Sebi's decision to review the takeover code is timely, as there is a need to encourage mergers and acquisitions to free up locked assets in under-performing companies and attract more foreign investments. Takeovers improve utilisation of the economys productive assets, even if they are bad news for incumbent managements.
The takeover code must be seen to be fair to promoters, investors and those interested in acquiring a substantial stake in the company. The provisions that seek to ensure this are the 15% acquisition limit after which an open offer becomes mandatory and disclosure at particular thresholds.
The open offer allows non-promoter stakeholders to exit at a fair price it they have issues with the acquirer. Promoters were, on the other hand, allowed in October last year to increase the stake in their companies through creeping acquisition to 75% from 55% earlier.
This allowed them to consolidate their position in the company and almost make it takeover-proof. That leaves the acquirer, who is required to make a disclosure when his holding crosses 5%, 10% and 14%, in a weaker position. Besides disclosing his intent, the acquirer also has to make an open offer for another 20% stake when his holding crosses the 15% mark.
The mandatory open offer imposes an immediate obligation on the acquirer and, therefore, the low limit at which it kicks in discourages both private equity and hostile takeover attempts.
A large chunk of foreign investment moves through M&As, as investment in established businesses is usually less risky. So, if India is to attract more FDI from direct investors or private equity funds, then M&A rules have to be more accommodating. Besides, the pressure of hostile bids would tend to ensure better management as a poorly managed company would be seen as a good acquisition target. Sebi could, therefore, hike the open offer limit from the current 15%.
However, in the event of a change of control, open offer should become mandatory even if the new trigger limit is not breached. India could also explore some US-type 'poison pill' regulation, with appropriate checks, to allow corporates to defend against a disruptive hostile bid. The idea should be to grant M&A activity greater room within the rules of fair play.