Although the SEBI is making significant progress in establishing India as a competitive investment destination in the global market, the requirement to make such an offer is often a cause of significant concern for investors. Because the tendering of shares in an MTO is by a dispersed public pool, no identifiable party can be held accountable or offer contractual protection to the acquirer as is usual in a privately negotiated deal.

Further, while the obligation to acquire the additional 26% stake is mandatory, the actual take-up of the MTO cannot be guaranteed. The take-up is usually ascertained at the end of a protracted process and depends on a number of factors. These include the sector in which the target operates, the future prospects of the target, the market perception of the acquirer, general market conditions and the economic outlook for the country. The legislation also requires that certain other conditions be fulfilled to complete the underlying transactions of the takeover before the MTO is made. The combination of these factors renders the structuring of such deals challenging. The situation has become even more arduous in the wake of the covid-19 pandemic, when many companies faced financial troubles and the market outlook was not bullish. The prospect of significant tendering by public shareholders following an MTO deterred even the most optimistic of white knights.

It should be emphasised that this regulatory framework is not unique to India. It is generally the case in the United Kingdom, Germany and Singapore that an acquirer is required to make an MTO, among other cases, of an acquisition that results in such acquirer and their PAC holding 30% or more of the voting rights in the target company. As is the case in India, the reasoning behind the requirement in the UK is that if a person acquires control, the other shareholders must be protected, and withdrawal of the bid can be allowed only in extreme circumstances. In the United States, there is no compulsion to make an MTO. However, a number of states, such as Pennsylvania, have passed legislation containing control share cash-out provisions. These permit shareholders to demand that an acquirer of a specified percentage of voting rights in a company purchase their shares.

To sum up, public M&A in India is at a mature stage, and the SEBI is consistently developing its control with marked vigour. While the obligation to make an MTO may seem onerous from an acquirer’s perspective, the practice in India appears to be consistent with global standards. Bearing that in mind, acquirers contemplating strategic or controlling public M&A deals in India will benefit from being circumspect and maintaining a sensible market strategy. They should also retain experienced advisers to undertake thorough due diligence on the target companies, provide actionable advice to help them navigate the complexities associated with such deals in the listed market and avoid expensive pitfalls.

This article was originally published in Mondaq on 2 January 2025 Co-written by: Mithun V. Thanks, Partner; Pooja Singhania, Partner. Click here for original article

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