The Takeover Code is required to be read with the SEBI ICDR (formerly DIP Guidelines). They impose several restrictions on the preferential allotment of shares and/or the issuance of share warrants by a listed company. Under the ICDR, issuing shares at a discount and warrants which convert to shares at a discount is not possible as the minimum issue price is determined with reference to the market price of the shares on the date of issue or upon the date of exercise of the option against the warrants. This creates an impediment in the effectiveness of the shareholders’ rights plan which involves the preferential issue of shares at a discount to existing shareholders.The ICDR also provide that the right to buy warrants needs to be exercised within a period of eighteen months, after which they would automatically lapse. Thus, the target company would then have to revert to the shareholders after the period of eighteen months to renew the shareholders’ rights plan.Without the ability to allow its shareholders to purchase discounted shares/ options against warrants, an Indian company would not be able to dilute the stake of the hostile acquirer, thereby rendering the shareholders’ rights plan futile as a takeover deterrent.Also, the FDI policy and the FEMA Regulations have provisions which restrict non-residents from acquiring listed shares of a company directly from the open market in any sector, including sectors falling under automatic route. There also exist certain restrictions with respect to private acquisition of shares by non-residents, under automatic route, is permitted only if Press Note 1 of 2005 read with Press Note 18 of 1998 is not applicable to the non-resident acquirer. This has practically sealed any hostile takeover of any Indian company by any non-resident.However, for the poison pill strategy to work best in the Indian corporate scenario certain amendments and changes to the prevalent legal and regulatory framework are required. Importantly, a mechanism must be permitted under the Takeover Code and the ICDR which permit the issue of shares/warrants at a discount to the prevailing market price. These amendments would need to balance the interests of the shareholders while allowing the target companies to fend off hostile acquirers.The ICDR do not stipulate any pricing restrictions on the issue of non-convertible preference shares, non-convertible debentures, notes, bonds and certificates of deposit. Thus, companies may consider structuring a poison pill in place whereby backend rights which permit the shareholders to exchange the rights/shares held for senior securities with a backend value as fixed by the Board, are issued to existing shareholders when the hostile acquirer’s shareholding crosses a predetermined threshold.
Comparative Study of Takeover Regulations in Different CountriesAs most takeovers are carried out through borrowed funds, the use of backend rights reduces the