Tuesday, July 20, 2010

Indian takeover overhaul could drive up M & A costs

Buying controlling stakes in companies in India will become more expensive and tougher under radical changes regulators are proposing for the country’s merger and acquisition rules, FT reports. India’s takeover panel on Monday said investors who wanted to buy more than 25 per cent of a company would have to make a mandatory bid for all remaining shares in the target.

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By James Fontanella-Khan in Mumbai [Financial Times] - Published: July 19 2010

Buying controlling stakes in companies in India will become more expensive and tougher under radical changes regulators are proposing for the country’s merger and acquisition rules.

India’s takeover panel on Monday said investors who wanted to buy more than 25 per cent of a company would have to make a mandatory bid for all remaining shares in the target.

Analysts in Mumbai said this meant that a buyer wanting to acquire only 26 per cent stake ran the risk of buying 100 per cent of the target company, making the takeover more expensive.

Current rules say that a buyer wanting to acquire more than 15 per cent in a company, must make a mandatory offer for an extra 20 per cent stake.

By raising the threshold before a mandatory offer kicks in to 25 per cent, the rules would make it easier for investors to acquire smaller strategic stakes.

The Securities and Exchange Board of India said the takeover panel proposal sought to protect smaller investors by giving them a chance to sell their shares in a company that becomes a takeover target.

It said: “The committee has recommended that an open offer ought to be for all the shares of the target company, to ensure equality of opportunity and fair treatment of all shareholders, big and small”.

However, several analysts said forcing buyers to make a mandatory bid for all outstanding shares could cut the overall number of M&A transactions.

Ashvin Parekh at Ernst & Young in Mumbai said: “This plan will make mergers and acquisitions more expensive and in the long term it will reduce the number of deals”.

And Girish Vanvari, an M&A specialist at KPMG, said that under the proposed rules, the $4.6bn 2008 acquisition by Japan’s Daiichi Japanese pharmaceutical group of a 50.1 per cent stake in Ranbaxy, the Indian family-owned company, would have never happened.

He said: “Imagine Daiichi having to make an open offer for the entire 100 per cent [of Ranbaxy]; it would have become unfeasible”.

Sebi said that it aimed to align India’s takeover regime to those of other countries.

“The committee observed that [in] several international jurisdictions . . . acquirers must make an offer for 100 per cent of the outstanding voting capital of a company,” it said.

The trigger for a mandatory offer is 30 per cent in the UK. In emerging capital markets other than India, rules tend to differ substantially from country to country.