SEBI Increases Open Offer Size To 26%, Trigger To 25%

SEBI has announced new takeover codes.
- Open offer trigger increased from 15% to 25%
- Mandatory open offer size increased from 20% to 26%.
- Scraps Non-Compete fees that an acquirer pays to the target company.

With this amendment, the minimum stake that an acquirer can now obtain in a target company after the open offer if fully subscribed would be 51%.

The new takeover code took a year to secure Sebi's clearance. Last July, a panel headed by the former chief of the Securities Appellate Tribunal C Achuthan had submitted its recommendations to change the existing takeover regulations that were framed in 1994.

According to draft form of ‘The Takeover Regulation Advisory Committee (TRAC)’, a 100% open offer requirement was proposed in order to provide an exit opportunity for all the shareholders and to attract only serious companies to go for buyouts. The disadvantage been, this would increase the cost of acquisition.

SEBI has also scrapped non-compete fees and stated that all the shareholders shall be given exit at the same price. This ensures equal treatment to minority shareholders and promoters. The disadvantage will be that the promoter shareholder will have the ability to affect the business of the company if he / she wants to compete in the same vertical or business.

Recently, minority shareholders of Cairn India Ltd had protested against acquisition of a stake in the firm by Vedanta on grounds of non-compete fee amounting to differential open offer pricing for the promoter shareholders and other stakeholders in Cairn.

Cairn Energy Plc and Vedanta Resources have agreed to remove the non-compete provision and related non-compete fee of Rs 50 a share for Vedanta's 40% stake purchase in Cairn India Ltd. With this, the effective sale price of Cairn India's shares came down to Rs 355 a share as against Rs.405 a share earlier. Hence, the total consideration payable by Vedanta for 40% stake has been reduced to $6.023 Bn as against $6.65 Bn.

In the US, there is no mandatory trigger for an open offer. In UK, the first trigger point is at 30 %, while in other jurisdictions such as Singapore, Hong Kong, EU and South Africa, the open offer trigger points are in the range of 30% to 35%.

Here is the offer size analysis of the last four years in India.

Source: SEBI

SEBI has also cleared the committee’s proposal on pricing takeover issues. At present, open offers are priced at the higher of weekly averages of market price for 26 weeks or two weeks. To ensure that all shareholders of the target firm get a fair value for shares tendered in an open offer, the panel proposed that the minimum price payable as the offer price shall be the highest of:
- the negotiated price under the agreement that attracted the open offer;
- volume-weighted average price paid by the acquirer and persons acting in concert in
the preceding fifty-two weeks;
- highest price paid by the acquirer or persons acting in concert with him during the
preceding twenty-six weeks;
- sixty trading day volume weighted average market price (for frequently traded shares).

The panel had suggested that the total time to complete a takeover should be brought down to 57 days, from 95 days now, paving the way for money to accrue to the selling shareholders much faster.

SEBI has mandated that promoters and persons being part of the promoter group of a company should disclose their initial shareholding when they become a part of the group, and also in case their holdings change by Rs.5 lakh in value or 25,000 shares in number or 1%t in stake, whichever is lower.

SEBI has also asked merchant bankers to maintain records and documents pertaining to due diligence exercised before and after an IPO, takeover, buyback or de-listing that they handle and these would be subject to SEBI audit.

Reference: SEBI

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