Takeover code: Impact on rules

WHAT ARE THE MAJOR CHANGES PROPOSED?

The trigger point in deals for making a mandatory offer to buy all of the target8217;s remaining outstanding shares would be raised to a 25 percent ownership stake from 15 percent now.

An acquirer will have to offer to buy all the outstanding shares of the target from just an additional 20 percent now.

Another major recommendation is scrapping of non-compete fees,which acquirers pay to the founders of target companies for agreeing not to enter the same business.

The price paid in a mandatory offer would be equal for all shareholders and would be at least as high as is required under current rules. The price would be based on the highest of four different parameters,including the market price and the highest price paid by the acquirer to any shareholder.

An open offer must be completed in 57 business days,compared with 95 days currently.

WHAT WILL BE THE IMMEDIATE IMPACT?

With the trigger for the mandatory offer to shareholders raised to 25 percent,the immediate impact would be to increase activity in certain stocks where a major investor8217;s stake is hovering just below 15 percent.

Investors such as private equity and hedge funds would have more headroom to increase their investments in companies.

Cigarettes maker major ITC,which holds 14.98 percent in hotel chain EIH,would be able to raise the stake to 25 percent,if the panel8217;s proposals are accepted. Shares in EIH rose 5 percent on Monday.

Similarly,Malaysia8217;s Petronas holds 14.94 percent in India-focused energy explorer Cairn India,and could therefore lift its stake to 25 percent without triggering a mandatory offer.

HOW WILL THE PROPOSALS IMPACT Mamp;A DEAL FLOW?

The number of takeovers may decline in the near term,as the higher financing required to buy out all shareholders of a target firm deters buyers.

However,the 100 percent mandatory offer rule would also weed out non-serious bidders and restrict the field to those who have deep pockets or the wherewithal to raise the funds. Deal sizes in Mamp;A landscape would rise as a result.

With improving economic and corporate growth prospects,analysts expect Mamp;A and private equity investments to pick up in India. In the first five months of 2010,inbound Mamp;A by value jumped 74 percent from last year,according to Thomson Reuters data.

WHY THE NEED FOR CHANGES?

The changes are intended to increase transparency and make conditions equitable for all classes of shareholders.

The proposals would bring Indian takeover rules closer to standards elsewhere,according to the SEBI panel. In the U.K.,Europe and Singapore,the mandatory offer is triggered when the acquirer8217;s stake reaches 30 percent. In Hong Kong,the trigger is 35 percent.

Under existing rules,minority shareholders don8217;t always receive equal treatment. And minority investors could lose out on the gains to be had in a bidding war if they rushed to sell their shares under a partial offer.

The 100 percent general offer requirement changes that,as minorities would not feel compelled to offload their shares early in the process for fear of missing out on the offer.

Last year,shipbuilders ABG and Bharati Shipyard waged a six-month battle for a bigger stake in Great Offshore,with both revising bids several times. However,minority shareholders who sold out their shares,lost out on the final mandatory offer which was made at a higher price.

Under the new rules,scrapping of non-compete fees would bring more transparency to takeovers and ensure the alignment of interests between founders and minority shareholders.