The market for corporate control now opens up

There is room for quibble but, on the whole, the new takeover regulations announced by markets regulator Sebi is a long step forward in opening up India’s market for corporate control. An acquirer has to make an open offer once he crosses the threshold holding of 25% in a company, rather than 15% as before, and the open offer has to be for 26% (20% earlier) and at the full price at which the threshold was crossed.

No more sweet deals for promoter-sellers in the form of ‘non-compete fees’ , an element of the share price that was denied to minority shareholders, while making the open offer. The acquirer would end up with a controlling stake, and shareholders , with a higher price than was likely in the previous regime. The raising of the open-offer trigger threshold has two effects. It makes it easier to fund enterprises — private equity player can hold a much larger stake, just a sliver lower than 25%, without getting into control mode. At the same time, the fact that someone can come so close to the 26% threshold that endows the holder with veto rights on special resolutions would put the promoters on their toes, even when that holding is below the 25% takeover threshold. Does this mean India is now ready for hostile takeovers? Three things militate against that.

One, an acquirer cannot fund the cost of acquisition by borrowing against the assets of the target — for that, delisting norms have to change. Two, funding large takeovers through debt is tough: banks rarely lend for takeovers and India’s debt market is stunted, thanks to persistently large fiscal deficits and lack of competition in the stock market space. And, three, financial institutions , which hold large chunks in Indian companies and sit on their boards, tend to be pro-incumbent . Yet, promoters no longer can sit cosy on top of under-utilised assets and undervalued shares. This is good for the economy , as also good for all investors. Sebi has also fixed the distribution issue for mutual funds in a reasonable manner. It would not be widely remunerative to sell mutual funds but the effort would still be worth the sweat. This is a model that the New Pension System can usefully copy.