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Banks, FIs may fund takeovers

BS Markets Bureau

The Sebi committee on takeover under the chairmanship of P N Bhagwati has recommended that banks and financial institutions should be encouraged to finance takeovers and acquisitions. The committee has said that Sebi should take up the matter with the Reserve Bank of India to work together to finance such transactions.

The draft report is being made public prior to being taken up by the Sebi board for final approval.

This is being done in order to invite comments and opinion from the public.

The committee said that the offer document should include an undertaking from the acquirer not to strip substantial assets from the target company except with the prior approval of the shareholders of the company.

It recommended that an open offer should always be for 20 per cent and above but may be subject to an acceptance level of less than 20 per cent. Currently the regulations provide for making an offer conditional upon the level of acceptances only.

The committee felt that following an acquisition under a memorandum of understanding, the acquirer is required to make an offer to the public. So such a public offer cannot be conditional. The committee has also recommended that an offer can be conditional to the success of restructuring by the parent or holding company and there is no need to distinguish between obligated and non-obligated offers.

The scope of Regulation 3, which deals with exemption provisions, may be expanded to cover acquisitions by a person following an open offer for exchange of shares.

The exemption should also be provided in case of acquisitions in excess of the creeping acquisition limit, following an offer of a safety net made by promoters or merchant bankers. The committee was informed that the current regulations do not provide for such exemptions.

The committee felt that such acquisitions which arise as a result of a receipt of consideration for open offers in terms of the regulations are passive acquisitions and hence require to be exempted from the applicability of the regulations.

It was also felt that the safety net, that is, acquisition by a promoter or through a merchant banker, is for the benefit of investors and therefore anyone providing a safety net and thereby crossing the threshold limit should not be burdened with open offer obligations.

The committee noted that at times an acquirer may want to change the mode of payment, especially when there is a revision in offer price or the quantity.

The current regulations provide only for exchange or transfer of shares and do not provide for the issue of securities.

The committee, however, noted that suitable safeguards should be provided so that the acquirer does not indulge in reckless revisions without adequate preparation and without ensuring the possibility of carrying through the revisions.

The committee, therefore, recommended that the offer price may be paid by issuing securities. However, a change in the mode of payment may be permitted only in the case of an upward revision in the offer price or size. Following an upward revision, where the mode of payment is changed to cash-cum-security, the composition could be allowed to be changed as long as the cash component is not reduced by subsequent changes.

Where the mode of payment is changed subsequently, if, for whatever reasons, the acquirer is unable to fulfil the conditionalities flowing out of such change in mode, the acquirer shall be required to pay the entire amount of consideration in cash.

Where the mode of payment involves issuing securities, the approval of the shareholders should be obtained within 21 days from the date of closure of the offer, so that the merchant banker can ensure that the special account is funded in cash in case shareholders refuse approval.

The committee has recommended that it would not be equitable to have a 100 per cent exit option to one class of shareholders alone.

The members of the committee deliberated on the question of whether there should be a 100 per cent exit option to small shareholders even while retaining the 20 per cent minimum offer size.

The committee felt that it would be difficult to determine who can be considered a small shareholder. Further, where the acceptance level from small shareholders alone comes close to the offer size, the other shareholders including mutual funds (which represent the small shareholders) stand to lose as they would be deprived of an equal exit opportunity.

The committee also recommended that the acquirer may be permitted to offer shares of a third listed company, subject to the condition that the shares of that company are included in the list of A Group or specified shares of the Bombay Stock Exchange or shares grouped under S&P CNX Nifty of the National Stock Exchange.

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