A fundamental role of takeover regulation is to promote and maintain a vibrant market for corporate control. This concept is apposite in corporate structures with dispersed shareholding where it can be used to address the agency problems between shareholders and managers. However, it applies with much less force in companies with concentrated shareholding where the dominant shareholders are able to prevent takeovers with the sheer strength of their shareholding. Accordingly, the market for corporate control may be far less effective as a governance mechanism to address the agency problems between controlling shareholders and minority shareholders.
In practice, however, takeover regulation in different jurisdictions (particularly in emerging markets) tends not to fully grasp these nuances, limiting their effectiveness. While there may be superficial similarity (and possibly formal convergence) between takeover regulations in different countries, their manner of operation in fact could be substantially different – given differences in ownership structure - indicating divergence at a functional level. An emerging strain of literature attributes the phenomenon of takeover regulations that are a ‘poor fit’ for their context to the role of interest groups who are able to shape regulations to cater their group. These interest groups could comprise managers, controlling shareholders such as business families and the state, or even other stakeholders. The literature at present extends to the developed markets such as the US, the UK and Japan, and the emerging market of China. In a working paper “The Nature of the Market for Corporate Control in India”, I explore this phenomenon in another emerging market, India.
Given its deep and liquid stock markets, India presents a favourable environment for public takeovers. In order to develop and regulate takeover activity, India’s securities regulator the Securities and Exchange Board of India (SEBI) has enacted specific regulations. While at a broad level these regulations appear to attribute their origins to the UK and other countries that have adopted the UK model or its variants, I argue in this paper that takeover regulation in India bears fundamental differences and unique characteristics that have necessitated special treatment.
Due to the prevalence of concentrated shareholdings in Indian companies, the incidence of hostile takeovers has been negligible. While SEBI’s takeover regulations do not confer much power to the target’s board to set up takeover defences, the nature of concentration of shareholdings and other factors offer sufficient protection to incumbent shareholders and managements against corporate raiders. Hence, substantial attention in India is focused on the mandatory bid rule (MBR), which operates to grant equality of treatment to minority shareholders by conferring upon them an exit option in case of a change in control. India’s takeover regulations are arguably stringent in implementing the MBR. This impedes value-enhancing takeovers unless they are effected with the concurrence of the controlling shareholders, who could potentially block them.
Added to this, India’s takeover regulations confer benefits on incumbents that would impede a market for corporate control in the conventional sense. For example, promoters can take advantage of creeping acquisition limits, and also certain exemptions from the MBR when they enhance their positions in the company. Hence, while the takeover regulation overtly appears designed to engender a market for corporate control, its operation coupled with the corporate structure and culture in India diminishes the possibility of takeovers.
Relying upon the political economy of takeover regulation, and more specifically the interest group theory, my goal in this paper is to demonstrate the influence of promoters in shaping India’s takeover regulation. While the Indian markets have witnessed a constant stream of takeovers, they are almost entirely organised changes of control in a friendly manner that trigger the MBR. Voluntary, unsolicited offers that are common in the more developed markets are miniscule in number in India. While India’s takeover regulations have witnessed wholesale reforms, the approach thus far has been dictated by pragmatism. As a result, it has paid short shrift to vital philosophical underpinnings, which need to be revisited.
Umakanth Varottil is an Associate Professor at the Faculty of Law of the National University of Singapore.
 J. Armour, J.B. Jacobs and C.J. Milhaupt, ‘The Evolution of Hostile Takeover Regimes in Developed and Emerging Markets: An Analytical Framework’, Harvard International Law Journal, 52 (2011), 219-85; J. Armour and D.A. Skeel, Jr., ‘Who Writes the Rules for Hostile Takeovers, and Why?—The Peculiar Divergence of U.S. and U.K. Takeover Regulation’, Georgetown Law Journal, 95 (2007), 1727-94.