Sunday, February 17, 2008

Hostile Takeovers in India: Opportunities and Challenges (Part 1)

Hostile takeovers of companies (otherwise referred to as the market for corporate control) is a rather well-known phenomenon in the corporate sphere. The 1980s (a.k.a. the deal decade) were famous in the US for large hostile transactions that set fire to lawyer ingenuity resulting in the development of various takeover defences. Hostile takeovers continue to pose a threat to companies – even as the story of the Microsoft offer for Yahoo unfolds with a hostile takeover looming large in the wake increasing resistance by the Yahoo board.

Despite their prominence elsewhere, hostile takeovers have been largely alien to Indian listed companies that have rarely witnessed raids by hostile acquirers. This may lead one to believe that the Indian legal system – with the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2007 (the Takeover Code) being the legislation on point - is friendly to incumbent shareholders and management and is unfriendly to raiders. However, a reading of the Takeover Code would reveal that it does not prohibit hostile takeovers, and even more, it in fact imposes various restrictions on incumbent promoters and management once an open offer is made, thereby enhancing the leverage available to the hostile acquirer. This poses an interesting question. Why then are hostile acquirers a rarity in the Indian context, despite a favourable regime under the Takeover Code?

This question has been examined by Shaun Mathew, an attorney with Wachtell, Lipton, Rosen & Katz and a Harvard law graduate, in a well-researched article titled “Hostile Takeovers in India: New Prospects, Challenges, and Regulatory Opportunities” that has been published in the Columbia Business Law Review (2007 Colum. Bus. L. Rev. 800) (available here). The article begins with an analysis of the Takeover Code and the broad shareholding pattern of top listed companies in India. Shaun then deals with the history of hostile takeover activity in India and alludes to the four large raids that were made on Indian companies in the last 25 years. These are:

1. Swaraj Paul’s failed bid for Escorts and DCM (1984);
2. ICI’s attempt to takeover Asian Paints (1997);
3. India Cements/ Raasi Cements (1998); and
4. The Dalmia group’s purchase of stake in GESCO’s real estate company (2000).

Unsurprisingly, the attempts failed for one reason or the other, except for India Cements’ successful acquisition of Raasi Cements.

The article then deals with the possible regulatory obstacles to hostile takeovers. First is the Takeover Code, which as discussed above does not present any direct hindrance to hostile acquisitions. Second is the foreign investment policy of the Government of India and the Reserve Bank of India (RBI) that deal with acquisition of shares by foreign acquirers. Even these have been largely liberalised in 2006 (by a Press Note – the relevant paragraph is 2e) enabling foreign acquirers to buy shares in Indian companies without the approval of the Foreign Investment Promotion Board or the Reserve Bank of India (RBI) even in case of an unsolicited offer made under the Takeover Code. Foreign acquirers may buy shares in Indian companies without prior approvals, except in specified sectors or where sectoral caps are exceeded, so long as the price is at or above the prevailing market price of the shares.

The next part of the post will deal with the article’s analysis of takeover defences in India and the impact of the level of promoter shareholding on hostile takeovers.

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