GENESIS OF TAKEOVER CODE

The concept of takeover emerged in late 19th century in some countries like US, UK etc. when the first wave of mergers and acquisitions started. The genesis of present stage of takeover can be studies in five waves:

1st Merger & Acquisition Wave – 1897-1904 – ”Merging and acquiring for Monopoly”

Underlying factors:

• Technological developments
• Innovations in production process
• Rapid Economic Expansion
• Corporation laws relaxed
• Voluntary code of ethical behavior

Characteristics of 1st wave mergers:

• Horizontal mergers
• Heavy manufacturing industry

Reasons for ending 1st wave:

• Majority of mergers failed – didn’t achieve increase in efficiency
• Economic recession in 1903
• Stock market crash in 1904

2nd Merger & Acquisition Wave – 1916-1929 – ”Merging and acquiring for Oligopoly”

Underlying Factors:

• Post-World War I economic boom
• Technological developments

Characteristics of 2nd wave mergers and acquisitions:

• Produced fewer monopolies, rather oligopolies, vertical mergers, and conglomerates (usually related)
• Used significant proportion of debt to finance deals
• Investment banks played central role in financing (as in 1st wave)

Reasons for ending 2nd wave:

• October 29, 1929 stock market crash
• Great depression

3rd Merger & Acquisition Wave – 1965-1969 – ”Conglomerate Mergers”

Underlying Factors:

• Booming economy
• Rising stock prices
• High interest rates
• Financial manipulations
• Price-earnings game
• Pooling of interests method of accounting

Characteristics of 3rd wave:

• Primarily conglomerate mergers
• Some bidders smaller than targets
• Primarily equity-financed–investment banks did not play central role
• CEOs with vision to create conglomerates

Reasons for ending 3rd wave:

• Market eventually saw through financial manipulations
• Many of conglomerates performed poorly

4th Merger & Acquisition Wave – 1981-1992 – ”The Megamerger”

Underlying Factors:

• Expanding economy
• Technological developments
• International competition
• Deregulation
• Financial innovations
• Investment banking industry much more competitive
• Failure of conglomerates

Characteristics of 4th wave:

• Size and prominence of acquisition targets much greater than before
• Oil and gas industries dominant in early 1980s, while pharmaceuticals most common in late 1980s; airlines and banking also common
• Foreign takeovers became common
• Heavy use of debt to pay for acquisitions
• Junk bonds
• More hostile takeovers
  o Corporate raiders
  o Arbitrageurs
  o Investment banks and law firms active

Reasons for ending 4th wave:
Initiation of policy of industrialisaiton

5th Merger & Acquisition Wave – 1992-till date – ”Strategic restructuring”

Underlying Factors:

• Expanding economy, rising stock prices
• Technological developments
• Globalization
• Deregulation

Characteristics of 5th wave:

• Emphasized longer-term strategy rather than immediate financial gains
• More often financed with equity than debt
• Consolidation in the telecommunications and banking industries
• Legislation
  • Enactment of SEBI Act, 1992
  • Enactment of SEBI (Substantial acquisition of shares and takeover) Regulations, 1992

Merger & Acquisition Trends in Current Scenario

• Uncommon before 1990s, especially hostile takeovers
• Takeovers increasing, despite antitakeover legislation

However, in India it was only in 20th century that the concept of takeover took birth but even then the concept of hostile takeovers was not known to anybody. This concept emerged when Swaraj Paul started efforts to takeover Escorts Ltd. and DCM Ltd. He was the first hostile raider among the raiders of Indian stock market. Although Paul could not succeed in his efforts because the incumbents fend him off by using the technicalities of rules governing non-residents but this created a need for a takeover code.

This need was further accentuated in 1990s when the government initiated the policy of liberalization and globalization which resulted in growth of Indian economy at an increased pace, and it created a highly competitive business environment, which motivated many companies to restructure their corporate strategies by including the tools of mergers and takeovers.

In the meantime, SEBI was established in 1992 as a body corporate under the SEBI Act, 1992 with the main objectives to- i) protect the interest of investors in securities market, and ii) to provide for the orderly development of securities market. Thus while the possibility of takeover of a company through share acquisition is desirable in new competitive business environment for achieving strategic corporate objectives, there has to be well defined regulation so that the interest of all concerned are not jeopardized by sudden takeover threats.

In the light of then present circumstances, the need for some law to regulate takeover was strongly felt. Moreover to achieve its objectives as stated in SEBI Act, 1992, SEBI enacted SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1994 in exercise of powers conferred under section 30 of the Act which laid down a procedure to be followed by an acquirer for acquiring majority shares or controlling in another company, so that process of takeover is carried out in a fair and transparent manner.

Thereafter, these regulations have been amended a number of times to address the changing circumstances and needs of corporate sector. In 1997 SEBI Takeover Code has been rechristened by enacting SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 substituting SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1994.

In September 2009, the Takeover Regulations Advisory Committee (TRAC) under the chairmanship of Mr. C Achuthan was constituted by SEBI with the mandate to examine and review the SEBI (SAST) Regulations, 1997 and to suggest suitable amendments, as deemed fit. Thereafter in June 2010, the Committee came out with the TRAC Report proposing some sweeping changes on critical issues, including the open offer triggering event, offer size, indirect acquisitions, exemptions from open offer obligations, offer price calculations and competing offers which was then open for public comments. After considering the public comments and further to discussion, the report has been modified to the present form i.e. SEBI (SAST) Regulations, 2011 substituting the SEBI (SAST) Regulations, 1997.