The Securities and Exchange Board of India (SEBI), the capital market regulator has by and large accepted, with the exception of the extent of the open offer requirement, most of the recommendations of Takeover Regulations Advisory Committee (TRAC), headed by former chief of the Securities Appellate Tribunal C. Achuthan. SEBI almost took a year to clear the new takeover code.
The Securities and Exchange Board of India (SEBI), the capital market regulator has by and large accepted, with the exception of the extent of the open offer requirement, most of the recommendations of Takeover Regulations Advisory Committee (TRAC), headed by former chief of the Securities Appellate Tribunal C. Achuthan. The Committee was constituted last year in July to make recommendations to change the existing regulations for takeovers that were framed more than 15 years ago. SEBI almost took a year to clear the new takeover code.
SEBI has decided to increase the open offer size from 20 percent to 26 percent. The market regulator has also raised the initial trigger threshold for an open offer, from the existing 15 percent to 25 percent. With this, acquirers will now need to make mandatory open offer for further 26 percent stake from the public shareholders after buying 25 percent under a private sale. The minimum stake that an acquirer can now obtain in a target company after the open offer if fully subscribed would be a controlling 51 percent.
Bar & Bench spoke to Amarchand Partner Reeba Chacko on the latest developments
Bar & Bench: Your comments on the new takeover code
Reeba Chacko: I think for all of us it’s very good news. The M&A and PE activity in India is definitely going to see a significant increase because a lot of PE and other financial investors were so far limited in their attempt to make significant investments in listed companies with the same being restricted to less than 15 percent under the current regime. Indian promoters as well were not always keen to have financial investors if they would trigger a public offer. Now increasing the threshold from 15 to 25 percent is definitely going to be more attractive to PE investors with the increased head room for those of who would be looking at certain minimum investment in a listed company as well as for companies in their ability to raise more capital from the private equity market.
Bar & Bench: Accepting the recommendation of the Committee, SEBI has decided to abolish the non-compete fees that acquirers are now permitted to pay to the sellers in private sale deals upto a 25% of the total acquisition price. The logic for scrapping the non-compete fees is to ensure equal treatment of promoters and minority shareholders.
Reeba Chacko: Scrapping of non-compete fees altogether could be looked at in two ways. While it may have a positive outcome from a public shareholders’ perspective in those cases where there is no genuine non compete element, on the other hand a promoter shareholder stands on a different footing from the public shareholders in that he / she has control and has the ability to affect the business of the company if he /she competed in the same vertical or business. There may not always thus be a case for parity of treatment between the promoter and the public shareholder. In a transaction where there is a genuine non-compete arrangement with a promoter, there is a valid case for permitting a non-compete fee payment because the promoter is actually restricting his ability to do the same business which effectively is in the interest of the target company itself. So to that extent, the new code could be a disadvantage in structuring such transactions and what could have been considered is to introduce some conditions to act as checks and balances to permit genuine non compete transactions rather than completely remove the same. It is thus both a yes and no to this change depending on the objective of the transaction.
Bar & Bench: TRAC had recommended an open offer for buying up to 100 percent in the target company, while suggesting an increase in the trigger limit to 25 per cent. While the recommendation on trigger has been accepted, the same for offer size has been kept lower due to intense opposition from industry and other market participants.
Reeba Chacko: In the draft form, a 100 percent open offer requirement was proposed which means that the acquirer, to be able to make a 100 percent offer, would have faced the onerous task of having to raise large capital for deals, where acquisition financing in India has its own regulatory and other challenges and this may have been a huge dampener. However, now restricting it to a 26 percent may achieve a good balance in enabling deals with a viable financial outlay for the acquirer while also making it possible for them to acquire a 51% stake in the company as well if the offer is successful. A 100% open offer requirement could have been a disincentive to deal making in India.”.
Overall, with the new Takeover Code in its proposed new shape, we certainly are moving towards international standards of takeover regulations as is seen in many other jurisdictions. Of course, we are also looking forward to see the new regulations in its full form.
Apart from the new takeover norms, the other significant aspect that was considered was the Know Your Customer (KYC) norms. Currently, there are separate Know Your Customer (KYC) norms for different segments like FIIs, mutual funds and brokerage customers. SEBI has proposed uniform and simplified KYC norms across market intermediaries to ensure flawless identification of customers in the securities market. To further simplify the investment processes, the market regulator plans to set up a KYC Regulatory Authority and registration agencies under it. They will maintain a database once a customer’s KYC is completed. These agencies will be required to have inter-connectivity and the data will be shared.
As regards mutual funds transaction charge, SEBI decided that the new investors will now have to pay an additional Rs. 150 for investment of Rs. 10,000 and above in mutual funds, while the charge will be Rs. 100 for existing investors. No charge can be made for investments below Rs. 10,000.
In another relaxation to fund houses, the market regulator allowed a common set of fund managers and research analysts for different pooled assets like offshore funds and pension funds. At present, fund houses have to maintain separate sets of people for such assets. SEBI will also regulate select distributors that account for a significant chunk of the total assets under management (AUM) by putting in place a due diligence process.
With regard to the primary market, SEBI has proposed shorter and simpler IPO forms which will help increase retail participation in IPOs. SEBI now requires that the Merchant bankers must maintain track records pertaining to due diligence exercised before and after an initial public offer (IPO), takeover, buyback or de-listing that they handle and these would be subject to SEBI audit.
With the capital market regulator formalising the recommendations of TRAC, the future of mergers and acquisitions market in India is set to change.
The Board Meeting minutes of the SEBI approving the TRAC committee recommendations are below.