Investors Acquiring Distressed Cos May be Spared Open Offer

Sebi considering lenders' proposal; if approved, it could revive sick cos, resolve banks' stressed asset situation

The rules of acquisition will be tweaked to make it more attractive for investors to acquire distressed companies whose bankers are pushing for a change in management.
Sebi, the Indian capital markets regulator, is considering a proposal to spare such investors from making open offers to the minority shareholders of companies where they take control.

The interests of a defaulting, cash strapped company, it's felt, would be better served if a new promoter spends its resources to infuse capital in reviving the company than paying out to shareholders in an open offer (that is triggered by the takeover code).

“The request (from lenders) is under consideration. We are working on it. It is expected to happen soon.An open offer is not warranted as money is needed by the company,“ a Sebi official told ET.

Banks have had very little success in converting outstanding loans to defaulting companies into equity and selling the shares to more credible investors who chip in fresh capital. The extent of haircut on loans, the background of new promoters and apprehensions of bankers fearing they could be blamed for failing to strike a fair deal have stood in the way of change in the control of distressed companies.

An incentive such as exemption from open offer may not itself be a game changer, but together with the bankruptcy code it could make a difference in handing over fund-starved companies to stronger investors and resolving the stress in banks.

Legal professionals like Kaushik Mukherjee, Partner at BMR Legal, believe that an exemption to open of fer is justified as the new promoter acquiring shares from the lenders would only provide public shareholders exit at a throw away price at which the sick unit is acquired. “It may be more profitable for public shareholders to continue till after a revival to be able to unlock value. An ailing SpiceJet used a different open offer exemp tion route sometime back in relation to its change of control. There, the exemption from open offer was in relation to reconstruction schemes approved by competent authorities,“ said Mukherjee.

Under the present rules, banks which convert loan into equity in taking control of a truant borrower, are not required to make open offer, but investors buying the equity from banks have no such exemption.

Also, companies under BIFR, security enforcement law, Court's arrangement receive automatic exemption from making any open offer. According to Manish Makharia, Partner, Brescon Corporate Advisors, while it is fair to give an exit option to minority shareholders when there is a change in management, one should examine the same in a stress situation from a different perspective as it facilitates a new capable management to regenerate value for everyone.

The market regulator has been cautious in granting such exemption in the past as was evident in the acquisition of Satyam Computer Services where no relief was given to the buyer Tech Mahindra.

But, perhaps, the surge in sticky loans on books of banks and hurdles faced by lenders are driving regulatory authorities to explore more practical solutions. “If distressed companies are not allowed such exemption, banks will not extend funds unless the promoters bring in matching contribution towards equity. If Sebi insists on open offer in such cases, it does not help in the revival as money goes to shareholders and not to the company,“ said RS Loona, managing partner of Alliance Corporate Lawyers and a former Sebi member.

ET VIEW

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A waiver of the open offer rule is a good idea. This will make it easier and quicker for an investor to acquire the promoter's shares, and save the hassle of an open offer that is aimed at providing an exit to existing shareholders. It will cut down the time and costs involved in process involved. But given the high level of debt on the books of banks, which reflect distress that cry out for re-organisation or dissolution, the need is also to swiftly enforce the bankruptcy code for the resolution of corporate distress.

The Economic Times New Delhi,19th September 2016