Hostile Takeover History in India

The Indian economy opened up in the year 1991 and the liberalization reforms opened the doors for more foreign players which in turn led to more aggressive strategies. India has seen very less M&A activity prior to the 90’s due to prevalence of the anarchic laws and regulations like MRTP Act, FERA, the licensing regime.  Indian government opening the doors to the foreign players during the economic reforms under the prime ministership of P.V Narasimha Rao led to the inflow of more foreign funds. The policy of decontrol and liberalization practiced by the government during 1991-96 had exposed the corporate sector to severe domestic and global competition.

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The new government policies led to restructuring of existing leading Indian business conglomerates with most divesting themselves from their non-core business and concentrating on their flagship and core competence areas. The early years have seen a lot of M&A activity both inbound and outbound. The $13.2 billion buyout of England based Corus Steel Indian conglomerate TATA and the $11.1 billion buyout of India based HutchissonEssar telecom by England based Vodafone are two of the few landmark M&A acquisitions that dominated the news headlines across the world.

As mentioned earlier the increased activity in Indian business houses also led to the coporate restructuring of the existing businesses. To name a few the types of Corporate restructuring are: i) Mergers & Acquisitions, ii)  Leveraged Buyout, iv) Spin offs, v) Hostile Takeovers, etc.  In the Indian context while the first four are common, hostile takeovers are rare and are often seen as undemocratic and unethical way of taking over a company.

Acquisition refers to the process in which a person or firm acquires controlling interest in another firm. Acquisition can be friendly or hostile. An acquisition can either be friendly or hostile. Where the management of the target company or controlling group sells its controlling shares to another group at its accord is termed as friendly takeover.  Where the management of the target company is unwilling to negotiate and contact a prospective acquirer, and such a prospective acquirer approaches the shareholders of the target company by making an open offer. Such acquisition is termed as a known as Hostile takeover.

In India the acquisition of all listed companies shall abide to the SEBI Regulation for Substantial Acquisition of Shares and Takeover’ (most popularly known as Takeover code) The takeover regulations first came into force in the year 1997 with SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (“1997 Code”), the 1997 code was replaced in the year with SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“2011 Code”).

Hostile Takeovers in India: The History

In 1982, Lord Swaraj Paul, then a young corporate executive had launched well-publicised stock market raids on two of India’s leading firms – Delhi Cloth Mills (DCM) and Escorts Ltd. The Bharat Ram family the promoters of DCM owned about 10 per cent of the stock at that time, while the Nanda family the promoters of escorts Ltd had a 5 per cent share in Escorts. The low percentage of shares held by the promoters gave Paul a chance to take over the board by simply buying more shares than the original promoters. The aggressive campaign by Paul to takeover leading Indian businesses shocked the Indian community.

Hectic lobbying prevailed and after several anxious months, Paul backed out. It later emerged that it was only after Vivek Bharat Ram of DCM requested Rajiv Gandhi to intercede (the two had studied together at the Doon School in Dehra Dun) that Paul let go of Escorts and DCM.[1] Later in the year, 1986 Supreme Court gave verdict in the favor of existing promoters and asked the Reserve Bank of India (RBI) to check once again that the investments had been made in accordance with legal requirements.[2] Towards the end of 1986 the shares were registered in the name of Paul and his entities, while Paul announced his reluctance to takeover the companies abiding to his earlier announcement of pulling out of India.

Raasi Cements – Sri Vishnu Cements – India Cements Saga: India Cements is a South based cement manufacturing company, then with 6 plants in the Southern states, while Raasi Cements and Sri Vishnu Cements are group companies with corporate headquarters based in Hyderabad. N. Srinivasan the promoter of India Cements Ltd made an open offer for RCL shares at Rs. 300 per share[3] at the time when the share price on the Stock Exchange, Mumbai (“BSE”) was around Rs. 100.  The open offer announcement led to skyrocketing of Raasi scrip which led to freezing of the shares at Rs 188.30 when it hit the circuit-breaker on the National Stock Exchange.[4]

Towards the end ICL in total bought out 85% of the shareholding.  As a twist in the plot BV Raju and NKP Raju, the promoters of Raasi Cements  transferred 39.5% stake of Shri Vishnu Cement Limited (“SVCL”), which was an subsidiary of RCL, to nine investment companies owned by Raju and his family barely days after the purchase by ICL of Raju’s shares in RCL.[5] This was in violation of Regulation 23(1) (g) of the 1997 Takeover Code, which prohibits a target company from transferring its significant assets after a public announcement has been made by the acquirer to make an open offer for purchase of shares from the public.  SEBI the market watchdog held that the transfer of SVC shares was not valid. The matter was finally sorted out of court through a negotiated deal by which Raju’s associates sold their shares of SVCL to ICL.[6] To date this is the only successful hostile acquisition in India.

Gesco Corporation: In October 2000 Abhishek Dalmia led New Delhi-based real estate firm Renaissance Estates Ltd, made an open offer to acquire 45% of the share capital in Gesco Corporation.at Rs. 23 per share.  The offer price was raised to Rs. 27 with a revised target of 55% stake in the company.  Sheths, the promoters in the fear of losing the company approached Anand Mahindra’s Mahindra Realty and Infrastructure Developers (MRID) to make a counter-offer of Rs 36 per share agaisnt Dalmia offer of Rs 27. The drama of offer and counter offer continued for some time.[7] Towards the end of January 2001 the combine of Sheths-Mahindras and the Dalmia group announced the end of the war, with the combine buying out the Dalmias’ 10.5% stake at Rs 54 per share. Following the deal, the combine’s stake of promoters in Gesco Corp went up close to 30% (MRID 17% and the Sheths 13%).

The Takeover Regime under SEBI

The SEBI takeover code is in no way acts as a barrier to a hostile acquisition while it actually paves way for open offers.  The code in its present form provides for creeping acquisition limits which in turn creates a mechanism by which hostile takeovers can be accomplished, while securing the shareholders interest. . The Takeover Code is required to be read with the SEBI (Disclosure & Investor Protection) Guidelines 2000 (“DIP Guidelines”), which are the nodal regulations for the methods and terms of issue of shares/warrants by a listed Indian company.[8] The DIP guidelines imposed several restrictions on the preferential allotment of shares and/or the issuance of share warrants by a listed company. However, the guidelines were replaced with more stringent SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.

Defenses against Hostile Takeovers

Over the period of time companies have developed various strategies to combat a hostile takeover by a rival. To name, few such strategies are: i) Pac-Man Defense, ii) Staggered Board iii) Golden Parachute, iv) Poisson Pills, etc. The strategies are often referred as Shark repellants as they are intended to fend of acquirers by making the target company a less feisty target.

Poison Pills

This is the most popular and effective defense to combat the hostile takeovers. Using this method the target company gives existing shareholders the right to buy stock at a price lower than the prevailing market price if a hostile acquirer purchases more than a predetermined amount of the target company’s stock.[9] The purpose of this move is to devalue the stock worth of the target company and dilute the percentage of the target company equity owned by the hostile acquirer to an extent that makes any further acquisition prohibitively expensive for the predator.

Poison pills are primarily of two types: – A ‘’flip-in’’ strategy which allows the existing shareholders (excluding the acquirer) to buy more shares in the target company at a discount, upon the mere accumulation of a specified percentage of stock by a potential acquirer. By purchasing the shares cheaply, investors get instant profits and, more importantly dilute the shares held by the competitors.  As a result of flip-in the predator’s takeover attempt is made more difficult and less lucrative.

In the year 2009, Internet major Yahoo! adopted this form of strategy permitting the board to issue upto 10 million shares on new stock in the event of an hostile acquisition.[10] In addition every director of Yahoo has to cash in all of their outstanding stock options which amounted to about 16 million potential new shares. This defence made it practically impossible for possible acquirers like Microsoft to proceed with a hostile bid once Yahoo! expressed its unwillingness towards the offer of Microsoft and ultimately resulting in the withdrawal of the same.

A ‘’flip-over’’ is another form of passion pill strategy which permits the existing shareholders to buy the predator’s  shares at a discounted price after the merger.The pill gets triggered when an acquirer crosses a threshold level of shareholding (for example 20%) or makes a bid for a certain amount of shareholding. At this point, the shareholders, other than the acquirer, get a right to buy shares at a deep discount in the merged / surviving entity after the merger.[11] This right is exercisable only on the merger of the target with the acquiring firm. This pill releases its poison when the acquiring firm acquires all the shares of the target firm and merges with it. The result of flip-over pill is that the wealth from the shareholders of the acquiring firm is transferred to the shareholders of the target firm.

The board of directors can adopt a poison pill at any time in anticipation of a hostile bid or have one prepared and kept ready to be adopted when a hostile bid is announced. They can also suspend the application of the pill in case of a friendly takeover. So the poison pill acts selectively at the discretion of the The holders of common stock of a company receive one right for each share held, bearing a set expiration date and no voting power. In the event of an unwelcome bid, the rights begin trading separately from the shares. If the bid is successful, all shareholders except the acquirer can exercise the right to purchase shares of the merged entity at discount.

For instance, a shareholders and share purchase agreement can contain a clause that the shareholders have the right to purchase stock of the acquirer on a 2-for-1 basis in any subsequent merger. Such a right may result in significant dilution in the shareholdings of the acquirer which in turn makes the takeover expensive and sometimes frustrates it[12]. The defences related to the classic version of poison pills include poison debt , put rights plan , voting poison pill plan , macaroni defenceetc to name a few.

An Indian version of Poisson Pill is devised by the Indian conglomerate Tata’s which is often referred as a ‘Brand Pill’.  Tata group companies have a brand licensing agreement with the holding company and owner of Tata brand, the Tata Sons whereby any hostile (or otherwise) acquirer of any of the Tata entities is not permitted to make use of the established Tata brand name. Consequently, the bidder in a hostile takeover has to change the name of the company immediately after the takeover thereby losing the much valued brand name which may in turn result in loss of valuation.[13]

Pac-Man Defense

The Pac-Man defense is a defensive business strategy used to stave off a hostile takeover, in which a company that is threatened with a hostile takeover “turns the tables” by attempting to acquire its would-be buyer.[14]  Further The Pac-Man defense is an expensive strategy that may increase debts for the target company which in turn may result in losses or lower dividends in future years.[15]

Staggered Board

A staggered board of directors is a practice in which groups of directors are elected at different times for multiyear terms.[16] In the presence of a staggered board, a hostile bidder must wait several years to entirely replace the board with one of its own choosing, particularly because it must win proxy fights at successive shareholder meetings[17]

Golden Parachute

A golden parachute consists of substantial benefits given to top executives if the company is taken over by another firm and the executives are terminated as a result of the merger or takeover.[18]  Golden parachute clauses are present in the employment contracts as any other employment related clauses. The clauses result in a hefty pay to the executives in the event of termination of their jobs resulting out of a hostile takeover. Such a strategy makes it less lucrative for the predator to continue with the acquisition.

In India of recently, Golden parachute clauses are included in the employment contracts of CXO level employees.[19]

Hostile Takeovers in India: Way Forward

Even after 25 years since opening up our economy it can be said that the Indian corporate world has not seen major hostile take overs. The current Takeover Code – the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, read with amendments in 2013 – is modelled towards the progressive U.K. City Code on Takeovers which promotes hostile takeovers through a ‘no frustration’ doctrine, and not the U.S. code which is more aligned to protect entrenched managements.[20]  India’s first Takeover Code was released in the year 1994, and then a modified version in the year 1997 followed by 2011 which brought in many progressive features. Despite the regulations not in opposition of hostile takeovers India has seen only one successful hostile take over viz., the acquisition the Raasi Cements by India Cements Limited way back in the year 1998. Despite significant advances in the regulatory framework, the minority shareholder in listed entities still continues to remain at the whims and fancies of the controlling shareholder group. The regulations should be more progressive and should support the honest risk takers while still protecting the rights of the shareholders. UdayKotak, the veteran Indian banker is totally correct in publicly saying that the time had come for hostile takeovers in the country.[21]

[1]Bhandari, B., 2014. 40 Years Ago… And now: Escorts – Fending off a hostile takeover and surviving a family split. Business Standard. Available at: http://www.business-standard.com/article/companies/40-years-ago-and-now-escorts-fending-off-a-hostile-takeover-and-surviving-a-family-split-114110500008_1.html [Accessed April 7, 2018].

[2]Ninan, T.N., 1986. Supreme Court, RBI giveSwraj Paul clean chit in Escorts, DCM share cases. India Today. Available at: https://www.indiatoday.in/magazine/economy/story/19860415-supreme-court-rbi-give-swraj-paul-clean-chit-in-escorts-dcm-share-cases-800784-1986-04-15  [Accessed April 7, 2018].

[3]Anon, 1998. India Cements makes open offer for Raasi .Indian Express. Available at: http://expressindia.indianexpress.com/fe/daily/19980227/05855424.html [Accessed April 1, 2018].

[4]Anon, 1998. India Cements makes open offer for Raasi .Indian Express. Available at: http://expressindia.indianexpress.com/fe/daily/19980227/05855424.html [Accessed April 1, 2018].

[5]Anon, India has experienced only a handful of hostile takeover attempts. Law Teacher. Available at: https://www.lawteacher.net/free-law-essays/business-law/india-has-experienced-only-a-handful-of-hostile-takeover-attempts-business-law-essay.php [Accessed April 7, 2018].

[6]Anon, 1997. India Cements buys out Raju in Sri Vishnu Cement for Rs 115 cr. Indian Express. Available at: http://expressindia.indianexpress.com/fe/daily/19991028/fco28053.html [Accessed April 1, 2018].

[7]The Tug of War over Gesco Corporation. Case Studies | Case Study in Business, Management, Operations, Strategy, Marketing, Finance, Corporate Governance, Economics, Project Management, Insurence, Free Management Case Study, Case Study. Available at: http://www.icmrindia.org/casestudies/catalogue/Business Ethics/The Tug of War over Gesco Corporation.htm [Accessed April 02, 2018].

[8]Anon, English and US law on takeover defences. Law Teacher. Available at: https://www.lawteacher.net/free-law-essays/business-law/english-and-us-law-on-takeover-defences-business-law-essay.php [Accessed April 01, 2018].

[9]Anon, Combating Hostile Takeovers.Combating Hostile Takeovers in India. Available at: http://www.legalserviceindia.com/article/l274-Combating-Hostile-Takeovers.html [Accessed April 01, 2018].

[10]Davies, M., 2008. Yahoo has poison pill defense at disposal. Reuters. Available at: https://www.reuters.com/article/us-yahoo-microsoft-pill/yahoo-has-poison-pill-defense-at-disposal-idUSN0143636120080202 [Accessed April 7, 2018].

[11]D.L, S., 2013. The Controversial ‘Poison Pill’ Takeover Defense: How valid are the Arguments in Support of it? NMIMS Management Review, pp.47–66.

[12]D.L, S., 2013. The Controversial ‘Poison Pill’ Takeover Defense: How valid are the Arguments in Support of it? NMIMS Management Review, pp.47–66.

[13]Luthra, R.K., 2008. Can India Inc swallow the ‘poison pill’? .Economic Times. Available at: https://economictimes.indiatimes.com/view-point/can-india-inc-swallow-the-poison-pill/articleshow/3051566.cms [Accessed April 01, 2018].

[14]Anon, 2018.Pac-Man defense.Wikipedia. Available at: https://en.wikipedia.org/wiki/Pac-Man_defense [Accessed April 02, 2018].

[15]Anon. 2007.Pac-Man Defense.Investopedia. Available at: https://www.investopedia.com/terms/p/pac-man-defense.asp [Accessed April 01, 2018].

[16]Huntsley, I., 2018. Corporate Takeover Defense: A Shareholder’s Perspective. Investopedia. Available at: https://www.investopedia.com/articles/stocks/08/corporate-takeover-defense.asp#ixzz5BdATTvPt [Accessed April 01, 2018].

[17]Anon, Staggered Board .Lexicon. Available at: http://lexicon.ft.com/Term?term=staggered-board [Accessed April 01, 2018].

[18]Anon, 2015.Golden Parachute.Investopedia. Available at: https://www.investopedia.com/terms/g/goldenparachute.asp#ixzz5BdBbRLGQ [Accessed April 01, 2018].

[19]Anon, 2017. Golden parachutes start to land in Indian tech CXO contracts – ETtech. ETtech.com. Available at: https://tech.economictimes.indiatimes.com/news/corporate/golden-parachutes-start-to-land-in-indian-tech-cxo-contracts/57216634 [Accessed April 01, 2018].

[20]Roy, P.B., Is India Ready For Hostile Takeovers? Bloomberg Quint. Available at: https://www.bloombergquint.com/opinion/2017/03/29/is-india-ready-for-hostile-takeovers [Accessed April 01, 2018].

[21]Anon, Maybe it’s time for hostile takeovers; govt must back honest risks: UdayKotak. Moneycontrol. Available at: https://www.moneycontrol.com/news/business/economy/maybe-its-time-for-hostile-takeovers-govt-must-back-honest-risks-uday-kotak-2244285.html [Accessed April 01, 2018].