Hostile Takeovers In The Subcontinent Of India - Rarity Or Prevalence
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Category: General Law
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HOSTILE TAKEOVERS IN THE SUBCONTINENT OF INDIA:
RARITY OR PREVALENCE?
Arihant Jain & Aditya J. Hiremath, O.P Jindal Global University
ABSTRACT
This research paper explores the phenomenon of hostile takeovers within the Indian corporate landscape, aiming to determine whether they are a rarity or a more prevalent occurrence. Initiated by a discussion in a Company Law class at Jindal Global Law School, the study delves into the concept of hostile takeovers, contrasting them with friendly takeovers where consent of the target company's board is obtained. The paper conducts a thorough literature review, examines statutory mandates such as the Companies Act 2013 and SEBI Regulations, and analyzes notable case precedents to illustrate the regulatory and practical aspects of hostile takeovers in India.
The analysis reveals that while hostile takeovers are relatively infrequent in India, notable instances such as the Reliance Industries' attempt on L&T Finance and L&T's acquisition of Mindtree underscore their occurrence and the legal complexities involved. Factors contributing to the rarity of hostile takeovers include concentrated shareholding structures, regulatory safeguards protecting minority shareholders, and cultural preferences for negotiated acquisitions. The paper concludes that despite these challenges, hostile takeovers remain feasible through strategic planning, shareholder engagement, and adherence to evolving legal frameworks. The study underscores the evolving nature of corporate governance in India and suggests avenues for future research in corporate finance and governance.
1. Introduction
As students of Law, one must question everything. In the class of 22’ JGLS, there were two students, the authors of this paper, who attended their first lecture of Company Law and were instantly mesmerised by the diverse mechanism of the ‘juristic person’. During the class, began a discussion on transfer of shares to which the students mentioned a nomenclature, ‘Hostile Takeover’ as they had heard the term during their binge-watching sessions of various courtroom dramas. The professor however, questioned that, in India there are not many cases of hostile takeover, are there? That was the initiation of this research paper. As iterated, one must question everything, thus the objective of this paper is to answer the questions, what in-fact is a hostile takeover? What is the current Indian position regarding the concept and does it actually occur in the Indian Business World?
This paper shall cover literature review, statutory mandates, case references and an analytical investigation to answer these questions and to draw out a study in respect of ‘Hostile takeover’.
2. Literature review
i) Friendly takeover “Friendly takeover is done with the consent of the target company. In friendly takeover there is a formal agreement between the management of two companies through negotiation. Both the parties voluntarily agrees for the takeover and they go through certain negotiations. Hence this type of takeover is also known as Negotiation takeover.” A friendly takeover thus, pertains the question of due consent and approval garnered from the
board of directors regarding an acquisition. An important characteristic element of such a takeover is negotiation, where-In the parties through a series of discussions reach a consensus upon the terms and conditions of such take-over. The negotiations may relate to a number of things ranging from, compensation to control paradigm. This combination of an amicable settlement which is mutually decided upon with valid consent and approval is the element which lacks in the case of a hostile take-over. ii) Hostile Takeover
“A hostile takeover is a type of acquisition where a company (the acquirer) takes control of another company (the target company) without the approval or consent of the target company's board of directors. In other words, the target company's management is not in favour of the takeover, hence the term "hostile".”1 Thus, in layman terms, when the word hostility is used in conjunction with the word ‘takeover’ it relates to the fact that the acquisition of the company was done without the approval of the board members and they stand opposed.
3. Statutory mandates in India
The concept of hostile takeover is not explicitly broached upon in The Companies Act 2013 however certain sections exist which do touch upon it, both in The Companies Act, 2013 and other regulatory frameworks. i) The Companies Act, 2013 Section 235 of the statute – “Power to acquire shares of shareholders dissenting from scheme or contract approved by majority” has given the power to the tribunals in certain cases of oppression by the majority shareholders which can be invoked if the transaction which took place is curtailing the rights of the minority shareholders. ii) SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 “SEBI regulations also play a key role in regulating hostile takeovers in India.
The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 provide a framework for the acquisition of shares and control of companies through hostile takeovers. These regulations require the acquiring company to make an open offer to the shareholders of the target company once they have acquired a substantial stake in the target company. ”2 iii) Other statutes 1 taxguru_in & Kaustav Chattopadhyay, Understanding Hostile Takeovers: Prevention and Types – A Guide, TAXGURU (2023), https://taxguru. in/company-law/understanding-hostile-takeovers-prevention-and-types. html (last visited Jul 9, 2024).
2 Hostile Takeovers in India: Legal and Regulatory Challenges – The Legal Affair, (Mar. 9, 2023),
https://thelegalaffair.com/hostile-takeovers-in-india-legal-and-regulatory-challenges/ (last visited Sep 30, 2023).
“Other applicable laws and regulations include the Competition Act, which governs mergers and acquisitions in India, and the Foreign Exchange Management Act, which regulates foreign investment in Indian companies.” Which act as a regulatory and procedural guideline while dealing with the transfer of ownership”3
4. Precedence
Upon a thorough reading of the statutory mandates it is clear that when the acquisition of a company takes place, the Indian jurisprudence is to mainly two part, where firstly, the acquisition should be valued at a fair price and secondly, the minority shareholders’ right should be safeguarded. These frameworks put forth a solid foundation into our understanding as to why the incidents are rare in the Indian business world but they still occur. This section shall elaborate the Indian incidents of hostile take-over and how they circumvented the provisions. Hostile takeovers are relatively rare in the Indian market however some of the top cases of hostile takeovers in India are mentioned below. i) hostile takeover attempt on L&T Finance by Reliance Industries Limited in 2011. Without L&T's consent, the former bought a 14.
98% share in the company that belongs to the engineering conglomerate. To stop the acquisition of L&T Finance, the two businesses engaged in a protracted court battle. ii) Another example of a hostile takeover in India was Mahindra Tech's acquisition of Satyam Computer Services. The former was embroiled in significant fraud problems, and Mahindra Tech had taken over the business to win back investor trust. iii) Gautam Adani's acquisition of the New Delhi Television Ltd. (NDTV) news station as a "hostile takeover" and it has come as a great shock to the viewers. This is so that it is clear that there was no "discussion, consent, or notice" about the news channel's assertion that 29. 18% of NDTV had been acquired.
3 Id.
Adani, the wealthiest man in Asia, began a hostile takeover of media behemoth NDTV by first acquiring an indirect 29. 18% holding in the broadcaster and then making an offer to buy out a second 26% controlling stake. According to NDTV, the debt was turned into equity without the founders' or the business's consent. This will be the most prominent investment made by the ports-to-energy firm in the media space, where Mukesh Ambani already has a sizable presence through Network18, which broadcasts a variety of channels, including the business channel CNBC-TV18 and the news station CNN-News18. Quintillion Business Media Pvt Ltd (QBM), a digital business news portal, was purchased by Adani Media Ventures Ltd (AMVL), the media division of the group's flagship Adani Enterprises Ltd (AEL). he issue of "hostile takeover" in the Indian corporate sector has once again come to light.
iv) “This is one of the classic examples of a hostile takeover in the Indian business industry resulting in the ultimate acquisition of the traget by a hostile bidder occurred in 1998 when BV Raju sold his 32% stake in Raasi Cements to India Cements. ”4 v) “This was the second successful takeover after India Cement's successful takeover of Raasi Cement. Larsen and Toubro Ltd (L&T) gained a controlling interest in Mindtree Ltd, raising its stake to 60% in the Bengaluru-based company in 2019. L&T completed buying the 31% additional stake it targeted to acquire in Mindtree for ₹4,988. 82 crore through an open offer as large investors rushed to sell their holdings. The 60% stake in Mindtree gives L&T complete control over the software company’s board and management. The purchase of additional shares through an open offer by L&T after acquiring a 20.
4% stake in Mindtree from coffee baron VG Siddhartha and affiliate firms marked the culmination of a year-long effort by the Mumbaibased engineering giant to gain control of Mindtree through a hostile bid. ”5
5. Analysis
In India, hostile takeovers of businesses can be difficult because of a variety of legal, regulatory, cultural, and business considerations. They are not impossible, though. Here are several factors that make hostile takeovers in India challenging but not completely unthinkable: 4 Livemint, Adani Group vs NDTV: The Tale of Hostile Takeovers in Indian Corporate Industry, MINT (2022), https://www.livemint.com/news/india/adani-group-vs-ndtv-the-tale-of-hostile-takeovers-in-indian-corporateindustry-11661307221684.html (last visited Sep 30, 2023).
5 Id.
Regulations and legal protections are in existence in India, which makes aggressive takeovers more difficult. The Securities and Exchange Board of India (SEBI), for instance, contains rules intended to safeguard minority owners and guarantee fair treatment during takeovers. Because of these rules, it might be more challenging for an acquirer to seize control without the backing of the target company's management. • Shareholding Structure: Promoters and founders typically own sizable shares in many Indian enterprises, which have concentrated ownership structures. Due of this, acquiring a controlling interest without the assistance of the current management is difficult. • Networks and commercial contacts are extremely important in Indian business culture. Conflictive disputes are a common part of hostile takeovers, which can harm reputations and relationships.
Companies could choose to participate in friendly negotiations over hostile activities. • Complex Approval Procedures: In India, hostile takeovers may need to get a number of permissions, including those of regulatory organizations, governing bodies, and the Competition Commission of India (CCI). These procedures could take a while and be unpredictable. • Poison pills and Defensive Measures: To prevent hostile takeovers, Indian businesses have implemented a number of defensive strategies, including poison pills and staggered boards. Potential acquirers find it more difficult to take control thanks to these precautions. • Legal Redress: aggressive takeovers may result in legal disputes, and Indian courts have occasionally backed minority shareholders' rights and stopped aggressive acquirers from acquiring control without providing fair compensation.
• Cultural considerations: Maintaining the status quo and avoiding conflict are frequently preferred in India. It may be more difficult for hostile bids to win the support of important stakeholders due to this cultural factor. • Hostile takeovers are still conceivable in India despite these difficulties. In some
circumstances, acquirers may be successful by combining strategic planning, forging partnerships, and providing shareholders with favorable terms. It's crucial to keep in mind that the environment for takeovers and corporate governance in India might change over time, so what is difficult now might be easier to do in the future if laws and business practices alter. • Economic Conditions: Market dynamics and the state of the economy can both affect whether hostile takeovers are feasible. Companies may be more open to hostile takeovers in times of economic uncertainty or distress because shareholders may be more receptive to offers that promise greater profits. • Institutional investors: The presence of investors with a long-term perspective, such as mutual funds and foreign institutional investors (FIIs), might have an effect on how hostile takeover efforts turn out.
These shareholders could have a big say in voting outcomes and could support either the acquirer or the target company's management. • Hostile Strategies: In order to gain the upper hand, hostile bidders may use a range of strategies, including as starting proxy wars, making open market purchases, and pursuing legal action. These tactics can be expensive and difficult, but if used properly, they might be successful. • Price and Valuation: In the end, the price provided to shareholders may be a deciding factor in whether a hostile takeover is successful. Even in the face of opposition from the target company's management, a well-structured and compelling offer may encourage shareholders to tender their shares. • Public Opinion: Public opinion and media attention can also affect how a hostile takeover turns out.
A poor public opinion of the target company's management may weaken it and possibly work in the acquirer's favor. • Corporate Governance Reforms: Over time, India has seen efforts to raise transparency levels and strengthen corporate governance standards. By strengthening minority shareholder rights and increasing the overall governance environment, these measures might affect how simple or challenging hostile takeovers are.
An outline of possible hostile takeover strategies in India is shown below: • Acquiring Shares: The hostile bidder often begins by buying shares of the target firm on the open market in order to build up a sizable stake in it. The amount of ownership required to exercise control may differ, but often, obtaining more than 50% of the voting rights is the objective. • Tender Offer: To get additional shares from the target company's shareholders, the hostile bidder may issue a public tender offer. In order to get stockholders to sell their shares directly to the bidder, a premium price must be offered. The Securities and Exchange Board of India's (SEBI) regulatory standards must be met by the tender offer. • Proxy Fights: Through proxy fights, adversarial bidders may attempt to appoint their own nominees to the target company's board of directors.
In order to do this, shareholders must be encouraged to support the acquirer's board candidates at the annual general meeting (AGM) or at special shareholder meetings. • Public manipulation: Public perception and media coverage of a hostile takeover can have an impact on the result. Bidders that are hostile to the target company's management may utilize public relations and media methods to boost support for their offer.
6. Conclusion
In conclusion, the landscape of hostile takeovers in India presents a multifaceted and challenging terrain for corporate acquirers. As this research paper has demonstrated, the difficulties in executing hostile takeovers in India stem from a combination of regulatory frameworks, legal safeguards, cultural nuances, and business dynamics. Nevertheless, it is important to recognize that while hostile takeovers are challenging, they are not impossible. Through careful strategic planning, diligent adherence to legal and regulatory requirements, and effective engagement with shareholders, determined acquirers can navigate these challenges and potentially succeed in gaining control of target companies.
As India's corporate governance landscape continues to evolve and adapt to changing economic and regulatory conditions, the feasibility and dynamics of hostile takeovers may evolve as well, making it an area of ongoing interest and study in the realm of corporate finance and governance.