Company takeover rules in India are all set to be at par with some of the best global practices with special emphasis on the protection of the interest of the minority shareholders. Paradigm shift towards the international best practices is evident by the move towards an equal exit opportunity for all on equal terms.

The C Achuthan panel on takeover has recommended a complete rewrite of the regulations, which if implemented may make investors happy, but make domestic companies jittery while attempting for mergers and acquisitions.

The recommendations by the Takeover Regulatory Advisory Committee include raising the public offer trigger to 25 per centfrom the existing 15 per cent; obligation on any acquirer to buy out all minority shareholders instead of just 20 per cent; introducing the ability to control concept; doing away with non-compete fees and making mandatory for independent directors of the target company to give their views on the pricing of the offer. These suggestions, if implemented will replace an archaic takeover rule that was amended 23 times in 13 years. Achutan, who was appointed the head of the panel on September 2009, submitted the report to market regulator Securities and Exchange Board of India (SEBI) Chairman C B Bhave on July 19. The regulator will take a decision on implementing the suggestions after receiving public comments till end-August.

"The proposed code is very much in line with international threshold. From a shareholder perspective the 100 per cent limit is good. What is difficult is acquisition cost will rise, funding in open offer will be difficult," said PriceWaterhouseCoopers Executive Director Rekha Bagry.

Funding needs of companies for acquisition are set to soar as buyers will have to make open offer for the entire 100 per cent stake and make arrangements for financing at the time of announcement of the deal. So the deal valuation might come down as cost associated to the merger rises, experts said. With the implementation of the new rules, there will be uneven playing field between Indian and foreign acquirers as Indian banks have certain regulatory restrictions in lending for takeovers.

Experts feel all this hazards would now bring in only serious players on the show.

The panel also recommended that the offer price would be based on the volume weighted average of 12 weeks market price of the target company, against 26 weeks now. For frequently traded shares, 60 day trading volume weighted average market price would be taken into account for calculating the minimum offer price.

"As the markets are moving very fast, taking into account the 26 week average price might not give the right picture. Although it increases the risk of price manipulation in a deal, but taking into account the movement for such a long time would be theoretical,"SMC Capitals Equity Head Jagannadham Thunuguntla said. Experts said the recommendation if put in place would make acquisitions expensive in widely held companies as it has to make offer for all the shareholders.

"The minority shareholders will get an opportunity to exit, but acquisition costs can go up by three-fold and acquirers would have to reconsider their financing arrangements," BMR Advisors Partner Rohit Berry said.

"Hostile takeovers could increase as the acquirer can now bid up to 100 per cent, thereby taking full control of the target firm," Thunuguntla said.

The panel also recommended that the formalities for completion of an open offer be reduced to 57 days, from the current 95 days. In case the acquirer's holding exceeds 90 per cent in the target company, delisting should be triggered automatically.

With this, acquirers can use open offer as a tool to delist the target company. It also made it mandatory for independent directors of the target company to give their views on the offer price, as in US, UK, so that the interest of the minority shareholders is protected. The panel has recommended creeping acquisition of up to 5 per cent shares or voting rights in any financial year after crossing the threshold trigger limit of 25 per cent. In summary, whilst the new takeover code will make takeover far more transparent and fair to minority shareholders, they may become far more expensive and difficult to execute.