Poison Pill as an effective anti-takeover mechanism in India

In India regulations pertaining to takeovers and mergers can be referenced to Takeover Code of SEBI 1997 and SEBI (Disclosure and Investor Protection Guidelines), 2000. The current regulations don’t pose any stifling difficulties at the very outset for the determined bidder of the company. It just stipulates that the potential acquirer needs to notify the SEBI and the existing shareholders if the number of shares that they hold of the target exceeds above 24.99%. The public announcement should contain the intention of acquisition, bid details like offered price per share, number of shares, future plans for the firm, change of control intended etc.

The poison pill, as we know, is associated with the issuance of rights or warrants that allows the existing shareholders of the firm to purchase additional shares at a discount so as to increase their shareholding and dilute the stake of the potential acquirer. Now, according to Indian law, it is illegal for a firm to issue such warrants or rights at a discount and can only be made with respect to the current market price of the company. Also the issuance of any such warrants requires the approval of shareholders. Since these regulations make the whole affair a long drawn process, poison pill as a protection mechanism is not very prevalent and effective in Indian context.

The intent of such regulations can be taken as something which is done to protect the rights of the shareholders who more often than not are left with some kind of value erosion by exercise of such rights in these circumstances. The situation gets aggravated when the board wants to thwart the takeover bid in an attempt to protect some vested interests and in the process issues such rights without shareholder approval thus undervaluing the company in the long run and eroding shareholder wealth.

One more regulation that makes poison pill mechanism ineffective is the ineffectiveness of Staggered Board defense. While in countries such as US only 1/3^rd members of the board can be removed per year, an aggressive takeover bid will require 3 years to work through the board of directors to redeem the poison pill. However in India the board can be replaced in a single shareholder meeting and the potential acquirer, if has a significant number of shares, can replace the whole board by flexing the required power of number of favorable votes.

Thus we may conclude that under the current regulations, Indian laws are takeover friendly and the mechanisms against takeover present in foreign countries are largely ineffective in India, unless Indian companies have some built-in mechanism to thwart the aggressive bidders as in the case of Tata Sons and some others.