchases of only 5 per cent through the creeping acquisition route without approval.

Any further purchases in excess of 5 per cent would require the approval of the board of directors concerned, the government and other regulatory bodies. "This is to check clandestine acquisitions," Bhagwati explained.

The disclosure norms will be further strengthened and the acquiring companies will have to make disclosures to the target company and the stock exchanges at levels of 5 per cent, 10 per cent and 14 per cent. Shares pledged would also have to be reported to the company concerned and to the stock exchanges.

Bhagwati also affirmed an earlier provision of the takeover code on transfer of shares through mergers and amalgamations would be exempt from the purview of the takeover code.

This means that if the foreign holding company (A) of an Indian subsidiary (B) has been merged with another foreign company (C), then the second foreign company (C) will not have to make an open offer to the shareholders of B.

No creeping acquisition beyond 75 per cent will be allowed and any further acquisitions will have to be through an open offer.

A panel has been constituted to which applications for exemption from the takeover code will be referred. This panel will examine the matter and make its recommendations to the Sebi board, which will then take a decision.

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