Sebi's Bold M&A Shake-up: Small Investors Win Big as New Rules Target Shareholder Perks!

Sebi Plans Overhaul of Merger and Acquisition Rules

India's market regulator, the Securities and Exchange Board of India (Sebi), is set to introduce sweeping changes to its merger and acquisition (M&A) regulations, commonly known as the "takeover code." These proposed reforms aim to create a more equitable environment for all investors, particularly smaller and retail shareholders, and to streamline the deal-making process.

The Core Issue

Sources close to the matter indicate that the primary objective of these revisions is to address past instances where major shareholders received preferential treatment or better deal terms than the public during acquisition processes. This has often led to concerns about fairness and transparency in M&A transactions.

Proposed Reforms

The planned amendments include a significant restriction on acquiring entities. Post the initial open offer to the public, acquirers will be prohibited from negotiating separate deals or offering additional compensation to large shareholders for a period of six months. This is intended to prevent backroom deals that could disadvantage minority investors.

Sebi also intends to accelerate the timeline for completing open offers. The current two-month period for public shareholders to respond to an acquisition offer is proposed to be reduced to just 30 days. This, coupled with faster regulatory clearance mechanisms, is expected to expedite the M&A process.

Furthermore, the regulator plans to introduce mandatory external valuations. This will be applicable when large shareholders engage in private sales of shares to specific parties, ensuring that such transactions are based on objective valuations and not subject to arbitrary pricing.

Market Context and Rationale

These regulatory revisions come at a time when India is experiencing a surge in M&A activity. A recent decision by the Reserve Bank of India permitting domestic banks to finance such deals, alongside rising foreign investment, has created a fertile ground for corporate consolidations and acquisitions in 2025.

Example from Past Transactions

The need for stricter regulations was highlighted by transactions such as the Adani Group's acquisition of a significant stake in New Delhi TV Ltd (NDTV) in December 2022. The group acquired founders Radhika and Prannoy Roy's stake at a premium, 18 days after making an open offer to minority shareholders. While Adani Group later adjusted its offer price for public investors, the incident exposed regulatory gaps that allowed for such preferential deal structuring between large shareholders.

Creeping Acquisition Norms Under Review

Sebi is also re-evaluating its norms related to "creeping acquisitions." Currently, existing investors can increase their stake in listed companies by up to 5% annually without triggering a mandatory open offer. The regulator is considering stricter thresholds, drawing parallels with global markets like Singapore, which caps creeping acquisitions at 1% every six months, and Hong Kong, at 2% annually. Globally, an open offer is typically triggered by acquiring over 25% stake (as in India) or 30% stake (as in the UK).

Impact

These proposed changes are expected to significantly enhance investor protection by ensuring greater transparency and fairness in M&A deals. The accelerated timelines could lead to quicker deal closures, providing more certainty to market participants. However, some market participants might find the restrictions on negotiating with major shareholders and the shorter open offer period challenging. The review of creeping acquisition norms aims to prevent gradual takeovers without adequate public disclosure and offer.

Impact Rating: 8/10

Difficult Terms Explained

• Merger and Acquisition (M&A): The process where companies combine (merger) or one company takes over another (acquisition).
• Takeover Code: Regulations set by Sebi governing the process of acquiring control of a listed company.
• Open Offer: An offer made by an acquirer to buy shares from existing public shareholders of a target company, typically triggered by acquiring a certain percentage of voting rights.
• Minority Shareholders: Shareholders who own a small percentage of a company's shares and thus have limited voting power or influence.
• Creeping Acquisition: A strategy where an investor gradually increases their stake in a company over time without triggering a mandatory open offer, usually by acquiring shares in small tranches within regulatory limits.
• External Valuations: An assessment of a company's worth conducted by an independent third party.