Tuesday, February 3, 2009

Proposed Change in Takeover Rules: More than Just Satyam

A few days ago, when newspapers reported that SEBI was considering an exemption from the minimum pricing norms in the context of a potential takeover offer on Satyam, the obvious question arose as to how an exception can be made in respect of a single company, and that too one which has been the subject matter of alleged fraud. The minimum pricing norms require that when an acquirer obtains 15% or more shares of a company, it has to make an open offer for at least another 20% of the company at a price that is not less than the average of the weekly high and low of the closing prices during 6 months or such average during 2 weeks preceding the date of public announcement of offer, whichever is higher.

The latest board meeting of SEBI decided as follows:

“The SEBI Board examined the request of Satyam Computers Services Limited for exemption from certain provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997.

The Board recognized the special circumstances that have arisen in the affairs of the company and concluded that the issue needs to be dealt with in the general context. Accordingly it was decided to appropriately amend the regulations / guidelines to enable a transparent process for arriving at the price for such acquisition.

The above measures will be effective from the date of amendment to the Regulations / DIP Guidelines / Listing Agreement.”
SEBI’s approach is not to make a specific exception in the case of Satyam, but to revise the rules altogether so that they are applicable to other companies as well. This is helpful in several ways. First, it avoids creating special rules for individual companies. Second, and depending on the form in which the new pricing rules will be enacted, it may benefit other acquirers as well because the existing SEBI rules’ reliance on the 6-month average requires acquirers to make open offers at prices way above the current market prices as markets have been on a decline mode. In any event, the 6-month average has already been relaxed in other similar situations where that average is considered for minimum pricing of various corporate transactions such as GDRs/ADRs/FCCBs and qualified institutional placements (QIP). One may possibly expect similar relaxation on the pricing for takeover offers as well, although the final word on this is still awaited.

On the allotment of warrants in listed companies, SEBI’s decision states:

“It has been decided to amend the DIP Guidelines to increase the upfront margin to be paid by allottees of warrants to 25%. At present, in terms of DIP Guidelines, the allottees of warrants are required to pay a margin of 10% as upfront payment at the time of allotment.”
This seemingly comes in the wake of several promoters allotting warrants that they allowed to lapse because the exercise price turned out to be higher than the market price at the time of exercise. The new rule will make it more onerous for promoters (or other investors for that matter) to take warrants in listed companies as they will have to risk a significant amount of the investment (25%), thereby making warrants a less attractive instrument.

Other decisions by SEBI are the following:

1. Listed companies are to declare dividends on a per-shares basis only (so as to ensure uniformity), and not with reference to par value as that varies from company to company;

2. Timelines for bonus issues have been reduced; and

3. Time frame for announcement of price bands in IPOs has been shortened.

In general, some of these decisions appear to be part of a series of concerted efforts by SEBI to boost capital markets and M&A activity in India.

6 comments:

Anonymous said...

Dear Umakanth,

Was the amendment to SEBI (SAST) Regulations (“Takeover Regulations”) relaxing the pricing norm really required?

1. An acquirer pursuant to the provisions of regulation 12 of Takeover Regulations, is exempted from making an open offer for the target company, if the acquisition of control is approved by the shareholders of the target company and is also approved by the shareholders of the target company through a postal ballot. Thus, L&T Infotech could have acquired control of Satyam pursuant to provisions of Takeover Regulations. Because then there is no question of making an open offer to the shareholders of Satyam. On the contrary, even by relaxing the pricing norms, no purpose is being served because there will still be leakage of funds to the shareholders who would participate in the open offer, which funds could have been utilised by pumping the same in Satyam, which needs money. The shareholders can if they wish to exit, sell the shares in secondary market in any case.

2. Another option was to merge L&T Infotech with Satyam. This would amount to further allotment of shares by Satyam.

3. One more option was to merge Satyam into L&T Infotech (reverse merger) and the merged entitiy seeks listing without an IPO, pursuant to provisions of clause 8.3.5 of SEBI (DIP) Guidelines.

In each of the above option Satyam could go for preferential allotment to L&T Infotech, which would enable capitalising Satyam and would provide it with much needed cash.

While timing and financials (of Satyam) would be a challenge in case of option 2 and 3 mentioned above.

Kind regards,
Yogesh Chande

Umakanth V said...

Thanks again, Yogesh, for your comments.

As regards point no. 1, the exemption from making an open offer arises under Reg. 12 that deals with change in control. However, where there is an acquisition of shares beyond 15% (which is probably the manner in which most takeovers would be effected), then Reg. 10 will apply, and that provision does not confer an exemption in the form of shareholder resolution.

As regards point nos. 2 and 3, any merger would be exemption from the Takeover Regulations as you have pointed out. But, that may not be feasible to potential acquirers who may seek to leave the target company as a separate entity to protect the acquirer against existing liabilities of the target company. In case of a merger or reverse merger, the combined entity will have to assume all liabilities.

Ravi Kumar said...

Dear Umakanth,

In addition to Yogesh's suggestions (which I must admit I didn't think of), the larger issue here is that these proposed amendments to the Takeover Code are completely against the spirit of the Takeover Code.

If the spirit of the Takeover Code is to provide the shareholders of a company with a suitable exit, these amendments are not doing that. Why should the shareholders of Satyam be penalised (lower price for an exit) if the management perpetrated a fraud? If this amendment comes through, the shareholders have been offered an exit at a lower price than what is legally due to them.

In fact, the shareholders of Satyam should be allowed to elect a professional board and let this board run Satyam. Why is there such a tearing hurry to sell off Satyam to a third party? Let the shareholders of Satyam take the decision that there should be a change in control. They are being cut out of this decision. Considering the strong institutional shareholding in Satyam (nearly 60% as per the last filings with the exchanges), I would assume that these shareholders should be able to make their choices.

In fact, there are 2 other solutions that I can think of:

(a) Let the Government nationalise Satyam, if they indeed believe that this is required to boost the confidence of the investors in the country. They can do this by amending the Code as they are proposing, acquire a controlling stake, appoint a professional board and disinvest later. This way the Government will send the best signal possible to the investors and make some money when they exit. The current climate will ensure that such a step is completely justified. The Government could consider a preferential allotment to itself as per the present norms of 2 week high-low.

In any event, I do believe that this should be a bidding process re identifying the acquirer so that the shareholders get an option to exit at the best possible price.

(b) Let the shareholders of Satyam decide to make a preferential allotment to the bidder that they prefer. This pricing is anyways the 2 week high-low, pursuant to the changes to the SEBI (DIP) Guidelines. The allotment can be for 25.1% or 51% to give the acquirer control. The allottee can then make an open offer as per the existing Takeover Code pricing norms for 20% and offer an exit to the shareholders at an attractive price. The preferential allotment will ensure that the funds go into Satyam and ensure that the spirit behind the Takeover Code is maintained. In fact, I feel that the preferential allotment should be at a price higher than the 2 week high-low as the allottee will be paying a control premium to Satyam for taking over control. If this was a negotiated deal with the promoters of Satyam, I am sure that the promoters would have sought a significant control premium.

At any rate, I hope that shareholders do not tender too many shares in the open offer citing the low price on offer and let status quo continue. In any event, the way the stock price is moving, that could still be the case.

I find that these are very short-term, knee-jerk reactions that are forcing legislative changes that will have repercussions that will be discovered in the future (as is always the case). Frankly, I am curious to see how SEBI will make this a "general" exception. The best way would be to say that SEBI has the discretion to determine pricing in exceptional cases. The thought of such an amendment does not make me very happy, I must confess, as everybody will run to SEBI to get an exemption from stiffer pricing norms.

The times that we live in will through up more of such cases (I am not referring to the fraud)and I hope that the regulators realise that they can use the existing framework (like Yogesh's suggestions) and not make such knee-jerk changes to prevailing laws.

On a separate note, I find it disturbing that the probe on PwC has strangely gone quiet. Surely, the ICAI cannot be taking so long over this probe, especially considering the fraud related to bank deposits!!And PwC have to pay far more than just cutting those 2 imprisoned accountants loose from their organisation.

Is there anything that SEC is doing considering that Satyam has ADRs listed? In fact, the Satyam board (or shareholders of Satyam) should consider suing PwC in the US for a deficiency in service, fraud, gross negligence and god knows what else.

I wonder what the world now says about a Big Four auditor!! Investors insisting on these in deal documents are going to be laughed at by Indian promoters and companies. I hope it does not just stop at that.

Best,

Ravi Kumar said...

Dear Umakanth,

The larger issue here is that these proposed amendments to the Takeover Code are completely against the spirit of the Takeover Code.

If the spirit of the Takeover Code is to provide the shareholders of a company with a suitable exit, these amendments are not doing that. Why should the shareholders of Satyam be penalised (lower price for an exit) if the management perpetrated a fraud? If this amendment comes through, the shareholders have been offered an exit at a lower price than what is legally due to them.

In fact, the shareholders of Satyam should be allowed to elect a professional board and let this board run Satyam. Why is there such a tearing hurry to sell off Satyam to a third party? Let the shareholders of Satyam take the decision that there should be a change in control. They are being cut out of this decision. Considering the strong institutional shareholding in Satyam (nearly 60% as per the last filings with the exchanges), I would assume that these shareholders should be able to make their choices.

In fact, there are 2 other solutions that I can think of:

(a) Let the Government nationalise Satyam, if they indeed believe that this is required to boost the confidence of the investors in the country. They can do this by amending the Code as they are proposing, acquire a controlling stake, appoint a professional board and disinvest later. This way the Government will send the best signal possible to the investors and make some money when they exit. The current climate will ensure that such a step is completely justified. The Government could consider a preferential allotment to itself as per the present norms of 2 week high-low.

In any event, I do believe that this should be a bidding process re identifying the acquirer so that the shareholders get an option to exit at the best possible price.

(b) Let the shareholders of Satyam decide to make a preferential allotment to the bidder that they prefer. This pricing is anyways the 2 week high-low, pursuant to the changes to the SEBI (DIP) Guidelines. The allotment can be for 25.1% or 51%. The allottee can then make an open offer as per the existing Takeover Code pricing norms for 20% and offer an exit to the shareholders at an attractive price. The preferential allotment will ensure that the funds go into Satyam and ensure that the spirit behind the Takeover Code is maintained. In fact, I feel that the preferential allotment should be at a price higher than the 2 week high-low as the allottee will be paying a control premium to Satyam for taking over control. If this was a negotiated deal with the promoters of Satyam, I am sure that the promoters would have sought a significant control premium.

At any rate, I hope that shareholders do not tender too many shares in the open offer citing the low price on offer and let status quo continue. In any event, the way the stock price is moving, that could still be the case.

I find that these are very short-term, knee-jerk reactions that are forcing legislative changes that will have repercussions that will be discovered in the future (as is always the case). Frankly, I am curious to see how SEBI will make this a "general" exception. The best way would be to say that SEBI has the discretion to determine pricing in exceptional cases. The thought of such an amendment does not make me very happy, I must confess, as everybody will run to SEBI to get an exemption from stiffer pricing norms.

The times that we live in will through up more of such cases (I am not referring to the fraud)and I hope that the regulators realise that they can use the existing framework and not make such knee-jerk changes to prevailing laws.

On a separate note, I find it disturbing that the probe on PwC has strangely gone quiet. Surely, the ICAI cannot be taking so long over this probe, especially considering the fraud related to bank deposits!!And PwC have to pay far more than just cutting those 2 imprisoned accountants loose from their organisation.

Is there anything that SEC is doing considering that Satyam has ADRs listed? In fact, the Satyam board (or shareholders of Satyam) should consider suing PwC in the US for a deficiency in service, fraud, gross negligence and god knows what else.

I wonder what the world now says about a Big Four auditor!! Investors insisting on these in deal documents are going to be laughed at by Indian promoters and companies. I hope it does not just stop at that.

Best,

Anonymous said...

Dear Umakanth,

Regulation 12 exemption is available irrespective of whether there is any acquisition of shares or not, but change in control.

There are many precedents in past were this have been used without making an open offer.

I still fail to understand why should there be an open offer made at all for Satyam.

Kind regards,
Yogesh Chande

Anonymous said...

Apropos, reduction in timeline for bonus issue, it may be noted that as per clause 16 of equity listing agreement, companies whose equity shares are available for trading in derivatives (F&O) segment are required to give 30 days advance notice of the record date for various corporate actions including bonus.

Hence even if chapter XV of SEBI (DIP) guidelines is amended (which deals with Bonus issue), corresponding amendment is also required in clause 16 of listing agreement. But amendment to clause 16 may not be possible, because the 30 days period (stipulated in clause 16) is linked to tenure of F&O contract which is for a 30 days period, expiring on last thursday of evey month.

So it will be interesting to see how will the timelines for bonus effectively be reduced to 15 days as stated in the amendment.

Kind regards,
Yogesh Chande