Competing offers under the Indian takeover regime

Abhishek Dadoo
Khaitan & Co, Mumbai
abhishek.dadoo@khaitanco.com

Shruti Kunisetty
Khaitan & Co, Mumbai
shruti.kunisetty@khaitanco.com

Takeover laws in India enable the ‘white knight' defence in the case of attempted hostile takeovers by allowing competing offers to be presented to the public shareholders of the target company. While this provision has rarely been used, we seek to briefly analyse and delve into the growing pertinence of competing offers in the transforming landscape of the Indian economy and public markets.

The Indian market for corporate control has historically not been prone to hostile takeovers (despite a few notable instances). This can be attributed primarily to the prevalence of concentrated promoter shareholding among listed entities. However, with the evolution of the public markets, Indian markets have recently seen a rise in hostile takeovers. The Securities and Exchange Board of India’s Substantial Acquisition of Shares and Takeovers Regulations 2011 (the ‘SEBI (SAST) Regulations’) is the cornerstone of the legal regime surrounding the transfer of shares, voting rights or control in listed entities in India. It primarily seeks to regulate the acquisition of control in listed entities to best protect the rights and interests of public shareholders. In a bid to streamline the tendering process for the acquisition of a stake and to avoid overlaps in open offers to public shareholders, the SEBI (SAST) Regulations generally restrict an additional open offer being launched while an earlier open offer is still in existence.

Regulation 20 of the SEBI (SAST) Regulations operates as an enabling provision for Indian entities to secure white knights by offering an exception to the general restriction on parallel offers. It allows any entity, other than the original acquirer, to make a ‘competing offer’ on the satisfaction of the following conditions: the competing offer is made within approximately 20 working days from the date the original offer was made; and the offer size of the competing offer is such that the shares held by the competing offeror (along with persons acting in concert) and the offer size must be equal to or greater than the shares held by the original acquirer (along with persons acting in concert) and the offer size of the subsisting offer. Further, the original acquirer may revise the original offer provided the revised terms of offer are more favourable than the existing terms. Upward revisions in the terms of offer may be made by any acquirer up to one day prior to the tendering period. In furtherance of its intended application to secure white knights, the target is restricted from inducting any new director on to its board during the existence of competing offers.

The provision for competing offers under the SEBI (SAST) Regulations arguably seeks to achieve ‘shareholder democracy’ by maximising the choice and competition in the market for control over the target without derailing the course of the existing offer. Curiously, there have been limited precedents on competing offers in India. A notable instance is the competing offer made for acquiring a stake in Mangalore Chemicals and Fertilizers Limited (the 'Target') in 2014. In this instance, SCM Soilfert Limited (the 'Original Acquirer') and Zuari Fertilizers and Chemicals Limited (the 'Competing Acquirer' or ‘Zuari’) were shareholders of the Target, holding 24.46 per cent and 16.43 per cent, respectively. On 23 April 2014, the Original Acquirer made a public offer to acquire 26.1 per cent of the shares at INR 61.75 per share. Thereafter, on 12 May 2014, the Competing Acquirer, along with persons acting in concert, made an offer under Regulation 20 of the SEBI (SAST) Regulations to acquire 26.1 per cent of the shares at INR 68.55 per share. Subsequently, on 25 September 2014, the Original Acquirer revised its offer price to INR 93.60, after which the Competing Acquirer revised its offer price to INR 81.60 per share. On completion of the tendering period, 70,65,807 shares were tendered in favour of the Original Acquirer and 42,424 shares were tendered in favour of the Competing Acquirer (as opposed to the offer size of 3,08,12,939 shares). Interestingly, the competing offer saga was followed by another open offer process a few months later. On 4 December 2014, Zuari made a public announcement about a fresh offer to acquire 25.90 per cent of the shares in the Target at INR 91.92 per share. On 30 December 2014, Zuari increased its offer to 36.56 per cent at the same offer price. This public offer resulted in Zuari Fertilizers and Chemicals Limited holding 53.03 per cent of the shares in the Target as of 31 March 2015 and SCB Soilfert Limited divesting its entire stake in the Target.

Thus, the series of events transpiring from the competing offer definitively establishes the role of competing offers in securing a benefit that exists for the public shareholders of a target entity. However, the limited example of Zuari demonstrates that there are various costs attached to launching competing offers: first, there is an added layer of uncertainty in the timelines due to limited precedents; second, the competing bidder could shoulder a significant sunk cost in subsequent rounds of revisions to their offer; and third, both/all the bidders operating in the instance of a competing bid run the risk of receiving few or no tenders. This is particularly disadvantageous considering that they have the option of launching a separate public offer after the closure of the tender period.

In spite of its desirable effects, which align with the underlying object of the SEBI (SAST) Regulations, a competing offer is an acutely underutilised concept. The dearth of precedents on competing offers can also be attributed to the mismatch in the incidence of cost and gain resulting from the use of the provision. While the shareholders stand to benefit from the choice of various competing offers, the potential acquirers bear the cost of navigating a relatively uncertain and risky process at the expense of their financial resources. However, the dearth of precedents backing the use of competing offers under the SEBI (SAST) Regulations must be seen as a function of the stage of development of the public markets. Therefore, economic development coupled with the evolution of the market for corporate control in the country is likely to lead to the realisation of its intended function as a potential white knight provision against hostile takeovers.