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Is the M&A scene set to change?
Mon, 1 Aug Pre-Open

The Securities Exchange Board of India has been taking initiatives in the best interest of retail investors who get caught in the daunting world of stock markets. Taking its efforts further, SEBI has recently revised guidelines regarding open offer, non-compete agreement, mutual funds and stock market transactions. The most important change however has been with respect to open offer. The open offer trigger limit and the size of the offer have both been revised upwards. The trigger limit for open offers has been raised from 15% to 25%. Also, the size of such an offer has been increased from present 20% to 26%. This implies that once acquiring entities have bought 25% (earlier trigger 15%) of a company, they will have to launch an open offer for an additional 26% (earlier: 20%). Once 25% has been acquired, it is a possibility that the acquirer may get a controlling stake of 51% (26% + 25% from open offer) in the company if the offer is successful.

Existing investors may not be comfortable with such a fundamental change in the company and may want to exit. Thus open offers give them a fair chance to exit the stock if they do not want to hold on to it. For acquirers, as stated earlier, it gives a good opportunity to claim controlling interest in the target company.

The revised 26% is however much lower than the 100% recommended by a committee that is in charge of the code overhaul. The suggestion has been ignored on grounds that it will be difficult to fund full offers. As per existing regulations, such funds cannot be raised from the banking system. Existing shareholders who wish to increase their stake through an open offer can also do so, as voluntary open offers have been allowed. Entities that already hold 25% have been asked to launch an open offer for a minimum of 10% additional shares. With this new initiative, SEBI aims to strike a balance between promoters and acquirers. Let us see how this changes the acquisition scene in India.

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