Company Law - Takeover Code: SEBI vis-a-vis SEC: An Economic Analysis

INTRODUCTION

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ver the last several years, takeover activity has surpassed the extraordinary levels seen during the 1980s . In 1996, there were over 7,000 merger and acquisition transactions completed in the U.S. valued at more than $650 billion. In 1997, U.S. merger and acquisition activity increased to approximately 7,800 transactions valued at over $790 billion. Global merger and acquisition activity totaled approximately (U.S.) $900 billion in 1996. In 1997, global merger and acquisition activity increased to (U.S.) $1.6 trillion. This wave of takeovers has continued into 1998 with approximately $626 billion in domestic mergers and acquisitions announced as of June, 1998.

Takeover of companies are the usual phenomenon in the competitive and free market. With the liberalization and government promotion to the industrialization takeover become a regular feature of the market. There are many pro-and cons against the regulates role in the takeover as although accepting the importance of takeover, it seems its existence as anti-takeover nature. Although it became inevitable for any government to just free its market from all such regulators because there are so many stakeholders importantly: small shareholders/ investors whose interest ay government has to protect.

Takeover is a process by which a company acquire substantial shares of another company and control its management. It requires a broad understanding of this subject, because takeover is not a matter between the two companies but there are many other players like investors, promoters, directors and obviously market regulators and their different conflicting interest has to be rationally adjudicated.
In India, Securities And Exchange Board of India plays the role of market regulator so far takeover is concerned. For that matter India have SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 with certain latest amendments in it .

In Australia, role of market regulator has been done by Australian Securities And Investments Commission (ASIC) which derives its power from Australian Securities And Investments Commission Act 2001 . Under the new Corporations Act 2001, chapter 6 starting from section 602 to 742 deals with takeovers.

Three characteristics are common to many of today’s takeover transactions.
 First, many acquirors are offering securities or a combination of securities and cash to the security holders of subject companies (“targets”). In 1996, almost half of the completed takeover transactions involved some form of stock as consideration, as opposed to cash only. In 1997, the number of stock-based takeovers remained relatively constant at approximately half of all completed transactions. During the first half of 1998, approximately 43% of the completed transactions involved securities as consideration.
 Second, there has been an increase in the number of hostile transactions involving proxy or consent solicitations. This trend appears to be the result of the adoption of anti-takeover devices by many public companies and the development of more stringent state anti-takeover laws in reaction to the wave of takeovers in the 1980s. Today’s proxy and consent solicitations are primarily aimed at unseating incumbent directors, dismantling anti-takeover devices, and generally facilitating transactions opposed by management.
 Third, significant technological advances in communications permit more frequent, timely and direct communications with security holders. These developments in technology affect how acquirors, targets, and other market participants communicate with security holders and the securities markets regarding proposed mergers and other extraordinary corporate transactions. For example, many companies post detailed information regarding corporate developments on their Internet web sites.

In addition, companies use the Internet as a means of communicating with security holders during proxy contests and in connection with tender offers and mergers. These changes in how companies, security holders, and market participants communicate with one another prompted the Commission to issue several releases addressing the use of the Internet and other electronic media under the federal securities laws. While the takeover market has evolved dramatically over the past 20 years, the applicable regulatory framework has remained substantially the same. As a result, the application of our existing rules to today’s extraordinary transactions can often raise complex regulatory issues.

These issues may, in some instances, cause unnecessary burdens for companies without corresponding benefits to security holders. Today’s proposals are intended to reduce these costs while maintaining the same high level of investor protection.

WHAT IS TAKEOVER ?

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he term 'takeover' is not defined in the Takeover Code. However, this is the classic definition given by M.A. Weinberg in 'Weinberg on Takeovers and Mergers' (1979, Sweet & Maxwell, London) is:
‘A takeover may be defined as a transaction or, series of transactions, whereby a person (individual, group of individuals or company) acquires control over the assets directly or indirectly, by obtaining control of the management of the company.’
Where shares are closely held,--i.e. held by a small number of persons - a takeover will generally be affected by agreement with the holders of the whole of the share capital of the company, being acquired.
In other words, a takeover is the acquisition of shares.
However, the Takeover Code applies only to companies, whose shares are listed on a stock exchange. Thus, it applies only to companies where the shares are held by the public, generally.

TAKEOVERS IN INDIA

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nder Section 602 of the Corporations Act, 2001 talks about purpose of the chapter 6 which deals with takeovers states that it is to provide the safeguard the interest of the shareholders or a listed company, the interest of the directors. The basic purpose is to provide an efficient, competitive and informed market. This chapter not only regulate the listed companies but also unlisted as well as “listed bodies that are not companies but are incorporated or formed in Australia ”. It also include a manage investment scheme .

Under the Indian Takeover Regulation, the preamble does not specific the purpose of the takeover code but the reference can be made out from the Justice P.N. Bhagwati Committee Report on Takeover. Under the preface of the said report it had been stated that a framework should be one which comports with principles of fairness, transparency and equity, and above all with the need to protect the rights of the shareholders .

Takeover of companies is a well accepted and established strategy for corporate growth. International experience of takeovers and mergers and amalgamations has been varied. Nonetheless, one of its important lessons is that, its appeal as an instrument of corporate growth has usually been the result of an admixture of corporate ethos of a country, shareholding pattern of companies, existence of cross holdings in companies, cultural conditions and the regulatory environment.
In India, however, "the market" for takeovers has not yet become significantly active, though following economic reforms, there is now a discernible trend among promoters and established corporate groups towards consolidation of market share, and diversification into new areas, albeit in a limited way through acquisition of companies, but in a more pronounced manner through mergers and amalgamations. The latter course is outside the purview of SEBI and constitutes a subject matter of the Companies Act, 1956, and the courts of law, and there are well laid down procedures for valuation of shares and protection of the rights of investors . This Report and the SEBI Regulations for Substantial Acquisition of Shares and Takeovers do not deal with the subject of mergers and amalgamations.
In common parlance, a takeover bid is generally understood to imply the acquisition of shares carrying voting rights in a company in a direct or indirect manner with a view to gaining control over the management of the company. Generally speaking, there cannot be a change in the control of a company simpliciter, unaccompanied by acquisition of shares, though there have been cases before SEBI where management control has changed from one group of persons to another without any overt acquisition of substantial quantities of shares. It would therefore be correct to state that, takeover or gaining control over a company, as opposed to pure investment, is the most common leitmotif for substantial acquisition of shares. Such takeovers could take place through a process of friendly negotiations or in a hostile manner in which, the existing management resists the change in control.

The first attempts at regulating takeovers were made in a limited way by incorporating a clause, viz. Clause 40, in the listing agreement, which provided for making a public offer to the shareholders of a company by any person who sought to acquire 25% or more of the voting rights of the company. This allowed for the passive participation of shareholders of the company that is being taken over, in the takeover process. But the clause used to be easily circumvented and its basic purpose frustrated by the acquirers, simply by acquiring voting rights a little below the threshold limit of 25% for making a public offer. Besides it was also noted that it was possible to acquire control over a company in the Indian context with even holding 10% directly. There was therefore a case for lowering of the threshold from 25%. In 1990, even before SEBI became a statutory body, Government, in consultation with SEBI, amended Clause 40 by -
 lowering the threshold acquisition level for making a public offer by the acquirer, from 25% to 10% ;
 bringing within its fold the aspect of change in management control under certain circumstances (even without acquisition of shares beyond the threshold limit), as a sufficient ground for making a public offer;
 introducing the requirement of acquiring a minimum of 20% from the shareholders;
 stipulating a minimum price at which an offer should be made;
 providing for disclosure requirements through a mandatory public announcement followed by mailing of an offer document with adequate disclosures to the shareholders of the company; and
 requiring a shareholder to disclose his shareholding at level of 5% or above to serve as an advance notice to the target company about the possible takeover threat.
TAKEOVER IN UNITED STATES

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tate statutes have been adopted in many jurisdictions regulating tender offers to shareholders of publicly owned corporations and takeover-bid disclosures. However, a state's takeover law may be preempted by the Williams Act. The New Hampshire Takeover Act was designed to encompass the Williams Act while closing the perceived loophole of allowing an offeror 10 days to proceed with a tender offer before filing information about the offeror and the offer.

The application of the Commerce Clause may also invalidate state laws regulating corporate tender offers where such statutes directly regulate interstate commerce. A preliminary injunction against enforcement of a statute regulating takeover bids in the acquisition of corporations, as distinguished from the control share acquisition-type statutes discussed below, may be issued where a penalty provision of the enjoined provisions precludes a takeover bid for one year after failure to make a proper disclosure as required by the statute because such a penalty provision probably violates the commerce clause, at least where it is also highly probable that disclosure provisions of the statute as well as the penalty provisions are preempted by the Williams Act.

Where there is no discrimination against interstate commerce and the statute in question does not adversely affect interstate commerce by subjecting activities to inconsistent regulations, the next step in the commerce clause analysis is to balance the local benefits of the statute against any incidental burdens the statute might impose on interstate commerce. Although this balancing test has apparently been abandoned by the United States Supreme Court in cases where the state law merely regulates intrastate corporate governance, the Supreme Court has not indicated that the balancing test is to be abandoned in cases where the legislature's purpose was not simply to regulate intrastate corporate governance. According to the United States Supreme Court, the sole purpose of the Williams Act was the protection of investors who are confronted with a tender offer. Before passage of the Williams Act, hostile tender offers were not regulated by the disclosure requirements of the federal securities laws. The Act was designed to give the investor full information regarding the tender offer, so that the investor can make knowledgeable decision about whether to sell. A majority aspect of the effort to protect the investor was to avoid favoring either management or the takeover bidder. However, the Williams Act is not necessarily preempted if the balance between offeror and management is tipped because the neutrality between management and bidder is merely the means to the end of investor protection, rather than the objective itself. Accordingly, a takeover statute may, by deterring tender offers, tip the balance between management and offerors to the benefit of the former, but, nonetheless, that protection of management that is incidental to protection of investors does not per se conflict with the purpose or purposes of the Williams Act. In determining whether or not the statute conflicts with the Williams Act, the court must look to the principal result of the provisions in question to see if that result is fully in accord with the purposes of the Williams Act. Although one probative test is to determine if the regulation alters the balance between management or offeror in any significant way, this is not in itself dispositive. Where takeover bid disclosure provisions are at issue, the focus should remain on determining whether the disclosure provisions are beneficial to the investors caught between management and offerors.

COMPARISON OF TAKEOVER CODES ON INDIA AND UNITED STATES

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lthough, the term ‘Takeover’ has not been defined under the said Regulations, the term basically envisages the concept of an acquirer taking over the control or management of the target company . When an acquirer, acquires substantial quantity of shares or voting rights of the target company, it results in the Substantial acquisition of Shares.
For the purposes of understanding the implications arising from the aforementioned paragraph, it is necessary for us to dwell into what is the actual meaning of substantial quantity of shares or voting rights.
 Meaning of substantial quantity of shares or voting rights
The said Regulations have discussed this aspect of ‘substantial quantity of shares or voting rights’ separately for two different purposes:
(I) For the purpose of disclosures to be made by acquirer(s):
(1) 5% or more shares or voting rights: A person who, along with ‘persons acting in concert’ , if any, acquires shares or voting rights (which when taken together with his existing holding) would entitle him to more than 5% or 10% or 14% shares or voting rights of target company, is required to disclose the aggregate of his shareholding or voting rights to the target company and the Stock Exchanges where the shares of the target company are traded within 2 days of receipt of intimation of allotment of shares or acquisition of shares .
2) More than 15% shares or voting rights: An acquirer who holds more than 15% shares or voting rights of the target company, shall within 21 days from the financial year ending March 31 make yearly disclosures to the company in respect of his holdings as on the mentioned date.
The target company is, in turn, required to pass on such information to all stock exchanges where the shares of target company are listed, within 30 days from the financial year ending March 31 as well as the record date fixed for the purpose of dividend declaration.
(II) For the purpose of making an open offer by the acquirer
(1) 15% shares or voting rights: An acquirer who intends to acquire shares which along with his existing shareholding would entitle him to more than 15% voting rights, can acquire such additional shares only after making a public announcement (“PA”) to acquire at least additional 20% of the voting capital of the target company from the shareholders through an open offer.
(2) Creeping limit of 5%: An acquirer who is having 15% or more but less than 75% of shares or voting rights of a target company, can consolidate his holding up to 5% of the voting rights in any financial year ending 31st March. However, any additional acquisition over and above 5% can be made only after making a public announcement However in pursuance of Reg. 7(1A) any purchase or sale aggregating to 2% or more of the share capital of the target company are to be disclosed to the Target Company and the Stock Exchange where the shares of the Target company are listed within 2 days of such purchase or sale along with the aggregate shareholding after such acquisition /sale. An acquirer who has made a public offer and seeks to acquire further shares under Reg. 11(1) shall not acquire such shares during the period of 6 months from the date of closure of the public offer at a price higher than the offer price.
(3) Consolidation of holding: An acquirer who is having 75% shares or voting rights of target company, can acquire further shares or voting rights only after making a public announcement specifying the number of shares to be acquired through open offer from the shareholders of a target company.
In order to appreciate the implications arising here from, it is pertinent for us to consider the meaning of the term ‘public announcement’.
 Public Announcement
A Public announcement is generally an announcement given in the newspapers by the acquirer, primarily to disclose his intention to acquire a minimum of 20% of the voting capital of the target company from the existing shareholders by means of an open offer.
However, an Acquirer may also make an offer for less than 20% of shares of target company in case the acquirer is already holding 75% or more of voting rights/ shareholding in the target company and has deposited in the escrow account in cash a sum of 50% of the consideration payable under the public offer.
The Acquirer is required to appoint a Merchant Banker registered with SEBI before making a PA and is also required to make the PA within four working days of the entering into an agreement to acquire shares, which has led to the triggering of the takeover, through such Merchant Banker.
The other disclosures in this announcement would inter alia include the offer price, the number of shares to be acquired from the public, the identity of the acquirer, the purposes of acquisition, the future plans of the acquirer, if any, regarding the target company, the change in control over the target company, if any
the procedure to be followed by acquirer in accepting the shares tendered by the shareholders and the period within which all the formalities pertaining to the offer would be completed.
The basic objective behind the PA being made is to ensure that the shareholders of the target company are aware of the exit opportunity available to them in case of a takeover / substantial acquisition of shares of the target company. They may, on the basis of the disclosures contained therein and in the letter of offer, either continue with the target company or decide to exit from it.
 Procedure to be followed after the Public Announcement
In pursuance of the provisions of Reg. 18 of the said Regulations, the Acquirer is required to file a draft Offer Document with SEBI within 14 days of the PA through its Merchant Banker, along with filing fees of Rs.50,000/- per offer Document (payable by Banker’s Cheque / Demand Draft). Along with the draft offer document, the Merchant Banker also has to submit a due diligence certificate as well as certain registration detail.
The filing of the draft offer document is a joint responsibility of both the Acquirer as well as the Merchant Banker.
Thereafter, the acquirer through its Merchant Banker sends the offer document as well as the blank acceptance form within 45 days from the date of PA, to all the shareholders whose names appear in the register of the company on a particular date .
The offer remains open for 30 days. The shareholders are required to send their Share certificate(s) / related documents to the Registrar or Merchant Banker as specified in the PA and offer document.
The acquirer is obligated to offer a minimum offer price as is required to be paid by him to all those shareholders whose shares are accepted under the offer, within 30 days from the closure of offer.
Exemptions
The following transactions are however exempted from making an offer and are not required to be reported to SEBI.
• allotment to underwriter pursuant to any underwriting agreement;
• acquisition of shares in ordinary course of business by;
• Regd. Stock brokers on behalf of clients;
• Regd. Market makers;
• Public financial institutions on their own account;
• banks & FIs as pledges;
• Acquisition of shares by way of transmission on succession or by inheritance;
• Acquisition of shares by Govt. companies;
• Acquisition pursuant to a scheme framed under section 18 of SICA 1985;
• Of arrangement/ restructuring including amalgamation or merger or de-merger under any law or Regulation Indian or Foreign;
• Acquisition of shares in companies whose shares are not listed;
• However, if by virtue of acquisition of shares of unlisted company, the acquirer acquires shares or voting rights (over the limits specified) in the listed company, acquirer is required to make an open offer in accordance with the Regulations.
 Minimum Offer Price and Payments made
It is not the duty of SEBI to approve the offer price, however it ensures that all the relevant parameters are taken in to consideration for fixing the offer price and that the justification for the same is disclosed in the offer document. The offer price shall be the highest of :
• Negotiated price under the agreement, which triggered the open offer.
• Price paid by the acquirer or PAC with him for acquisition if any, including by way of public rights/ preferential issue during the 26-week period prior to the date of the PA.
• Average of weekly high & low of the closing prices of shares as quoted on the Stock exchanges, where shares of Target company are most frequently traded during 26 weeks prior to the date of the Public Announcement
In case the shares of target company are not frequently traded, then the offer price shall be determined by reliance on the following parameters, viz: the negotiated price under the agreement, highest price paid by the acquirer or PAC with him for acquisition if any, including by way of public rights/ preferential issue during the 26-week period prior to the date of the PA and other parameters including return on net worth, book value of the shares of the target company, earning per share, price earning multiple vis a vis the industry average.
Acquirers are required to complete the payment of consideration to shareholders who have accepted the offer within 30 days from the date of closure of the offer. In case the delay in payment is on account of non-receipt of statutory approvals and if the same is not due to willful default or neglect on part of the acquirer, the acquirers would be liable to pay interest to the shareholders for the delayed period in accordance with Regulations. Acquirer(s) are however not to be made accountable for postal delays.
If the delay in payment of consideration is not due to the above reasons, it would be treated as a violation of the Regulations.
 Safeguards incorporated so as to ensure that the Shareholders
get their payments
Before making the Public Announcement the acquirer has to create an escrow account having 25% of total consideration payable under the offer of size Rs. 100 crores (Additional 10% if offer size more than 100 crore . The Escrow could be in the form of cash deposited with a scheduled commercial bank, bank guarantee in favor of the Merchant Banker or deposit of acceptable securities with appropriate margin with the Merchant Banker. The Merchant Banker is also required to confirm that firm financial arrangements are in place for fulfilling the offer obligations. In case, the acquirer fails to make payment, Merchant Banker has a right to forfeit the escrow account and distribute the proceeds in the following way.
 1/3 of amount to target company
 1/3 to regional Stock Exchanges, for credit to investor protection fund etc.
 1/3 to be distributed on pro rata basis among the shareholders who have accepted the offer.
The Merchant Banker advised by SEBI is required to ensure that the rejected documents which are kept in the custody of the Registrar / Merchant Banker are sent back to the shareholder through Registered Post. Besides forfeiture of escrow account, SEBI can take separate action against the acquirer which may include prosecution / barring the acquirer from entering the capital market for a period etc.
 Penalties
The Regulations have laid down the general obligations of the acquirer, target company and the Merchant Banker. For failure to carry out these obligations as well as for failure / non-compliance of other provisions of the Regulations, Reg. 45 provides for penalties. Any person violating any provisions of the Regulations shall be liable for action in terms of the Regulations and the SEBI Act.
If the acquirer or any person acting in concert with him, fails to carry out the obligations under the Regulations, the entire or part of the sum in the escrow amount shall be liable to be forfeited and the acquirer or such a person shall also be liable for action in terms of the Regulations and the Act.
The board of directors of the target company failing to carry out the obligations under the Regulations shall be liable for action in terms of the Regulations and SEBI Act.
The Board may, for failure to carry out the requirements of the Regulations by an intermediary, initiate action for suspension or cancellation of registration of an intermediary holding a certificate of registration under section 12 of the Act. Provided that no such certificate of registration shall be suspended or cancelled unless the procedure specified in the Regulations applicable to such intermediary is complied with.
For any mis-statement to the shareholders or for concealment of material information required to be disclosed to the shareholders, the acquirers or the directors where he acquirer is a body corporate, the directors of the target company, the merchant banker to the public offer and the merchant banker engaged by the target company for independent advice would be liable for action in terms of the Regulations and the SEBI Act.
The penalties referred to in sub-regulation (1) to (5) may include -
 criminal prosecution under section 24 of the SEBI Act;
 monetary penalties under section 15 H of the SEBI Act;
 directions under the provisions of Section 11B of the SEBI Act.
Regulations have laid down the penalties for non-compliance. These penalties may include forfeiture of the escrow account, directing the person concerned to sell the shares acquired in violation of the regulations, directing the person concerned not to further deal in securities, monetary penalties, prosecution etc., which may even extend to the barring of the acquirer from entering and participating in the Capital Market. Action can also be initiated for suspension, cancellation of registration against an intermediary such as the Merchant Banker to the offer.
In comparison, the Supreme Court has validated Indiana's Control Share Acquisition Act which allows a target company's disinterested shareholders to deny voting rights to potential acquirers. The court found the Indiana Act consistent with the provisions and purposes of the Williams Act and the Commerce Clause.

In determining the constitutionality of state control share acquisitions provisions under the commerce clause, the Supreme Court has determined that the practical effect of such provisions is to condition acquisition of control of a corporation on approval of a majority of the preexisting disinterested shareholders. This does not violate the commerce clause under the following two-pronged analysis:
 does the statute discriminate against interstate commerce? and
 does the statute adversely affect interstate commerce by subjecting activities to inconsistent regulations.

If the provision at issue applies equally to both intrastate and interstate offerors, then it is nondiscriminatory. If, however, the burden on interstate commerce is excessive in relation to the local interest served by such provisions, the provision is discriminatory. If, under the provisions at issue the corporation might be subject to regulations in two states as to the same transaction it may not survive the commerce clause, however where the particular target has its principal place of business and place of incorporation in the same jurisdiction so that no other state could have a legitimate interest in regulating takeover bids for that corporation because it is neither incorporated in the other state nor has its principal place of business there, then there is no risk of conflict or inconsistent regulation. A corporation challenging the disclosure provisions of an anti-takeover law may not challenge a provision based on a hypothetical application of the statute to a corporation not incorporated in the state if the plaintiff corporation is in fact incorporated in the state.

The Delaware statute regulating takeovers is a “business combination” type statute, as distinguished from the "control share" type statute discussed above that emphasizes the right of shareholders not associated with an acquirer or incumbent management to determine the voting rights of a person reaching the specified shareholder thresholds. The business combination-type statute regulates takeovers by preventing, unless certain conditions are met, follow up mergers or other specified transactions that an acquirer often desires to effectuate following acquisition of control of a corporation. The business combination-type statute gives a corporation's board of directors a more active voice.

Under the Delaware statute, it is possible for a business combination to occur within a three-year period if at least two-thirds of the shareholders approve it, excluding the shares owned by the interested shareholder, but the board of directors also must approve the transactions. Also, to calculate the two-thirds majority, shares owned by incumbent management are able to vote--only the acquirer's shares are excluded. Furthermore, shareholders of an existing corporation may opt out of the applicability of the Delaware statute by amendment to the corporation's certificate of incorporation or bylaws, although such action is not effective for a year and does not apply to any business combination when an interested shareholder becomes such on, or prior to, the amendment. That the new Delaware statute favors management over the acquirer may become a basis for constitutional challenge on the theory that the balance intended by the Williams Act, discussed above, may be impermissibly tipped. But, directors' discretion is still restrained by the fiduciary duties of care and loyalty to the corporation. The Delaware statute does not prohibit an acquirer's purchase of shares or disenfranchise the vote of those shares. As well, the statute allows an interested shareholder to seek board representation and even control. Furthermore, under the Delaware statute, once another party proposes a business combination, an interested shareholder may counter with his or her own proposal subsequent to the announcement of the first proposal but prior to its consummation or abandonment. In addition to possible challenge based on preemption under the Williams Act on the basis of violation of that act's goal of neutrality in favor of corporate management, the Delaware statute's three-year freeze period on business combinations is subject to an argument of impermissible delay as to the tender offer time period. The New York business corporation laws, in addition to regulating takeovers through a "business combination" type statute, permit a corporation to void or preclude the exercise of rights or options held by an "interested person," a term defined as a holder of twenty percent or more of the corporation's shares. Pennsylvania's Control Share Acquisitions Statute requires that tender offers be subject to shareholder approval at a meeting. Further, under Pennsylvania's statute there must be a control share acquisition triggered by actual acquisition of at least 20 percent of the outstanding shares by an acquiring person before voting shares may be deemed control shares. Statutes in other states have been interpreted to permit discriminatory treatment of shareholders in a rights plan to provide flexibility in the use of defensive mechanisms to possible takeover. So, in a few states, a target corporation may adopt a defensive maneuver commonly known as a "poison pill" without violating statutory provisions prohibiting discrimination among shares of stock.

CONCLUSION

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he Securities and Exchange Commission proposes to update and simplify the rules and regulations applicable to takeover transactions (including tender offers, mergers, acquisitions and similar extraordinary transactions).
Corporate restructuring has become the buzzword in the liberalised economy in India. Mergers, acquisitions and takeovers that earlier could only take place with some political administrative patronage, have now become not only common place but also more transparent. This is good for the health of the corporate sector and corporate governance.
The numbers of mergers, acquisitions and takeovers has been very large. According to SEBI, around 700 companies have acquired shares since the takeover code came into force in 1997 - there were a significant number of cases before that too.
Corporate restructuring became imperative in the 90s for several reasons. Global exposure meant that companies needed to become more competitive. Some companies needed to expand to reap economies of scale. Consolidation of small and fragmented players took place for similar reasons . Others sought to become more efficient and focussed by hiving off certain parts of their businesses and adding others. Yet others sought synergies in operations or tax advantages from restructuring.
Additionally, a shakeout in several sectors that followed changes in government policy offered many possible target companies for takeover, buyouts and mergers. The recession in mid 1990s also made certain companies cheap for acquirers.
Facilitation of takeovers and transparency in the process is good for the corporate sector and good for the shareholders. One of the fundamental assumption that an acquirer works on in trying to acquire a company is that he will be able to run it more efficiently than the existing management and hence make greater profits. Takeover for inefficient companies by more efficient managers is thus desirable.
As far as the individual shareholders are concerned, they ordinarily have little control if any on the management of the company. This is a direct result of the divorce between management and control due to dispersed shareholding. How can the shareholders be sure that the management is actually working towards the goal of maximisation of shareholder wealth rather than some other goal, such as maximisation of management compensation, strength, reputation, etc? A threat of a possible takeover imposes a certain discipline on the management and ensures that that the company is run efficiently.
And yet, during takeovers, it is important to ensure that the small shareholders don't end up with the short end of the stick. The takeover code aims to ensure that all shareholders are treated equally, that the minority shareholders' interests are protected, that there is fair and truthful disclosure of all information relating to the takeover , that shareholders get enough time to make informed decisions, that no false market in the shares of the companies is created and that shareholders' approval is taken for any action by the target company.
For achieving these objectives the legislation has several provisions. Any company acquiring shares of another company has to inform the stock exchange once its stake reaches 15% of the target company. Beyond this the acquirer must purchase shares from the public through a public offer in the same proportion as through negotiation up to a maximum of 20% so as to reduce the scope for manipulation. There are certain situations however, under which the acquirer is exempted from making a public offer. The formula for calculating the minimum offer price has been specified by SEBI. Also, the acquirer has to deposit 10% of the equity in an escrow account on making a public offer. This amount is forfeited if the acquirer does not complete the obligation. This provision is meant to discourage frivilous offers.
SEBI figures show that since 1997 when the takeover code came into force, the acquisitions have amounted to Rs 11,600 crores , a figure the SEBI chairman can be proud to quote as evidence of success of the Takeover Code in promoting speedy corporate restructuring.
However, there have been several criticisms of the regulation of takeovers. Financial Institutions have been permitted to fund takeovers by foreign companies and this has come under criticism - a little erroneously because any change of management that leads more efficient management deserves to be encouraged. Secondly, figures show that only 17.6% of corporate restructuring has been through open offers, indicating that exemptions have been more common than the rule of open offers. Perhaps then, the aim of ensuring equal treatment to the small shareholder has not been fully achieved? Perhaps SEBI needs to review its criteria for granting such an exemption. Finally, SEBI has been seen to be bumbling through the legislation, needing to revise it several times to get it right.
As long as there are regulations, there will be companies that will try and find ways of getting around them and SEBI and other regulators will need to keep revising their rules to plug the loopholes. For example the government is now seeking a blanket exemption for all PSUs from the takeover code during their privatisation endeavours. The Chandrashekhar Committee has sought exemption from the takeover code for Venture capitalists. SEBI now needs to decide whether to allow these or not. Regulation is after all a continuous process, which has to be flexible enough to adapt to changing circumstances.
The fundamental good that takeovers can do for the health of the corporate sector cannot be denied.
Pursuant to the Bhagawathi Committee’s recommendations the regulations were further reframed as SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. Amendments were made in the regulations in 2002 to finetune it further. Over a decade, SEBI made several amendments, from time to time, to meet the ever growing and fast changing economic milieu. Structurally Indian industry and corporate edifice are quite different from the corporate structure of the US, Canada and the European countries. Some of the Asian countries resemble Indian corporate ownership and management style to a limited extent. Historically and traditionally majority of the Indian companies have been set up by families belonging to trading communities. In certain cases, family’s own large number of voting stock and in some others, financial institutions, institutional investors and banks largely support this capital. In the latter category many a time stake of promoter/family owner is insignificant. Despite low ownership stake the companies are run by the minority promoter or family.

Globalization of Indian economy has started changing the landscape of Indian industry and its management style. With liberalization and globalization, emphasis shifted to increased competition, more resources, professional talent and latest technology. All these factors and other related issues have dictated changes within and outside the industry. In response to these changes and to be a proactive regulator, SEBI formulated takeover regulations in order to facilitate smooth transformation of Indian companies and make them grow inorganically also.

Owing to these specific, economic and non-economic reasons our Regulations, many a times, appear to be quite different from the takeover regulations of other countries. General principles followed while framing any takeover regulations include:

 Transparency – the mechanism and the process used to acquire control of companies should be transparent and known to all concerned in advance so that everyone can take informed decision and all will have equal opportunity.
 Fairness – Takeover code should be fair to all concerned i.e. majority owners, institutional investors, minority shareholders and other shareholders. Therefore, valuation and pricing of securities are of paramount importance in an emerging market like India where sometimes the pricing of securities can be improper and valuation may not be fair to all concerned. Therefore, the regulations should address these issues also.
 Valuation and Payment - Corporate valuation and payment to shareholders are two important pillars. Payment can be made either in cash or in kind, basically in the form of securities of acquirer or a third company.
 Disclosures - SEBI made an elaborate, and rightly so, regulations, so that the present and prospective investors have all the information with them before they take a decision either to continue with the new management or to quit the company at the offer price or at the market price. Financial and non-financial disclosures are made and sufficient time is given to the investors to take an informed decision.
 Conflict of interests - Since stakeholders have different expectations, naturally there will be a conflict of interest. This conflict of interest could be amongst the shareholders group, current owners, management, institutions, small shareholders etc. Conflict of interest can also arise between owners and creditors and between owners and Government, owners and institutions, etc. Therefore, the Regulations should be addressing the issues of conflict so as to minimize the conflict of interest among the competing stakeholders.