Last week’s episode of CNBC-TV18’s The Firm sat Takeover Regulations Advisory Committee (TRAC) members YM Deosthalee and Sourav Mallik opposite AZB & Partners’ Zia Mody and Amarchand Mangaldas’ Cyril Shroff to discuss some of the intended and unintended consequences of the proposed drastic overhaul of India’s takeover regulations.

On 19 July the 12-member Securities and Exchange Board of India (SEBI) appointed committee released its proposals, most notably to increase the substantial acquisition trigger from 15 to 25 per cent, allowing investors to hold up to 24.99 per cent in a company before having to make an open offer.

The panel generally agreed that this suggestion would be beneficial to both private equity and companies but we witnessed disagreement between the TRAC members and the corporate lawyers about the qualitative definition of control being expanded to include the “ability” to manage a company.

Legally burdensome

It is clear that adding the notion of “ability to manage” to the already ambiguous definition burdens corporate lawyers. Mody pointed out that under the current definition lawyers have a difficult time fielding client questions related to their package of veto rights and whether such rights triggered the Takeover Code. With the addition of an “ability to manage” factor, lawyers will have an even greater challenge determining which actions fall under the Takeover Code’s purview. {source} <div style=“float: right;”><strong>The Firm, 28 July 2010 video (6 parts, ~40 minutes):</strong> <script type=“text/javascript” src=“/video/example/flowplayer-3.2.2.min.js”></script> <a href=“http://video.tv18online.com/cnbctv18/news\_videos/2010Jul/frm1.flv” style=“display: block; width: 425px; height: 360px;” id=“player”> </a> <script> flowplayer(“player”, “/video/flowplayer-3.2.2.swf”, { clip: { autoPlay: false, autoBuffering: false }, playlist: [ // video ‘http://video.tv18online.com/cnbctv18/news\_videos/2010Jul/frm1.flv’, ‘http://video.tv18online.com/cnbctv18/news\_videos/2010Jul/frm2.flv’, ‘http://video.tv18online.com/cnbctv18/news\_videos/2010Jul/frm3.flv’, ‘http://video.tv18online.com/cnbctv18/news\_videos/2010Jul/frm4.flv’, ‘http://video.tv18online.com/cnbctv18/news\_videos/2010Jul/frm5.flv’, ‘http://video.tv18online.com/cnbctv18/news\_videos/2010Jul/frm6.flv’ ], plugins: { controls: { playlist: true } } }); </script> </div> {/source} But was this a missed opportunity? Shroff seemed to think so, going so far as to suggest TRAC failed to act because it was “weighed down by Subhkam […] pending in the Supreme Court they didn’t want to take a call”.

TRAC member and executive director of Kotak Investment Banking Mallik countered by suggesting that the committee looked at all situations and the Indian market before deciding that a pure threshold was inappropriate. Mallik also noted that the committee did not have the ability to improve the current definition significantly without “doing away with it totally”.

Though India’s legal community may agree that a pure threshold definition of control would not work under current conditions, they will most likely push SEBI to adopt a more tailored definition of control.

Without additional clarification it appears likely that clients asking their legal counsel whether they de facto control a company will continue to be told, in Mody’s words: “Ok here is this crystal ball so maybe yes, maybe no.”

Mandatory debate

The big issue of the night was undoubtedly TRAC’s hotly contested decision to increase the mandatory minimum open offer from 20 per cent to 100 per cent. The corporate lawyers stated that the effectiveness of the change came down to a balance between the benefit to shareholders and the unintended consequence on M&A activity.

Noting that under the existing 20 per cent rule most open offers were not over-subscribed, Mody did not see the increase as providing a “philosophical service to the public” and instead warned that the regulations might slow down M&A activity as companies may be unable to afford the 100 per cent financing.

TRAC member and L&T CFO Deosthalee disagreed and argued that if the market has faith in the acquirer funding can be arranged through methods like the stocks, convertibles or debentures while noting that companies may not in fact have to spend that money if the offer is not fully subscribed.

The panelists were more or less in agreement that the market may come up with additional methods of financing. But the big questions that remain are: should they have to; and does this increase give an unfair advantage to foreign acquirers who may have an easier time raising funds abroad?

Are we getting into dangerous territory by forcing domestic corporations to innovate means of financing, possibly triggering the regulations of other government agencies and will the Reserve Bank of India respond?

Pitting the drafters of the regulations against some of India’s most powerful and outspoken players in the field definitely made for some fervent debate. But at the show’s end viewers were arguably left with more questions than answers.

Click here for a full transcript of the show, which was first aired on Wednesday 28 July 2010.

This is the first part of a new Legally India series that will review and condense the latest episodes of CNBC-TV18’s The Firm.

Legally India is not affilliated with CNBC-TV18 or The Firm.