Sebi goes for big-bang reforms, makes it easier to take over companies

MUMBAI: Market regulator Securities and Exchange Board of India (Sebi) has announced a slew of measures that can have far-reaching implications for the market, making it easier to acquire a company, helping mutual funds get more retail investors and making it easier and safer for small investors to access the markets.



The game changer for India Inc, however, is the change in the almost 15-year-old takeover rules, which would now enable companies to buy up to 25% in another company without triggering the mandatory open offer. Currently this trigger is at 15%. The regulator also said that after the new takeover rules become effective, the acquirer will have to buy a further 26% stake in the acquiring company through an open offer, up from 20% now. In effect, under the new rules if the open offer is successful, the acquirer will get a controlling 51% stake in the target company, something which analysts say could give a boost to M&A (mergers and acquisitions) activity and ownership changes in the country.



The new rules will also allow companies which hold 14.9% in another company, which is just below the open offer trigger limit, to acquire a further 10% in that company without going for an open offer. For instance, ITC holds just below 15% in Oberoi group\'s East India Hotels and Hotel Leela Ventures. The increase in the open offer trigger price from 15 to 25 % could potentially increase the demand for shares of companies where investors have already acquired 14.9 % and therefore their prices could go up, analysts suggested.



The increase in the open offer size from 20% to 26% was mainly because of industry pressure which was against the 100% offer size recommended under the Achutan Committee set up by Sebi in 2010 to look into changes in the takeover rules, said Pavan Kumar Vijay, MD, Corporate Professionals, a securities and corporate laws advisory firm. \"The move is good for domestic promoters and the industry as the cost concerns related to 100% stake buy under the earlier recommendations and funding of offers of such large sizes have been addressed to a large extent,\" said Vijay, a former president of ICSI.



Besides, the Sebi board, which met here on Thursday, has also done away with the controversial non-compete fees that an acquirer has to pay to the promoters of the target company. In a number of recent takeovers, the acquirer had paid about 10-20% more to the promoters of the target company in the name of non-compete fee but had denied the same to the non-promoter shareholders. The change in rules will allow every shareholder the same price per share in all the acquisitions. A non compete fee also ensures that the seller does not enter the sector in which it was working.



According to Abhishek Dalmia, who made some visible hostile takeover bids in the past, the change in takeover rules would give investors flexibility and leverage to invest more in a company. \"Though the new rules definitely provide for more M&A activity, it may not lead to any substantial increase in hostile takeovers because institutions are not dispassionate and are almost always pro-incumbent promoter,\" Dalmia told TOI.



The market regulator also said that mutual fund distributors will get Rs 150 per new investor they bring into a fund, provided such investments are worth Rs 10,000 or more. Distributors will also get Rs 100 for every new subscription of Rs 10,000 or more from existing investors, the regulator said. Speaking about this move by the regulator, UK Sinha, chairman, Sebi said that the decision was taken after it was observed that after the entry load was abolished in the fund industry from August 2009, the number of fund investors has dropped as also sales of MF schemes in smaller towns have gone down. The new incentive structure \"will help MFs penetrate into retail segment in smaller towns,\" Sinha said.



Sebi also simplified the process of opening a demat account by making the forms simpler. Sinha said that once the new form is in place, the number of signatures one needs to put in to open a trading account will drop from more than 50 to just about one or two. The Know Your Client (KYC) requirement, a process that allows the market regulator to keep track of every investor in the market, will also be simplified. Currently, an investor has to complete separate KYC processes for investing in mutual funds and stock market although both are regulated by Sebi. Now the regulator will allow setting up KYC authorities, and once a KYC requirement is fulfilled at any one of these, the same will be valid for all market transactions.



Sebi also made the IPO process easier by reducing the size of IPO application forms much smaller and said that the information most relevant to the investors will be given in a set format. In a recent interview with TOI, Sinha had said that the information which is available in the 100-200 pages of IPO documents do not help retail investors to take an informed investment decision.
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