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New SEBI rules cloud Bharti & MTN deal
September, 23rd 2009

Officially, it was a routine announcement by the capital market regulator on changes to the takeover code. But the timing was such that it raised fresh questions on the planned mega telecom alliance between Bharti group and South Africas MTN.

The Securities and Exchange Board of India (SEBI) on Tuesday announced new norms that make it mandatory for entities acquiring Global Depository Receipts or American Depository Receipts (GDRs/ADRs) with voting rights in an Indian firm to make an open offer to minority shareholders if their shareholding crosses the threshold of 15 per cent.

If you are holding an ADR/GDR with voting rights, then you will have to make an open offer, SEBI chairman CB Bhave told reporters in Mumbai.

According to current regulations, any firm acquiring a 15 per cent stake in another company is mandated to make an open offer for an additional 20 per cent in the former.

The GDR and ADR shareholders by themselves do not have voting rights, but the rights are vested with the custodian bank.

Experts said the new norms could materially impact the original contours of the proposed Bharti-MTN deal. Effectively, this means MTN may be forced to buy more stakes than has so far been seen in the deal.

Under the original deal Bharti would acquire 36 per cent of MTNs current shares for $6.9 billion. Besides, MTN will also offer new shares to Bharti. The fresh share issue will eventually take Bhartis shareholding in MTN to 49 per cent.

MTN will acquire a 25 per cent economic interest in Bharti for $2.9 billion and MTN shareholders will acquire another 11 per cent in Bharti through a GDR.

According to the original plan Bharti would have had substantial participatory and governance rights in MTN, while MTN will hve equity and board participation in Bharti.

 There was a fear that the existing norms would have been violated by the explicit nature of the deal. Unlike other transactions, there was a fear that the GDR holders would thrash out an agreement to influence proxy voting through the depository bank, said a source involved in the deal-making, who did not wish to be identified.

The SEBI chairman said the new takeover norms would apply to all future ADR or GDR issues with voting rights, but would not be retrospective.

Bhave  also said it was "too premature" to comment on the issue of dual listings and that the regulator has not received any proposal for dual listing from any entity. The country's takeover laws would apply to all future ADR and GDR issues, but will not have retrospective effect.

A formal takeover code was first introduced in 1997 that set basic rules for mergers and acquisitions and was modified in 2002, making disclosures mandatory at every step before the consummation of a merger and acquisition deal.

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