India – Takeover Of Publicly Traded Companies: Flashback 2020.

India’s twin achievement of receiving the highest-ever FDI[1] and touching record highs at the bourses[2] occurred in the Financial Year 2020-2021. While the former came about in the first five months of the fiscal year (i.e. during the COVID-19 lockdown), the latter took place near the end of the calendar year 2020.
 

The year 2020 saw unprecedented business disruption due to the pandemic. Many Indian businesses were forced to reorganise and innovate to tackle the pandemic, which also resulted in revaluation of many firms by their acquirers. Cash rich and savvy investors took advantage of this unrivalled opportunity to make acquisitions and investments which is evident from the overall high deal activity in the calendar year 2020, especially in Q4.
 

Sectors such as tourism, hospitality, manufacturing (excluding pharma), commercial real estate, retail and aviation were severely impacted but sectors like technology, pharmaceuticals and healthcare flourished in these difficult times. The calendar year 2020 saw a fair deal of control transactions in the country. Thankfully, due to new regulatory exemptions and government driven bailouts, some major takeovers/buyouts did not require the acquirers to make a tender offer to the public shareholders, thereby reducing cost and time involved in closing such deals. This is the changing face of control deals marked by a rise in the number of stressed asset deals. Consequently, the number of bail out transactions requiring exemptions from routine processes and strict regulatory requirements is becoming the flavour of this unprecedent season.
 

We are sharing with you our two-part analysis viz.  (i) control deals in which exit was offered to public shareholders through the tender offer route in the year 2020[3], under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Regulations), and (ii) key control deals for which no tender offer was required to be made due to regulatory changes and action. We will be sharing a detailed report on such transactions shortly.
 

Part A: Control Deals involving Tender Offers
 

For such category of deals, calendar year 2020 was muted when compared to calendar year 2019 in both number and value terms.
 

Between January and December 2020, the country witnessed as many as 44 tender offers. In terms of value, the pharmaceutical sector shone with tender offers aggregating to INR 2,070 crore. While in absolute terms, the non-banking financial company (NBFC) sector stayed on top with six tender offers. Other sectors that saw high activity were power and power infrastructure, textiles, food processing and chemicals.
 

In 2020, the five biggest tender offers by value were for J.B. Chemicals & Pharmaceuticals Limited (pharmaceutical sector), IndoStar Capital Finance Limited (NBFC sector), ABB Power Products and Systems India Limited (power infrastructure sector), SeQuent Scientific Limited (pharmaceuticals sector) and HealthCare Global Enterprises Limited (healthcare sector). These five offers comprised approximately 82% of the aggregate value of all tender offers in 2020.
 

The following graph shows in number and value terms the tender offers in major sectors in calendar year 2020:
 

Please click on the image to enlarge. 

 

2020 versus 2019
 

Below is a comparative snapshot of key trends of such control transactions for the calendar years 2020 and 2019:

 

Calendar Year	2020	2019
Number of tender offers	44	61
Completed tender offers (tender offers that were launched and completed in the same calendar year)	27	39
Number of direct tender offers	37	58
Number of indirect tender offers	5	3
Number of tender offers made due to breach of 5% creeping acquisition limit	4	7
Total value of tender offers	INR 5,457 crore	INR 22,629 crore
Number of tender offers for NBFCs	6	9
Number of tender offer where underlying transaction was closed before closure of the tender offer	13	8

 

Other significant trends of 2020
 

• Busiest and slowest quarters: The announcement of fifteen (15) tender offers aggregating to INR 670 crore in Q4 of 2020 made it the busiest quarter garnering the least aggregate value of tender offers of the calendar year. While Q2 of 2020 was the quietest with nine (9) tender offers and Q1 of 2020 saw the highest aggregate value of tender offers at INR 2,021 crore.
   

• Foreign vs. Indian acquirers: Non-resident acquirers made eleven (11) tender offers in 2020 at an aggregate value of INR 5,190 crore, which was 95% of the value of all tender offers in this calendar year.
   

• Control deals by financial investors: Certain financial investors remained active in 2020 making tender offers to acquire control. These were Brookfield’s tender offer for IndoStar Capital Finance Limited (NBFC sector), The Carlyle Group’s tender offer for SeQuent Scientific Limited (pharmaceuticals sector), CVC Capital Partners’ tender offer for HealthCare Global Enterprises Limited (healthcare sector), KKR’s tender offer for J.B. Chemicals & Pharmaceuticals Limited (pharmaceuticals sector), Baupost Group’s tender offer for Timex Group India Limited (luxury consumer goods sector) and Fairfax Group’s tender offer for Fairchem Organics Limited (chemical sector).
   

• Voluntary tender offer: IGE (India) Private Limited, one of the promoters of International Conveyors Limited, made a voluntary open offer to the public shareholders under Regulation 6(1) of the Takeover Regulations to consolidate its shareholding.
   

• Independent Valuations: In two tender offers which were completed in 2020, namely, Tenneco Inc’s offer for Federal-Mogul Goetze (India) Limited[4] and Aurora UK Bidco Ltd.’s offer for Accelya Solutions India Limited[5], SEBI exercised its power to appoint independent valuers to value the shares of the target companies. SEBI’s decision for an independent valuation was challenged and upheld in both cases. The acquirers eventually accepted higher valuations and completed the tender offers.
   

• Time taken by SEBI to clear DLOF: The average time taken by SEBI to issue its final observations on the draft letter of offer (DLOF) was approximately 60 days. To issue its final observations, SEBI took anywhere between 20 days (in the case of Aditya Vision Limited) and 181 days (in the case of Beryl Securities Limited), which when compared to 2019 is significantly longer but not surprising in current times.
   

Part B: Changing face of Control Deals
 

In Part B of our earlier blog post of April, 2020[6], we discussed the much-needed ‘Deal Freedom,’ which primarily encompasses two concepts, (i) freedom from pricing regime; and (ii) freedom from tender offer requirement, for encouraging deals in distressed companies. SEBI introduced amendments to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations) and the Takeover Regulations to introduce greater freedom of contracting as a booster shot towards stressed company acquisitions and to ease further capital raising by companies.
 

1. Acquisition of stressed companies – pricing and open offer exemptions 
 

SEBI introduced Regulation 164A in the ICDR Regulations which exempts stressed listed companies from the 26-week pricing regime applicable to preferential allotments and allows such companies to issue shares through preferential allotment to new/incoming promoters at a price linked to 2-week VWAP. Acquisitions which meet the conditions of Regulation 164A are also exempt from the tender offer obligations under the Takeover Regulations[7]. These amendments are beneficial to all stakeholders of companies under extreme financial stress.
 

The takeover of CG Power and Industrial Solutions Limited by the Murugappa Group (through Tube Investments of India Limited) was the first deal completed under these new regulations. This deal took approximately eight (8) months to complete.
 

2. Government driven bailouts
 

 The calendar year 2020 saw the bailout of two publicly traded banks namely, Yes Bank Limited and Laxmi Vilas Bank. Both banks were initially put under moratorium by the Reserve Bank of India and then bailed out pursuant to government notified schemes under Section 45 of the Banking Regulation Act, 1949. A scheme notified under Section 45 has an overriding effect and therefore, the obligations to make a tender offer and follow SEBI pricing regime are not applicable. 
 

The Year Ahead
 

While SEBI introduced positive measures to revive stressed companies, there is a need for the government/ regulators to introduce measures to ring fence the incoming promoters from actions of pervious management. We propose that all acquirers who are acquiring controlling stake in stressed companies under Regulation 164A of the ICDR Regulations should be offered immunity from liabilities arising out of actions of the previous management. Also, the 2-week pricing regime is not particularly helpful as any rumor of potential control transaction may also make the 2-week VWAP a thoroughly unacceptable proposition. Since such deals will be hard fought battles with the lenders who will not agree to any random pricing for change in control, fixing the price for the deal should be purely a matter of negotiation and contract and not part of a pricing regime.
 

In the year 2021, we are likely to see an uptick in the takeover of stressed assets. Therefore, ring-fencing measures and freedom of contracting will encourage more acquirers (especially, the PE funds) to do such deals.
 

*The authors were assisted by Arnav Shah, Principal Associate and Ananya Pandit, Associate

 

 

For further information, please contact:

 

Cyril Shroff, Managing Partner, Cyril Amarchand Mangaldas

cyril.shroff@cyrilshroff.com 

 

[1] Based on public announcements for open offers available on SEBI website as on January 3, 2020.

 

 [1] https://economictimes.indiatimes.com/news/economy/finance/india-receives-highest-ever-fdi-in-apr-aug-fy21-government/articleshow/78773388.cms?from=mdr

[2] https://www.reuters.com/article/india-stocks/indian-shares-hit-record-high-as-country-approves-covid-19-vaccines-idUSL4N2JF11G

[3] Based on public announcements for tender offers available on SEBI website as on January 4, 2021.

[4] The tender offer was announced on April 16, 2018.

[5] The tender offer was announced on November 19, 2019.

[6] https://corporate.cyrilamarchandblogs.com/2020/04/control-premium-analysis-of-recent-top-deals-and-what-2020-is-likely-to-see/

[7] Even the existing promoters have been given certain exemptions from the creeping acquisition limits under Takeover Regulations but we are not dealing with the same in this blog.