Dealing with the aftermath of Covid and the containment measures will necessarily entail a hard rethink on regulations governing mergers and acquisitions. Companies and substantial shareholders that need to be bailed out would look for buyers. Capital being scarce, buyers would look to invest their resources in situations that are easy to comprehend, and logical in their regulation.
Against this backdrop, it is now time and most appropriate for a long-awaited and much-stymied reform of the Takeover Regulations and the Delisting
Regulations. For strange reasons these are two separate bodies of law in India.
Takeover Regulations entail an acquirer making an offer to buy shares from the other shareholders when she agrees to acquire 25 per cent or more voting power in a listed company or when, regardless of the shareholding level, she agrees to acquire control over the listed company. Those already holding above 25 per cent too would have to make such an offer if the acquisition exceeds 5 per cent of the voting rights in a financial year. The offer has to be to acquire at least 26 per cent. The minimum price to be paid is regulated and the acquirer can offer a higher price.
Regulations entail the public shareholders quoting the price at which they would like to be bought out by an acquirer to permit the company to terminate its listing on stock exchanges. The highest price at which the acquirer would cross the 90 per cent shareholding mark is the exit price that has to be paid to all shareholders willing to exit. If the price is acceptable and the 90 per cent threshold is crossed, the company can be delisted.
Now, when an incoming acquirer agrees to acquire anything more than 49 per cent in a listed company (or, already holds more than that), with the open offer for 26 per cent, she will likely cross 75 per cent, which is the maximum permissible non-public shareholding under listing rules. If the agreement to acquire shares is actually for 64 per cent or more, there is a possibility that she would even cross 90 per cent. Yet, by writing two separate bodies of law operating in the same sphere, a person who crosses 75 per cent (or, for that matter, even 90 per cent) cannot move into delisting, but has to dilute back to 75 per cent, wait for a year, and then attempt delisting
again. In short, one body of law would drag an acquirer past the 75 per cent mark; another body of law would force her back to 75 per cent and a third body of law would need to be complied with all over again to go back where she found herself in the first place.
Even in non-Covid times this would call for reform. However, now, more than ever before, this needs to be
cleaned up. So many potential acquisitions of Indian listed companies get shelved because of this anomalous framework. Deal statistics can only count transactions that are actually contracted. There is no measure to count potential deals that are abandoned due to inexplicable complexity like this one. When capital is scarce, it would move away from investment frameworks that have such complications.
A half-hearted reform at combining the two bodies of law was introduced but has failed since it was no reform at all. In a nutshell, an acquirer who agrees to acquire a size that would trigger an open offer under Takeover Regulations may commence the procedure under that law, put it on pause, and then attempt a delisting under the Delisting Regulations, and if that fails, come back to the Takeover Regulations and complete it. Obviously, this is hardly a popular framework.
A decade ago, a simple framework for reform was recommended by the Takeover Regulations Advisory Committee (disclosure: the author was a member of the committee) but in the ruckus over the recommendation for making an open offer for all shares (and not just 26 per cent) this reform too got shelved. An acquirer in a potential M&A transaction could express her intent to eventually delist, and if shareholders who liked the price did tender their shares and the 90 per cent mark was crossed, the company could indeed delist. All parties would look at the offer with eyes open, with full information on hand, and if 90 per cent agree in any case, the law should be an enabler than a hurdle. For those who have no intention to delist, they could curtail their purchases from the public, and from the substantial exiting shareholders in proportion, and stay at 75 per cent — so no law forces the acquirer to go over 75 per cent.
Those who desire to delist and therefore do not restrict themselves to 75 per cent would then have to comply with the requirement to get back to 75 per cent within a year. If the Delisting Regulations are reformed, they could commence delisting from where they end up with the offer under the Takeover Regulations and discover the exit price with a finishing line that is proportionately above 90 per cent.
This is low-hanging fruit for M&A reform that is crying to be executed. If we do not make M&A execution simple and logical, capital (Indian and foreign) would seek out jurisdictions that do not entail such a complication. In the Covid-infected world this is an extremely expensive complexity to exhibit.