Takeover Code -- Straighten out the global angle

S. Vaidya Nathan

GLOBAL-LEVEL arrangements have increasingly started to impact the structure of their Indian affiliates.

Often, they lead to mergers, would-be mergers and demergers in the Indian market. While these corporate actions get priced-in fairly quickly, there is considerable uncertainty vis-a-vis takeovers -- especially global arrangements that do not attract SEBI takeover regulations.

SEBI's (Securities and Exchange Board of India) takeover regulations are silent on this issue. Such cases are referred to the takeover panel to decide. With transactions taking place outside India, the applicability of the Takeover Code is not easy. But over the last three years, quite a few cases have been decided with regard to global-level developments and their implications for the listed Indian companies.

At the end of the day, however, the picture is still unclear. From a scrutiny of SEBI's decisions on various cases, it would appear that international arrangements (mergers and acquisitions) are outside the scope of the Takeover Code which requires an open offer in the event of a change in control.

Typically, all global-level changes that alters the status of Indian listed outfits satisfy the criteria prescribed in the Takeover Code for an open offer. One is the 15 per cent threshold limit -- most transactions involve the transfer of the entire stake held in the Indian outfit which is usually over 74 per cent. The other is the change in control.

So far, certain types of transactions have not led to open offers. But this appears to be proceeding on an ad hoc basis, with no clear pattern that could be of use to the investors in these companies.

There are cases of a division being sold off at the global level and an Indian company happens to be part of that division. Such instances have attracted open offers, the notable ones being Coates of India and Wheels India. In these cases, the shares of the Indian outfit were transferred to a new company which then made the open offer.

But the case of a division being sold and not attracting an open offer involved Bausch and Lomb India. The global parent sold the sunglasses business retaining the vision-care business. In India, this business is to be spun off as a separate entity. Bausch and Lomb India controls the sun-glasses business. The foreign stake, held through a Mauritius-based company, was transferred to another company in what, at first, seemed an innocuous transaction.

Subsequent events show the latter was merged with an investment company of Luxottica (which bought the sunglasses business from Bausch and Lomb Inc) and this effectively ruled out the open offer. It more or less fell in the mergers and acquisitions category. This appears to be the emerging pattern as global companies seek to avoid open offer. For instance, in the case of Colour Chem, Hoechst appears to be pursuing just this route. Hoechst may similarly deliver its stake in Colour Chem to Clariant and avoid the open offer.

There have been other cases, such as the Digital Equipment-Compaq deal, at the global level where no transfer of shares in the Indian company took place. As a consequence, no open offer materialised. There were at least two bursts of activity in the stock market when the Digital stock soared in the expectation of an open offer. This was denied by Compaq and Digital.

But in a similar deal involving Unilever and International Bestfoods, the former and its Indian affiliate, Hindustan Lever, came out with an open offer. Quite clearly, these cases portray the widespread divergence in relation to open offers triggered by the global level developments.

The latest such case is that of Kvaerner Cementation India Ltd (KCIL). In this case, Skanska Europe AB completed financial closure of the proposed acquisition of the entire issued share capital of Kvaerner Construction Group Ltd (KCGL) from Kvaerner Plc. The acquisition of KCGL will result in an indirect change of control of KCIL. This is because a KCGL subsidiary owns 64 per cent of the KCIL shares. SKAB proposes to make an application to SEBI for exemption from the mandatory offer requirement for a further 20 per cent of KCIL shares. Skanska AB has also indicated the possibility of the KCIL shareholding being transferred at a later date to an SKAB group entity. In this case, whether an open offer would materialise in the existing framework is unclear.

The ambiguity surrounding such cases has to be removed. SEBI, which is reviewing the Takeover Code, should ensure that any revised code provides some clarity over the way these cases are decided. Over the last three years, there have been many such cases.

So, SEBI should be able to provide a fairly comprehensive view on where the Takeover Code stands vis-a-vis the different types of global-level corporate actions impinging on Indian listed companies. At another level, the series of changes in control on account of the global-level changes without open offers also creates anomalies in the market over corporate control. The cost of growth through the acquisition route is tilted in favour of such cases against takeovers involving Indian acquirers. The entire issue deserves to be examined closely by SEBI to put a clearer framework in place.