SEBI Raises Threshold For Mandatory Takeover Offer

29 July, 2011

* Trigger for open offer raised to 25 pct of equity from 15 pct now

* Mandatory open offer size raised to 26 pct of equity from 20 pct now

* Scraps non-compete fees to be paid to the target company

* Move seen boosting private equity investment 

India raised the ownership trigger for a mandatory takeover offer in a company to 25 percent from 15 percent now, a move that could draw more private equity and other investors into listed companies.

The chairman of the Securities and Exchange Board of India (SEBI) also said the new rules will require such investors to offer to buy at least 26 percent more of the company, from the 20 percent minimum currently.

“Raising the open offer trigger to 25 percent is a pragmatic step that will provide growth capital to companies to expand their businesses without forcing the investor to make an open offer for more stake,” said Sourav Mallik, executive director of M&A at India’s Kotak Mahindra Capital.

Earlier, a panel had recommended that a mandatory offer be made for 100 percent of the shares in a company once the minimum threshold was met, which many analysts had said would raise the cost of acquisitions for local firms and deter consolidation.

The regulator also scrapped the non-compete fee the acquirer pays to a target company as part of the takeover rules, SEBI Chairman U.K. Sinha said.

Most Indian companies are controlled by a majority owner, known as the promoter, who owns at least 50 percent of their companies.

“This is an M&A gamechanger,” said Jagannadham Thunuguntla, equity head at SMC Capital in Delhi.

“Impact will be seen in companies where promoter holding is below 50 percent and external shareholding is higher,” he said.

Analysts said investors could raise stakes above 15 percent in firms such as EIH Hotels , in which ITC and Reliance Industries each own 14.9 percent.

Under current regulations, if an investor buys more than 15 percent in another company, it has to make a mandatory open offer for a further 20 percent stake.

Raising the takeover trigger to 25 percent is expected to result in increased private equity activity in the country, which is already on the rise due to sluggish capital markets.

Many private equity firms prefer to keep their holdings in listed companies below 15 percent to avoid making an open offer.

For example, Apax Partners owns 12.97 percent in Apollo Hospitals , while General Atlantic has a 14.72 percent stake in technology firm Infotech Enterprises , according to Thomson Reuters data.

Insurer and hospital firm Max India , in which private equity firm Warburg Pincus holds 14.7 percent, and supply chain manager Redington India , more than 10 percent held by Standard Chartered Private Equity, could see their private equity investors lift their stakes, analysts said.

“Now, small foreign investors or PE or even an individual can raise their stake in companies to more than 15 percent without triggering the open offer. This will help volumes and even prices of those stocks,” said Hitash Dang, vice president of institutional sales at Jaypee Capital Services.


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SEBI Raises Threshold For Mandatory Takeover Offer

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