Chronic delays in clearance of open offers are leading to M&A activity in India in the listed space being rendered unpredictable. Worse, technically, the Securities and Exchange Board of India claims in courts that it does not “clear” letters of offer and only issues letters of observations and comments. Courts have held the directions contained in such letters are “orders” for purposes of the appellate jurisdiction under the SEBI Act, 1992, and it is high time this ostensible stance is given up by SEBI.
SEBI is required to give its comments on letters of offers within 21 days of the document being filed by the merchant banker. However, there is no known case in recent years of the letter of offer being cleared by SEBI for circulation to shareholders within this deadline. I wrote about this situation last year in the Business Standard (edition dated September 24, 2007 – Without Contempt), and I have reproduced below:-
Last week, at a private training session, when I extolled the virtues of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (“Takeover Regulations”), an outspoken participant drove home a strong argument. His grouse was that the Takeover Regulations have failed to meet their fundamental stated objective – of giving public shareholders a timely exit opportunity.Another important factor to be borne in mind is that unless an open offer is fully completed and the public shareholders are paid for their shares, the agreement for the substantial acquisition that triggered the open offer cannot be closed. Therefore, once an acquirer agrees to acquire shares of a size that triggers an open offer, he is completely at the mercy of how well SEBI process the letter of offer for the open offer.
While at first blush, one could dismiss such an accusation as unduly provocative, further reflection suggests that the point is very pertinent. At the core of the Takeover Regulations is the intent of the law to provide the minority non-controlling shareholders a timely opportunity to exit the target company in the wake of a substantial change in shareholding or control. In fact, the law has been regularly amended to prune the time gap between the announcement of the open offer and the receipt of funds in the hands of the shareholders participating in the offer.
However, the practical reality is that the time gap between the announcement of an open offer and the completion of the open offer formalities has only widened. Increasingly, one comes across transactions where this time gap extends to well over six months. This is a sore PR point with SEBI, and has been subject matter of many letters to editors of newspapers that have carried reports of allegedly unduly long delays. However, a dispassionate and scientific review of some of the reasons for the delay would not hurt.
The Takeover Regulations require the acquirer to file the draft letter of offer with SEBI for review. However, once a draft letter of offer is filed, SEBI checks whether there has been any violation of the Takeover Regulations by any other acquirer in the history of the target company. Often, past acquisitions that would seem to have triggered an open offer obligation are discovered. SEBI then demands the acquirer who has filed the letter of offer in compliance with the law, to prove that the past acquisitions were indeed in compliance with the Takeover Regulations.
Checking the entire history of the target company for past violations could entail immense expenditure of time and energy, and substantially delays the clearance of the letter of offer. While such a review may be laudable in principle, it can in no manner justify holding up today’s compliant acquirer, it penalizes the acquirer who is compliant with the law today, for suspected past wrong-doings by others in the past. The past violator could well be a person who is selling his shares today, triggering the open offer by the purchaser, but even that is no reason to hold up the compliant acquirer, or to penalize the public shareholder.
The law has adequate teeth to penalize contraveners, and past breaches should be pursued separately by SEBI, leaving the acquirer who has filed the letter of offer free to proceed with his offer, and helping the public shareholder to get his funds quickly. An obvious import of such a delay is of course the unfair imposition of an enormous cost on the compliant acquirer since the acquirer has to lock up substantial resources in escrow. However, in reality, it is the public shareholder who is harmed.
First, once an open offer is announced, the “offer period” starts and the Takeover Regulations impose significant restrictions on the target company during the offer period. For many important decisions, the target company would need to take shareholder approval, and every general meeting or postal ballot would cost even a mid-sized company at least a million rupees. The economic impact of such avoidable administrative costs is obviously to the account of all shareholders.
Second, the public shareholder’s access to the open offer gets delayed, and thereby his receipt of funds is delayed. During this delay, the market price could move. If the market price goes up, the open offer becomes academic since the public shareholder could well sell his shares in the market instead of selling them to the acquirer. If the market price goes down, the public shareholder’s ability to have all his shares purchased would get further diluted since all shareholders would tender, and therefore, the shares tendered would only get accepted on a pro rata basis.
Third, once an open offer is announced, no other open offer for the same target company can be announced after 21 days. This is a very important rule that regulates competitive bids. If the open offer itself takes ages to be completed, no competitive bid can ever be made on the target company, taking away the prospect of public shareholders even being presented with another open offer. In fact, one interpretation of this rule would mean that after the first 21 days of announcement of the open offer, the target company’s M&A prospects get seriously curtailed.
Besides, SEBI now charges acquirers fees linked to the size of the open offer to review draft letter of offer. At 0.5% for most offers, with a graded scale, SEBI’s income from a single open offer could go up to as high as Rs. 10 crores. Surely, the scale of accountability for a rapid turnaround of documents should be commensurate with the size of these fees.
Acquirers making open offers are equally investors in the securities market who need protection.
Administration of the Takeover Regulations needs to change urgently. Takeover activity is not akin to raising money in the primary market. It cuts at the core of the M&A environment in India.