Hostile Takeovers in India

Hostile Takeovers in India

Khaitan & Co.’s webinar explained the Indian regulatory framework for hostile takeovers, common defenses, and three successful case studies. A hostile takeover is an attempt to acquire control of a listed company despite opposition from its management. The speakers emphasized that success depends on more than buying shares: the bidder needs a clear control strategy, adequate financing, strong execution, and support from public shareholders.

Business and regulatory context

• Hostile takeovers apply principally to listed companies, whose shares can be bought in the market. They are less common in India than in the US or UK, in part because many Indian listed companies have concentrated promoter ownership, often in the 60–75% range.
• India’s takeover regulations do not specifically define or prohibit hostile takeovers. A bidder may pursue one provided it complies with the applicable rules.
• Under the framework described in the webinar:
  • Acquiring 25% or more of voting rights generally triggers a mandatory open offer.
  • If an investor already holds at least 25%, acquisitions beyond the 5% annual creeping-acquisition limit can trigger an open offer.
  • Acquiring control can trigger an open offer even without acquiring shares—for example, through the right to appoint a majority of directors.
  • The open offer is generally for at least 26% under the current rules. The Zandu transaction occurred under earlier rules, when the minimum was 20%.
• A hostile takeover is a value-driven strategy: the bidder believes the company is worth more than its current market value and that changes in management, synergies, or the business model could unlock that value.
• The board’s role in India is governed primarily by its fiduciary duties. The US “Revlon” principle—where a board shifts from resisting a takeover to seeking the best value for shareholders once a sale becomes inevitable—was discussed as a comparison, not as the legal position in India.
• A takeover can benefit public shareholders through a premium offer. It may also provide an exit for existing promoters; prolonged conflict between competing control groups can otherwise destroy value.

Hostile takeover playbook

• Build a value thesis: Identify why the target is underperforming or undervalued and how new ownership could improve its prospects.
• Map the route to control: Combine negotiated purchases, market purchases, and an open offer. Plan for the possibility that shareholders may not tender the full offer.
• Set a control target and backup: Work out the stake needed to secure control, and maintain flexibility to buy additional shares in the market if the open offer falls short.
• Price to attract tenders: Public shareholders need a reason to sell to the bidder rather than hold or sell elsewhere. A premium can increase participation.
• Protect confidentiality and move quickly: A surprise bid can limit the target’s time to organize a response. Once announced, the bid becomes public and the target must disclose it to the stock exchange.
• Plan for post-acquisition control: Buying shares is not enough; replacing or reshaping the board can be a lengthy, costly process, particularly if the matter goes to litigation.
• Prepare for market and stakeholder reactions: Consider whether being perceived as a hostile investor could affect future transactions, and plan for engagement with regulators, the board, and shareholders.

Defense mechanisms discussed

• Poison pill: The target issues shares to existing promoters or other shareholders to dilute the bidder and make the acquisition more expensive. In India, preferential issues are subject to minimum pricing rules, so they cannot simply be issued at a steep discount and may require substantial funding.
• Buyback: A buyback can reduce public float and increase the promoter’s proportional stake. Its effectiveness depends on whether the company has sufficient resources.
• Pac-Man defense: The target attempts to buy shares in the bidder, potentially discouraging the bid. Both companies would need to be listed.
• Crown jewel defense: The target sells or transfers a key asset to a friendly party, reducing the appeal of the target. This may raise governance concerns and is subject to applicable requirements.
• White knight: The target finds a friendly investor to acquire shares or compete with the hostile bidder. A rival bidder may also make a competing open offer.
• Board and governance actions: The speakers noted that defenses must be assessed against directors’ fiduciary responsibilities and the interests of the company and its shareholders.

Case studies and metrics

Case Strategy and outcome Key figures L&T–Mindtree L&T used three routes: a negotiated purchase from V. G. Siddhartha, market purchases, and an open offer. Mindtree’s management opposed the transaction. L&T ultimately acquired control. Mindtree promoters held about 13.3%; Siddhartha’s group held about 20%. L&T acquired the 20% block, bought 9% through market purchases against a planned market order of up to 15%, and received 31% in the open offer—about 60% in total. The offer price was ₹980, versus a pre-bid trading range of roughly ₹800–₹880. Mindtree considered a buyback, but its available resources would have supported only about a 4% buyback, so it was abandoned. Standard Greases–Tide Water Oil Standard Greases announced an open offer without first agreeing to buy a block from an existing shareholder. It invited public shareholders to tender and sought recognition as a co-promoter. It ultimately became a co-promoter alongside the existing stakeholders. Existing promoters held about 26%; Standard Greases held 24.9% before the offer. It received 4.4% through the open offer and also bought shares in the market, reaching about 30%. The offer was initially made at the minimum price and later increased by nearly ₹1,000 per share. The stock traded around ₹16,600 before the offer; after the board announced a proposed stock split and bonus, it rose to about ₹31,200. Emami–Zandu Emami bought an initial market stake and agreed to acquire a block from one promoter group, triggering an open offer. It later settled with the other promoter group, which had opposed the takeover, and acquired its shares as well. The two promoter groups together held about 42%. Emami initially held about 4%, bought a further 24% block, and received the full 20% tendering under the then-applicable open-offer rules. It ultimately reached about 70%. The negotiated price rose from ₹6,900 to ₹16,500 per share. Defenses by the opposing promoter group included a proposed 5% preferential issue, board appointments, and regulatory and court proceedings; these did not prevent the acquisition.

Actionable lessons from the cases

• Design the transaction around the control threshold. L&T’s combination of a negotiated block, market purchases, and a 31% open offer was designed to give it a path to majority ownership, with additional market-buying flexibility.
• A hostile offer need not start with a negotiated seller. Tide Water Oil showed that a bidder can approach public shareholders directly through an open offer, subject to the regulatory framework.
• Offer price is a strategic lever. In Zandu, Emami’s increase from ₹6,900 to ₹16,500 helped secure broader shareholder participation and a settlement with the opposing promoter group.
• Defenses require resources and feasibility testing. Mindtree’s buyback proposal could not materially change the ownership balance given the available funds; Indian preferential-issue pricing rules can likewise make a poison pill costly.
• A negotiated resolution may preserve more value than prolonged conflict. Zandu illustrated how an exit for the resisting promoter group could benefit both the acquirer and the outgoing holders.
• Monitor ownership and prepare in advance. The webinar recommended regular checks of shareholding patterns and possible accumulation by unknown entities. Once an offer is underway, the target’s ability to make major changes may be constrained; for example, significant asset transfers may require shareholder approval.

Market outlook

The presenters expected hostile takeover activity in India to increase as some promoter families reduce their holdings or shift from operating businesses to more passive ownership. Lower promoter ownership can make companies more vulnerable to a bid. The presenters also noted growing market interest in hostile-takeover strategies and defenses.

Presenters and source

• Samir Shah, M&A partner, Khaitan & Co.—host and moderator.
• Abhishek Dadu, M&A partner, Khaitan & Co.—presenter.
• Source: Khaitan & Co., M&A Academy webinar, Hostile Takeovers in India.