The recommendations in the proposed takeover code can potentially further widen the bias in favour of foreign acquirers with access to acquisition financing,says Vallabh Bhanshali


THE proposed takeover code represents a landmark step with all the ingredients in place to completely change the Indian M&A landscape.The expert panel has clearly been inspired by international best practices.However,one should evaluate the implications of these recommendations in the context of readiness of Indian capital markets and financial system to facilitate a smooth transition and implementation.
That a 100% offer size is more equitable to minority shareholders,giving them an opportunity to fully tender their shareholding,is self-evident.However,one has to evaluate the ability of Indian acquirers to raise the resources necessary for a 100% buyout in the context of prohibitions on Indian banks to fund share purchases.This may hamper the inorganic growth ambitions of Indian companies.To put it in perspective,the average size of offers made by Indian acquirers in the last four years has been a meagre.40 crore,compared with the average offer size of.487 crore made by foreign acquirers.The new recommendation can potentially further widen this bias in favour of foreign acquirers with access to acquisition financing.
The accompanying table summarises the tremendous fund-raising challenge that the new regulations pose.The outlay would have increased by a staggering.1,33,350 crore had the rule of a 100% offer size been implemented four years ago.
On the flip side,minority protection measures have come a long distance since clause 40A of the Listing Agreement ruled the roost.When the 20% rule came in,when the 2%,5%,15% disclosures and trigger limits came in,there were similar reservations.Indian economy has shown alot of dynamism,though halting or nonholistic at times.Our uptake is that,unlikely as it may appear today,funding sources will open up MFs,insurance companies,NBFCs,investment banks,etc,will provide the funding.However,until these alternative sources open up,the average Indian company will feel daunted by the higher requirements.
Another important development is in raising the initial trigger to 25% instead of 15%.The change will bring us closer to the 30-35 % trigger in developed countries like the UK,Singapore,EU,etc.This move primarily takes into account the ability of shareholders with 25%+ voting rights to block special resolutions on key corporate matters as enshrined in the Companies Act.However,strictly speaking,special resolutions require an affirmative vote from 75% of the shareholders present and voting in the meeting.Taking into account absentee shareholders,shareholders with less than 25% shares do possess higher voting rights and indirectly gain the ability to block special resolutions.For instance,ashareholder with a 21% stake in a company has the ability to exercise 26.25% votes if 80% of shareholders are voting in the meeting,thus enabling him to exercise de facto control on key corporate matters.He does so without making an offer to minority shareholders.
Another welcome step is widening the definition of control to include not only the right but also the ability to control the management or policy decisions of a company by virtue of entering into private shareholder agreements.Though a step in the right direction,it still retains a high level of subjectivity,with Sebi retaining a right to evaluate control triggers on a case-to-case basis.
SIMILARLY,the proposed changes in the calculation of the minimum offer price,introducing volume weighted average market price in the preceding 60 days,is a well intended decision.Though it seeks to make the most relevant market price as one of the pricing benchmarks,it leaves a lot to be desired.It does not address the situation where the offer price is higher than the negotiated price because of the market price-based benchmark being higher.There are numerous cases of acquisitions where the offer price was substantially higher than the negotiated price,thus burdening the acquirer.
If the underlying intent is to preserve the concept of equity for all shareholders,and hence that the offer price payable to public shareholders should be not inferior to that paid for substantial shareholders,why should the acquirer make an offer to minority shareholders at a price higher than that is acceptable to the incumbent promoter
Under the current regulations,the extra burden on the acquirer was limited to the extent of paying a higher price only on 20% of the shares.However,retaining a market-linked pricing benchmark coupled with the requirement of making a 100% offer may be a double-whammy for acquirers who will have to offer a higher price owing to a higher 60-day average price.Rather than delivering a benefit to minority shareholders,the acquirer would be forced to drop the deal.Resultantly,the company does not benefit letting go the opportunity to get a stronger,newer management who could take it to new heights,post acquisition.
While the committee acknowledges the need for doing away with marketlinked benchmarks in the long run,they continue to retain it till the shareholder community becomes confident about the governance practices of smaller companies.However,the committee should have taken this bold step of doing away with the market-linked parameter in this set of recommendations itself instead of resolving to relook at it in the future.
On the pricing front,based on equity among shareholder groups,the committee has recommended that noncompete fees be added to the negotiated price so that it is offered to minority shareholders also.One can understand that the committee has responded to suspect non-compete fee arrangements.However,genuine cases of noncompete arrangements would suffer.
Regarding the downward revision in the timelines for completion of an offer from 95 days to 57 days,Sebi will have to take a more positive approach since only a small number of offers have actually been completed within 95 days in the past.
Additionally,to ensure the implementation in letter and spirit of all the recommendations,the existing regulatory framework with respect to preferential issuances,delisting,tax,FDI,etc,would need to be synchronised.


(The author is the chairman of
Enam Securities)

India's opportunity in Africa The market of one billion consumers in the continent has tremendous implications for businesses,investors,policymakers and donors;we need to reposition Africa in our minds,says Ajai Chowdhry IT WAS quite an experience to be cochairing the World Economic Forum on Africa.Concluded last week in Dar es Salaam,WEF brought together great minds from diverse backgrounds on Rethinking Africa's Growth Strategy',the theme for this edition.Everything resonated so well between our country and this optimistic,youthful,vibrant 1-billion-people continent,waiting to turn into an exciting destination in the new global regime.Enough has been said on Africa's need for education,health,infrastructure,etc.But before one stresses on the role of technology to speed things,a simple message to the people of Africa is: Change the attitude that someone from outside will come to change Africa & chose trade over aid'.Africa needs to take advantage of her demographic dividend,and then entrepreneurship will take over.It is in the hands of Africans to change Africa,become a continent of reality rather than hope.Dr C K Prahalad used to say A>R aspiration is greater than resources.So,if Africans aspire,resources will never be a constraint.Taking an example,it's a metamorphosis story for the Republic of Rwanda.It has come a long way since the 1984 genocide,in which about 800,000 were killed,to the CNN labelling the Land of a Thousand Hills' as Africa's biggest success story,having achieved stability and economic growth.While the rest of the world was reeling under the effects of the global financial crisis,Africa showed a remarkable 2% growth,about the same as in West Asia and more than parts of South Asia,except India and China.Further,the IMF estimates that growth in Africa will be in the vicinity of 4.8%,higher than Brazil and Eastern Europe.With the potential of development,Africa is in need of investment in areas like ICT to improve governance,overcome poverty and deal with critical infrastructure gaps.And the continent can look at India as an example to learn from.Because,India and Africa have similar problems,therefore,the solutions can be similar.What's been tried and tested in India,and with the technology readily available to transfer knowledge and experience from our country,it could actually be quite an African safari.Let's go back to India in the early nineties.Then,the government had only $1 billion left in the kitty.Dr Manmohan Singh and Mr Narasimha Rao opened up the country and the rest is history.The key to it was that entrepreneurship took over.Based on the country's strong financial system and tech prowess,liberalisation is giving banking to the unbanked,knowledge centres to villages,renewed focus on health,agriculture and education,and discouragement of rural-urban migration.Today,in spite of the global financial crisis last year,the country is on its way to achieve 10% growth in 2011.In many ways the next few years will be extraordinarily decisive.Shortage of energy and infrastructure is a 'brick wall'facing development.But then,progress is being made on a country-by-country basis,with governments putting in place the right environment which is encouraging investors to enter their markets.Despite the hardships and all the difficulties it faces,there is another face to Africa besides despair and pessimism.A Gallup survey of 50,000 people across the world found that Africans are the most optimistic people in the world.Further,African entrepreneurs,too long marginalised,have begun to show that they too can connect constructively to world markets,through successful ventures in exporting cut flowers,vegetables and clothing.THE market of one billion consumers in Africa has tremendous implications for businesses,investors,policymakers and donors.It presents a unique challenge to diverse stakeholders who have an interest in the success of the African market.All of them need to be focused on balancing social development with sustainable development.Authors Michel Homan and Greg Mills point out that an estimated $580 billion of western aid for Africa over the last 50 years has had little impact.Instead,aid has given rise to several challenges,including fear of aid reducing the recipient to the level of a victim rather than an active worker.It is clear that Africa does not need aid from western countries.What the continent needs,instead,is external support choosing trade over aid like it happened in India,last millennium coupled with internal reforms.Interacting with the Indian diaspora at an East Africa India dinner,one clearly understood what Africans want i.e., partnerships and not exploitation.The Indian diaspora also felt that Indians should realise that Africa is not a dark continent,it's a land of opportunity.We need to reposition Africa in our minds.The mid- and long-term goal for Africa should be to increase developing countries' share of global trade while supporting South-South flows of goods and services: countries in Africa cannot hope to grow their economies to their full potential and reduce poverty until they become fully engaged with world markets.How can we help bring transparency in institutions and governance in Africa By bringing all our knowledge of e-governance,by what we have done in our financial institutions,by helping conduct elections using electronic voting machines and by ideas like financial inclusion,telemedicine and tele-education.India and Africa are linked by old relationships South Africa's president proudly talked to me about how one incident' in Africa transformed Barrister Gandhi into Mahatma Gandhi.In a session at the WEF I talked about breaking away and providing access for all' i.e., internet/ broadband access for all in Africa to overcome infrastructure,education,health issues.The work to connect Africa by optic fibre has begun Kenya is leading and Tanzania has an ambitious plan.India can truly participate in this with our experience.In Africa,as has been the case in many developing and emerging economies of the world,despite different types of public governance,the best hope for sustainable progress may be economic development and entrepreneurship.There is a rising spirit of optimism and determination on the continent,particularly among the growing population of youth.We need to co-opt Africa into the rest of the world's spirit of partnership.(The author is chairman & CEO,HCL Infosystems)

Living in the world of derivatives

Interesting read:

http://www.thehindubusinessline.com/2010/05/20/stories/2010052051460900.htm

NSE v MCX

MCX is all set to start a new stock exchange for equities and derivatives. Tu read further, please refer to:
http://ibnlive.in.com/news/shock-showdown-stock-exchanges-go-to-war/115327-7.html?from=tn