Is India ready for principle-based regulation?

The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (the takeover code), was notified by SEBI in order to prevent actions that are detrimental to the interests of minority shareholders of companies. The takeover code requires that a fair chance be given to shareholders to exit a company in case of management changes. Ideally, the shareholders (especially the minority shareholders) should have a say in determining whether any corporate action (including a takeover) is in the best interest of the company.

Kraft Food’s offer to acquire Cadbury shows differences between the US and UK systems with regard to shareholder rights in the case of a takeover offer. While the UK is principle-based, the US is rule-based in its approach, allowing companies to adopt anti-takeover strategies including “poison pills” and “crown jewel sales”. By contrast, such “frustrating action” is prohibited in the UK by the principle that a company cannot take any action which results in a bonafide possible offer being thwarted, without gaining shareholders’ approval.

The first, limited attempt at regulating takeovers in India was made in 1984 with the incorporation of clause 40 in the listing agreement. Clause 40 contained a rule stating that a public offer must be made to the shareholders if any person acquired 25% or more of voting rights of the company. But the clause was easily circumvented and its purpose frustrated by acquirers using the simple strategy of acquiring direct voting rights to a maximum a little below the threshold limit. In addition, there was no restriction on the level of indirect participation.

H Jayesh is the founder partner and Prachi Loona is an associate at Juris Corp. The firm is a full-service law firm based in Mumbai and specializes in financial transactions including capital markets and securities, banking, corporate restructuring and derivatives.