New takeover code cramps leg room for promoters

The new takeover code is throwing up new surprises. Regulation 3 (3) of the new law, which deals with open offer obligations of persons acting in concert (PAC), has increased the liabilities of promoter group shareholders beyond what was conceived by the Achuthan committee, according to three experts, including two who were part of the committee.

According to sources, the market regulator may come up with clarifications on the point.

The Achuthan committee report and the draft takeover code had limited the open offer obligation to inter-se transfers between persons acting in concert.

But, the language of the new takeover code notified by the Securities and Exchange Board of India (Sebi) last week implies even other modes of stake increases by promoters such as market purchases, creeping acquisition and preferential allotment will trigger the mandatory open offer at the individual shareholder level, if the 25 per cent limit is breached.

Kumar Desai, advocate, Bombay high court, and member of the Achuthan committee, said the provision would cover modes other than inter-se transfers. “This will cover creeping acquisitions,” he said.

For example, if in a company, promoter group holding is 60 per cent, of which the main promoter holds 23 per cent, then, though the promoter group as a whole is entitled buy five per cent as creeping acquisition without an open offer, the main promoter who holds 23 per cent cannot acquire beyond 1.99 per cent.

Regulation 3 (3) of the new law says, “Acquisition of shares by any person, such that the individual shareholding of such person acquiring shares exceeds the stipulated thresholds, shall also be attracting the obligation to make an open offer for acquiring shares of the target company irrespective of whether there is a change in the aggregate shareholding with persons acting in concert.”

Experts say the result of this new sub-regulation will be that while taking decisions of consolidation of holdings, promoters have to see both overall as well as holding of individual entities.

Indian companies have multiple entities holding the promoter group shares. For instance, the promoter group shares of Mahindra & Mahindra are held by some 53 entities including companies, trusts and individuals.

Manoj Kumar, assistant vice-president, Corporate Professionals, a Sebi-registered merchant banker, said “As a basic principle, in takeover laws, the acquirer should always be considered with PACs with him and the prescribed thresholds should be based on the collective holding of the acquirer and PAC. But, this new sub-regulation makes the threshold individual as well as collective.”

The Achuthan committee draft had limited the obligation only to purchases of shares “by any person from other persons acting in concert”.

Regulation 3 (3) of the new law, according to lawyers, covers only inter-se transfers between co-promoters or two or more promoter group shareholders.