On right track

The  report of the Takeover Regulations Advisory Committee (TRAC), which was appointed to review the existing regulations pertaining to acquisitions and takeovers in the corporate world, has made a number of welcome recommendations. The existing regulations, framed  in 1997 and subsequently added to or amended, have become unwieldy and complicated and, more importantly, needed updating in view of the changes that have since taken place in the economy and the corporate world. The committee has done well to present an entirely new takeover code rather than propose changes in the existing one. It is simpler, more in conformity with the best international corporate norms and reflect the need for a more transparent and mature corporate culture and practices.

Two important recommendations are for increasing the threshold limit of shares – the size of the holding that will trigger off an open offer--  from 15 to 25 per cent and to make an open offer not just for 20 per cent, as at present, but for 100 per cent of the targeted company’s equity. The first provision will make takeover bids more serious and the second will help small shareholders who usually get a raw deal when companies are taken over now. The provision for buying out all shares in an open offer will give equal opportunity to all shareholders to benefit from the offer. This and the increase in the threshold limit will make takeovers much more expensive and make acquisitions serious business. There are more funds available now, internationally and domestically for an intending acquirer. If takeovers can be effected without high financial stakes, they can happen frequently in these times when raising capital is not difficult. But the minority and small shareholders are often shortchanged in the process.

When the takeover process is transparent and simple, companies stand better chances of getting correct valuations.  The proposal to involve independent directors of the company and the whole board in the takeover process will make the exercise open and is in keeping with the the best norms of corporate governance. With the remarkable growth of the corporate sector which makes many companies attractive takeover targets, a fair and equitable set of rules are needed to regulate the process. The TRAC report seeks to provide an adequate framework for such regulations, and they are both practical and based on principles.

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