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Q. Contentious non-compete fee issue: Comment on ongoing contentious issue of non-compete fee.
Oct 12, 2016 Related to : GS Paper-3

Ans :

Introduction-

Recently Security Exchange Board of India (SEBI) came out with its paper on the revised Takeover Code. SEBI reportedly proposes to prohibit payment of non- compete fees (NCF) to promoter groups in the case of mergers. Such fees already are restricted in the case of takeovers.

Non- compete fee (NCF)-

A non-compete fee is paid to selling promoters by the acquirer, so that the erstwhile promoters do not re-enter the business and pose serious competition to the acquired company. The non-compete fee, however, may be applicable only for a certain mutually-agreed period of time.

Recent SEBI takeover code-

  • SEBI wants to completely do-away with non-compete fee.
  • It has suggested that the premium be paid to all shareholders' alike.

Analysis-

  • Existence of non-compete fee will create differential treatment to the two sets of shareholders in the event of merger and acquisition.
  • Non-compete fee creates disguising deal between the incoming management and the outgoing one, in which the outgoing one receives an extra payment denied to minority shareholders. This would be unfair to minority shareholders.
  • But outright banning of non-compete fee is also disastrous. Because many time without a guarantee of no further competition from an incumbent management, the takeover might be meaningless.
  • Purchase of insurance against new competition from a player of proven competence could make sense in some circumstances. Hence non-compete fee has its own advantage.
  • Though it denies the rights of minority shareholders, but outright ban on non- compete fee is a bad idea.

Suggestions-

  • Instead of making outright ban, SEBI should leave this aspect to shareholders of the company whose management loses control to decide whether NCF are warranted or not.
  • Similarly SEBI should come up with some regulation to safeguard the interest of minority shareholders.

Conclusion-

NCF is the gift those who are capable of offering competition and denial of rights of minority shareholders. The recent move of SEBI is well intended, but it has its own loopholes and it may disturb various ongoing mergers and acquisitions. Hence instead of banning non-compete fee, SEBI should come up with innovative ways to bring the justice to minority shareholders.


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