Wednesday, December 16, 2015
Varottil on Securities Regulation in India
Umakanth Varottil has posted The Nature of the Market for Corporate Control in India on SSRN with the following abstract:
Given its deep and liquid stock markets, India presents a favourable environment for public takeovers. In order to develop and regulate takeover activity, India’s securities regulator the Securities and Exchange Board of India (SEBI) has enacted specific regulations. While at a broad level these regulations appear to attribute their origins to the United Kingdom (UK) and other countries that have adopted the UK model or its variants, I argue in this paper that takeover regulation in India bears fundamental differences and unique characteristics that have necessitated special treatment.
Due to the prevalence of concentrated shareholdings in Indian companies, the incidence of hostile takeovers has been negligible. While SEBI’s takeover regulations do not confer much power to the target’s board to set up takeover defences, the nature of concentration of shareholdings and other factors offer sufficient protection to incumbent shareholders and managements against corporate raiders. Hence, substantial attention in India is focused on the mandatory bid rule (MBR), which operates to grant equality of treatment to minority shareholders by conferring them an exit option in case of a change in control. India’s takeover regulations are arguably stringent in implementing the MBR. This impedes value-enhancing takeovers unless they are effected with the concurrence of the controlling shareholders, who could potentially block them.
Added to this, India’s takeover regulations confer benefits on incumbents that would impede a market for corporate control in the conventional sense. For example, promoters can take advantage of creeping acquisition limits, and also certain exemptions from the MBR when they enhance their positions in the company. Hence, while the takeover regulation overtly appears designed to engender a market for corporate control, its operation coupled with the corporate structure and culture in India attenuate the possibility of takeovers.
Relying upon the political economy of takeover regulation, and more specifically the interest group theory, my goal in this paper is to demonstrate the influence of promoters in shaping India’s takeover regulation. I seek to do so both analytically and empirically. While the Indian markets have witnessed a constant stream of takeovers, they are almost entirely organized changes of control in a friendly manner that trigger the MBR. Voluntary, unsolicited offers that are common in the more developed markets are miniscule in number in India.