What is the impact of changes to India's takeover rules?

A panel of capital markets regulator Securities and Exchange Board of India set the stage on Monday for overhauling the corporate takeover code, potentially making deals more expensive by forcing acquirers to offer to buy all the outstanding shares of a target.

WHAT WILL BE THE IMMEDIATE IMPACT?

With the trigger for the mandatory offer to shareholders raised to 25 percent, the immediate impact would be to increase activity in certain stocks where a major investor's stake is hovering just below 15 percent.

Investors such as private equity and hedge funds would have more headroom to increase their investments in companies.

Cigarettes maker major ITC, which holds 14.98 percent in hotel chain EIH, would be able to raise the stake to 25 percent, if the panel's proposals are accepted. Shares in EIH rose 5 percent on Monday.

Similarly, Malaysia's Petronas holds 14.94 percent in India-focused energy explorer Cairn India, and could therefore lift its stake to 25 percent without triggering a mandatory offer.

HOW WILL THE PROPOSALS IMPACT M&A DEAL FLOW?

The number of takeovers may decline in the near term, as the higher financing required to buy out all shareholders of a target firm deters buyers.

However, the 100 percent mandatory offer rule would also weed out non-serious bidders and restrict the field to those who have deep pockets or the wherewithal to raise the funds. Deal sizes in M&A landscape would rise as a result.

With improving economic and corporate growth prospects, analysts expect M&A and private equity investments to pick up in India. In the first five months of 2010, inbound M&A by value jumped 74 percent from last year, according to Thomson Reuters data.

Under the new rules, scrapping of non-compete fees would bring more transparency to takeovers and ensure the alignment of interests between founders and minority shareholders.

Source: Reuters