Competing Offers: On TRAC?

Let's start with the TRAC'S recommendation to shorten open offer timelines. The committee has proposed that a competing bid must be made within 15 business days of the first open offer public announcement, as opposed to the existing 21 calendar day period. Competing offers will open and close on the same day- unlike current regulations, in which the first offer period can be longer provided that both offers close on the same day. In addition, open offers will remain open for 10 days, and not 20 days, as is the case today. These proposals that are acceptable to most lawyers I spoke with.

But the more important proposal is to limit the time available for companies to revise their offer price

Rewind to last year's Bharati Shipyard versus ABG Shipyard battle for control of Great Offshore.

Both bidders revised their offer price 3 times each over 3 months. Finally, the day before the offer opened, Bharati announced a final price of 590 rupees per share and won the bidding war.

The TRAC proposes to disallow that. It says that companies should only be allowed to revise the offer price up until 3 days prior to the commencement of the open offer

Amrish Shah, Partner, EY

The public at large will have a lot of information upfront available rather than the current scenario where you could revise the price upwards even when your open offer period was on. And that would create confusion... what if I've already submitted before?

Arindam Ghosh, Partner, Khaitan & Co

The bidder will know, I have to come up with the best price within these three days. If I don't do it, the other person will get it. I don't have a second chance then. Both are put on the same pedestal. Both will come up with their best and the shareholders should then benefit from that

Shareholders may also stand to benefit from some guidance from independent directors of the target company.

The TRAC suggests that independent directors must evaluate the merits and demerits of all competing offers and after consultation with external advisors, make a 'reasoned recommendation' to the shareholders of the target.

Amrish Shah, Partner, EY

We will see independent directors relying on the judgment of experts in this field in terms of evaluation of price. But how do you evaluate a management is going to be a key question? Take an example, if someone is quoting 100 and is a much better management compared to someone else who's quoting 110 but cannot be compared in terms of management bandwidth, how does one react to that scenario?

Sourav Mallik, Member, TRAC and ED at Kotak Investment Banking

These are not easy decisions to make, but it is that much more difficult for the lay shareholder to make it. At least if the independent directors put their thoughts together it is a collective body of people who would have thought through what the implications are and put that succinctly in front of the shareholder.

Speaking of directors, the TRAC has prohibited the nomination of directors onto a company's board during competing offers

Currently, the Takeover Regulations say that an acquirer can nominate a director on the target's board provided he has deposited the full offer amount in an escrow account and only after the 15 day window for competing offers has closed.

This provision became the cause of much controversy in the battle for Fame India earlier this year. Days after Inox made the first move, Reliance Mediaworks made a competing offer for Fame. A week later Fame appointed 3 new directors on board, two of whom were also directors on board Inox. Reliance objected to the market regulator and the case has been pending with SEBI ever since. The TRAC now makes it clear that no change to the constitution of the board is allowed during the period of competing offers

Sourav Mallik, Member, TRAC, and ED at Kotak Investment Banking

If there are no competing offers, definitely you can go ahead and appoint people on the board. But if there is a set of competing offers then the board should really not be changed. And casual vacancies that may occur should not be allowed to be filled because then the person who is in control has a better ability to appoint people on the board by filling up casual vacancies

And finally, the TRAC gives losers a winning exit opportunity. 
Remember the Bharati versus ABG battle for Great Offshore? Bharati offered 590, ABG 520. The day before the two competing bids opened ABG exited the race by selling its previously acquired 8.27% Great Offshore stake to another investor group. But thanks to its open offer ABG acquired another 15.2% and is still stuck with a third of that. To allow for smoother exits, the TRAC now proposes that the losing acquirer be permitted to sell his shares to the competing acquirer within 21 days of the offer closure, without triggering the Takeover Code

Raj Balakrishnan, Member TRAC and, MD-M&A, DSP Merrill Lynch

Even if you've made a bid at say 100 rupees and someone else is at 105 you might end up getting some shares. And if you end up getting those shares, those you would not be able to tender during the offer period of the winning bidder. And the situation where you have had a 100% offer, and there is someone stuck with a large minority, which would be relatively illiquid, would not, we felt, in the interest of the company and the shareholders at large.

Arindam Ghosh, Partner, Khaitan & Co

You don't need two acquirers who don't see eye to eye on the board of a company or running the company. So in the best interests of the target company it is desirable that one of the acquirers say, here's my stake and you go ahead and run it your way, I don't want to get into your way. So it's a happy situation for everyone.

Well, at least for most people. Although the TRAC report does go some distance in making the competing bid process simpler and more equitable, most experts are still wary of how this process will be impacted by the 100% open offer requirement. Clearly, in a foreign acquirer versus Indian acquirer situation the foreign acquirer's financing ability would work against the Indian competitor. But considering that competing bids in India haven't been particularly common-maybe India INC will just cross that bridge is when they come to it. In Mumbai Isha Dalal