Project-Sebi Takeover Code

A PROJECT WORK IN CORPORATE LAWS

SEBI TAKEOVER CODE_______________________________________

A Project Work Submitted as a partial fulfillment under Executive

Development Programme

S ubmitted By :

Abhishek Jain

Reg. No. 420693991/08/2009

Submitted on: May,12 ,2014

INSTITUE OF COMPANY SECRETARIES OF INDIA

Table of Contents

S. No. Particulars Page Nos.

1. Introduction 3

2. Research Methodology 5

3. Meaning and Kinds of Takeover 7

4. Necessity of Takeover Code 9

5. New Takeover Code – Comparison and Analysis 12

6. International Application 32

7. Open Offers made under SEBI (SAST) Regulations, 2011 37

8. Case Study 41

9. Conclusion 45

10. List of References 49

Abhishek Jain, Reg. No. 420693991/08/2009 Page | 2

INTRODUCTION

The concept of takeover emerged in late 19th century in some countries like US, UK etc.

when the first wave of mergers and acquisitions started. However, in India it was only in 20th

century that the concept of takeover took birth but even then the concept of hostile takeovers

was not known to anybody. This concept emerged when Swaraj Paul started efforts to

takeover Escorts Ltd. and DCM Ltd. He was the first hostile raider among the raiders of

Indian stock market. Although Paul could not succeed in his efforts because the incumbents

fend him off by using the technicalities of rules governing non-residents but this created a

need for a takeover code.

This need was further accentuated in 1990s when the government initiated the policy of

liberalization and globalization which resulted in growth of Indian economy at an increased

pace, and it created a highly competitive business environment, which motivated many

companies to restructure their corporate strategies by including the tools of mergers and

takeovers.

In the meantime, SEBI was established in 1992 as a body corporate under the SEBI Act, 1992

with the main objectives to,

i) protect the interest of investors in securities market, and

ii) to provide for the orderly development of securities market.


Thus while the possibility of takeover of a company through share acquisition is desirable in

new competitive business environment for achieving strategic corporate objectives, there has

to be well defined regulation so that the interest of all concerned are not jeopardized by

sudden takeover threats.

In the light of the then present circumstances, the need for some law to regulate takeover was

strongly felt. Moreover to achieve its objectives as stated in SEBI Act, 1992, SEBI enacted

SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1994 in exercise of

powers conferred under section 30 of the Act which laid down a procedure to be followed by

an acquirer for acquiring majority shares or controlling in another company, so that process

of takeover is carried out in a fair and transparent manner.

Thereafter, these regulations have been amended a number of times to address the changing

circumstances and needs of corporate sector. In 1997 SEBI Takeover Code has been

rechristened by enacting SEBI (Substantial Acquisition of Shares and Takeover) Regulations,

1997 substituting SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1994.

In September 2009, the Takeover Regulations Advisory Committee (TRAC) under the

chairmanship of Mr. C Achuthan was constituted by SEBI with the mandate to examine and

review the SEBI (SAST) Regulations, 1997 and to suggest suitable amendments, as deemed

fit. Thereafter in June 2010, the Committee came out with the TRAC Report proposing some

sweeping changes on critical issues, including the open offer triggering event, offer size,

indirect acquisitions, exemptions from open offer obligations, offer price calculations and

competing offers which was then open for public comments. After considering the public

comments and further to discussion, the report has been modified to the present form i.e.

SEBI (SAST) Regulations, 2011 substituting the SEBI (SAST) Regulations, 1997.


RESEARCH METHODOLOGY

A rea : Corporate Laws

T opic : SEBI Takeover Code

P urpose : As partial fulfilment of Executive Development Programme.

O bjective s: The following are the underlying objectives of this study:

1. To study about the concept of Takeover.

2. To understand various elements and necessity of Takeover.

3. To analyse the new Takeover Code i.e. SEBI (SAST) Regulations, 2011.

4. To identify the international application of the Takeover mechanism.

5. To Study various Open Offers made under SEBI (SAST) Regulations, 2011

D ata - The data was completely secondary in nature due to the analytical nature of the project

and limitations of researcher of conducting a primary study.

A pproach : The secondary data has been analysed deductively so as to meet the requirements

of the study.

R esearch Tools : The research tools for the secondary data included soft as well as hard

materials. The soft material includes various websites, online journals, online books etc.,

whereas the hard material refers to the study of various books, newspapers, journals etc. The

important point to note is that the above mentioned materials have just been referred for a


basic theoretical understanding developed over the time and the study has been made

specifically first hand.

C hapterisation : For facilitating lucidity and for presenting the study in an organized form,

the information has been presented in different chapters as per the requirements.

1. The first chapter contains a general introduction about the topic including its

evolution through time and its present standing.

2. The second chapter consists of research methodology.

3. The third chapter deals with the meaning and kinds of the takeover.

4. The fourth chapter elaborates the necessity of the Takeover in today’s corporate

world.

5. The fifth chapter consists of the comparison and analysis of the New Takeover Code

i.e. SEBI (SAST) Regulations, 2011.

6. The sixth chapter deals with the International Application of the concept of Takeover.

7. The seventh chapter studies various Open Offers made under SEBI (SAST)

Regulations, 2011

8. The eighth chapter deals with the case study of Kamat Hotels (India) limited

9. The ninth chapter examines the practicability of the New Takeover Code.


MEANING AND KINDS OF TAKEOVER

Meaning of Takeover:

Takeover implies acquisition of control of a company which is already registered through the

purchase or exchange of shares. Takeover takes place usually by acquisition or purchase from

the shareholders of a company their shares at a specified price to the extent of atleast

controlling interest in order to gain control of the company.

Thus, when an “acquirer” takes over the control of the “Target Company”, it is termed as

Takeover. When an acquirer acquires “substantial quantity of shares or voting rights” of the

Target Company, it results into substantial acquisition of shares.

Kinds of Takeover:


I. Legal Context :- From legal perspective, takeover is of two types:

a. Friendly or Negotiated Takeover: Friendly takeover means takeover of one

company by change in its management & control through negotiations between the

existing promoters and prospective investor in a friendly manner. Thus it is also

called Negotiated Takeover. This kind of takeover is resorted to further some

common objectives of both the parties. Generally, friendly takeover takes place as

per the provisions of Section 395 of the Companies Act, 1956.

b. Hostile Takeover: Hostile takeover is a takeover where one company unilaterally

pursues the acquisition of shares of another company without being into the

knowledge of that other company. The most dominant purpose which has forced

most of the companies to resort to this kind of takeover is increase in market share.

The hostile takeover takes place as per the provisions of SEBI (Substantial

Acquisition of Shares and Takeover) Regulations, 2011.

II. Business Context: In the context of business, takeover is of three types:

a. Horizontal Takeover: Takeover of one company by another company in the same

industry. The main purpose behind this kind of takeover is achieving the

economies of scale or increasing the market share. E.g. takeover of Henkel by

Jyothy Laboratories, Patni Computers by iGate.

b. Vertical takeover: Takeover by one company of its suppliers or customers. The

former is known as backward integration and latter is known as Forward

integration. E.g. takeover of Sona Steerings Ltd. by Maruti Udyog Ltd.

c. Conglomerate takeover: Takeover of one company by another company

operating in totally different industries. The main purpose of this kind of takeover

is diversification.


NECESSITY OF TAKEOVER CODE

The twentieth century began with the process of transformation of entire business scenario.

The economy of India which was hitherto controlled and regulated by the Government was

set free to seize new opportunities available in the world. With the announcement of the

policy of globalization, the doors of Indian economy were opened for the overseas investors.

But to compete at the world platform, the scale of business was needed to be increased. In

this changed scenario, mergers and acquisitions were the best option available for the

corporates considering the time factor involved in capturing the opportunities made available

by the globalization.

This new weapon in the armoury of corporates though proved to be beneficial but soon the

predators with huge disposable wealth started exploiting this opportunity to the prejudice of

retail investor. This created a need for some regulation to protect the interest of investors so

that the process of takeover and mergers is used to develop the securities market and not to

sabotage it. In the year 1992, with the enactment of SEBI Act, SEBI was established as

regulatory body to promote the development of securities market and protect the interest of

investors in securities market. Further it got the power to make regulations for the above

objectives. Thus SEBI appointed a committee headed by P.N. Bhagwati to study the effect of

takeovers and mergers on securities market and suggest the provisions to regulate takeovers

and mergers.


In its report, the committee stated the necessity of a Takeover Code on the following grounds:

The confidence of retail investors in the capital market is a crucial factor for its

development. Therefore, their interest needs to be protected.

An exit opportunity shall be given to the investors if they do not want to continue with

the new management.

Full and truthful disclosure shall be made of all material information relating to the

open offer so as to take an informed decision.

The acquirer shall ensure the sufficiency of financial resources for the payment of

acquisition price to the investors.

The process of acquisition and mergers shall be completed in a time bound manner.

Disclosures shall be made of all material transactions at earliest opportunity.

Thereafter, these regulations have been amended a number of times to address the changing

circumstances and needs of corporate sector. In 1994 SEBI came out with SEBI (Substantial

Acquisition of Shares and Takeover) Regulations, 1994. Later SEBI Takeover Code has been

rechristened by enacting SEBI (Substantial Acquisition of Shares and Takeover) Regulations,

1997 substituting SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1994.

Thereafter, in September 2009, the Takeover Regulations Advisory Committee (TRAC)

under the chairmanship of Mr. C Achuthan was constituted by SEBI with the mandate to

examine and review the SEBI Takeover Regulations of 1997 and to suggest suitable

amendments, as deemed fit. Later in June 2010, the Committee came out with the TRAC

Report proposing some sweeping changes on critical issues, including the open offer trigger,

offer size, indirect acquisitions, exemptions from open offer obligations, offer price

calculations and competing offers which was then open for public comments.


The fundamental objectives of the Proposed Takeover Regulations were:-

a. To provide a transparent legal framework for facilitating takeover activities;

b. To protect the interests of investors in securities and the securities market, taking into

account that both the acquirer and the other shareholders or investors and need a fair,

equitable and transparent framework to protect their interests;

c. To balance the conflicting objectives and interests of various stakeholders in the

context of substantial acquisition of shares in, and takeovers of, listed companies.

d. To provide each shareholder an opportunity to exit his investment in the target

company when a substantial acquisition of shares in or takeover of a target company

takes place.

e. To provide acquirers with a transparent legal framework to acquire shares in or

control of the target company and to make an open offer;

f. To ensure that the affairs of the target company are conducted in the ordinary course

when a target company is subject matter of an open offer;

g. To ensure that fair and accurate disclosure of all material information is made by

persons responsible for making them to various stakeholders to enable them to take

informed decisions;

h. To regulate and provide for fair and effective competition among acquirers desirous

of taking over the same target company; and

i. To ensure that only those acquirers who are capable of actually fulfilling their

obligations under the Takeover Regulations make open offers.

After considering the public comments and further to discussion, the report has been

modified to the present form i.e. SEBI (SAST) Regulations, 2011 substituting the SEBI

(SAST) Regulations, 1997.


NEW TAKEOVER CODE – COMPARISION AND ANALYSIS

Vide Notification dated September 23, 2011, Market watchdog SEBI has notified the much

awaited New Takeover Regulations namely SEBI (Substantial Acquisition of Shares and

Takeovers) Regulations, 2011 (hereinafter referred to as “SEBI (SAST) Regulations,

2011”) which will replace the existing Takeover (SAST) Regulations, 1997. The new

Regulations shall come into force on the 30th day from the date of their publication in the

Official Gazette i.e. w.e.f. October 22, 2011, any acquisition or sale of shares of Listed

Company shall be governed by provisions of SEBI (SAST) Regulations, 2011.

Comparison of the New Takeover Code with the Old Takeover Code

1) Increase in Initial Threshold Limit from 15% to 25%: The Initial Threshold limit

provided for Open Offer obligations is increased from 15% to 25% of the voting

rights of the Target Company. Since SEBI (SAST) Regulations, 2011 will be

applicable from October 22, 2011, thus it’s a last opportunity for all the Promoters

holding less than 25% but more than 20% to come within bracket of Creeping

Acquisition. Otherwise even the existing Promoters of these Companies have to give

offer to consolidate their holding.

2) Creeping Acquisition Limit raised from 15%-55% to 25%-75%: Now there will a

single and clear creeping acquisition bracket. This will be available to all persons

holding 25% or more but up to 75% i.e. maximum permissible non-public holding

shall be eligible for creeping acquisition of 5% each financial year.


3) Open Offer Trigger Point based on Individual Holding: Now the Individual

Acquirer Shareholding shall also be considered for determining the Open Offer

Trigger Points apart from consolidated promoter shareholding. (Regulation 3(3) of

SEBI (SAST) Regulations, 2011).

4) Increase in Offer Size from 20% to 26%: The Offer Size is increased only up to

26% instead of TRAC Recommendation of 100%. It’s a good move from the point of

view of domestic acquirers on account of lack of proper bank funding options

available in India.

5) New Provisions in case of increase in shareholding beyond the maximum

permissible non-public shareholding due to Open Offer:

Obligation on the acquirer to bring down the non-public shareholding to the level

specified and within the time permitted under Securities Contract (Regulation)

Rules, 1957;

Ineligibility to make a voluntary delisting offer under SEBI (Delisting of Equity

Shares) Regulations, 2009, unless a period of twelve months has elapsed from the

date of the completion of the offer period.

6) Abolition of Non-compete fees: SEBI has accepted the TRAC Recommendation of

scrapping the non-compete fee or control premium. Any amount paid to the

Promoters/Sellers whether as consideration, non-compete fee or control premium or

otherwise, shall be added in Offer Price and hence public shareholders shall be given

offer at the highest of such prices.

7) Definition of “Control” modified: A new definition of Control has been introduced

in the new Regulation which is similar to recommendation of TRAC Report with an

exception that the word “Ability” has been removed. The definition is as under:


“Control” includes the right to appoint majority of the directors or to control the

management or policy decisions exercisable by a person or persons acting

individually or in concert, directly or indirectly, including by virtue of their

shareholding or management rights or shareholders agreements or voting

agreements or in any other manner:

Provided that a director or officer of a target company shall not be considered to

be in control over such target company, merely by virtue of holding such position

8) Change in Control: Any change in control of the listed company shall be only after

Open Offer. The exemption from Open Offer available in case of change in control

without acquisition of substantial shares, through a special resolution by postal ballot

process, has been withdrawn and now the only route available for change in

management and control is through the Open Offer to the shareholders of the Target

Company. This is in contrast with the Regulation 12 of the SEBI (SAST) Regulations,

1997 which provides for the change in control through the special resolution passed

by way of postal ballot.

9) No Exemption in case of acquisition from other competing acquirer in the New

Takeover Code.

10) Frequently Traded Shares: For determining the frequency of trading in shares, the

trading turnover during the 12 months preceding the month in which the Public

Announcement is made will be considered. Further, the volume of trading for

frequently traded company increase from 5% to 10% to have a more realistic picture.

11) New Definitions Introduced:


“Enterprise Value” means the value calculated as market capitalization of a

company plus debt, minority interest and preferred shares, minus total cash and cash

equivalents.

“Volume weighted average market price” means the product of the number of

equity shares traded on a stock exchange and the price of each equity share divided by

the total number of equity shares traded on the stock exchange.

“Volume weighted average price” means the product of the number of equity shares

bought and price of each such equity share divided by the total number of equity

shares bought.

“Weighted average number of total shares” means the number of shares at the

beginning of a period, adjusted for shares cancelled, bought back or issued during the

aforesaid period, multiplied by a time-weighing factor.

12) New Formats Introduced for PA, LOO, and Disclosures, Exemptions,

Recommendation on the Open Offer by the Board of Directors and so on.

13) Detailed provisions for Voluntary Open Offer: The concept of voluntary open offer

has been separately dealt in the SEBI (SAST) Regulations, 2011.


In case of voluntary open offer, the offer size may be of 10% or more of the voting

rights at the will of the Acquirer.

14) Detailed provisions relating to Indirect Acquisition: The New Regulations

prescribes detailed provisions relating to Indirect Acquisitions which is a welcome

move as there was quite confusion. The New Regulations define the situations which

will be deemed as Indirect Acquisition.

15) Recommendation on the Open Offer by the Board of Target Company:

A recommendation on the offer by the Board of Target Company has been made

mandatory and such recommendations shall be published at least two working days

before the commencement of the tendering period in the same newspapers where the

public announcement of the open offer was published, and simultaneously, a copy of

the same shall be sent to SEBI, Stock Exchange and Manager to the Offer.

16) Revision in SEBI fees to be given while submitting the draft letter of offer.

17) Provisions relating to Exemption from Open Offer have been modified.

18) Other Consequential Amendments: Simultaneously with the amendment in SEBI

(SAST) Regulations, 2011, the format of disclosure of shareholding as provided under

Clause 35 of the Listing Agreement in respect of following has been replaced

Statement showing holding of securities (including shares, warrants, convertible

securities) of persons belonging to the category “Promoter and Promoter Group”, :


securities) of persons belonging to the category “Public” and holding more than 1% of

the total number of shares;



securities) of persons (together with PAC) belonging to the category “Public” and

holding more than 5% of the total number of shares of the company.

Analysis of SEBI (SAST) Regulations, 2011

Triggers for making an open offer

1. Any acquisition of shares or voting rights in the target company by the acquirer and

PAC which entitle them to exercise in aggregate 25% or more voting rights.

2. Any acquisition of shares or voting rights exceeding permissible creeping limit (5%)

in a financial year. This situation arises in cases where the acquirer and PAC have

acquired and holds shares or voting rights in the target company which entitles them

to exercise 25% or more but less than maximum permissible non-public shareholding

and further acquires more than 5% shares or voting rights in a financial year.

3. Acquisition of shares by any person such that the individual shareholding of such

person acquiring shares exceeds stipulated thresholds irrespective of whether there is

a change in the aggregate shareholding with the PAC.

4. An indirect acquisition of shares or voting rights requiring an open offer would be

considered as direct acquisition, for pricing, timing of open offer and other

compliances / requirements of open offer, where the proportionate net assets or sales

turnover or market capitalization of the target company as a percentage of the

consolidated net asset or sales turnover or the enterprise value for the entity or

business being acquired is in excess of 80% on the basis of the most recent audited

annual financial statements (Deemed Direct Acquisition).

5. Any revision in voluntary offer size made by the acquirer within 15 working days

from the PA of the competing offer.


Acquisition of control

Any direct or indirect acquisition of control of Target Company by an acquirer irrespective of

acquisition or holding of shares or voting rights. Indirect acquisition of shares or control

Acquisition of shares or voting rights in, or control over, any company or other entity, that

would enable any person and PAC to exercise or direct the exercise of such percentage of

voting rights in, or control over a target company, the acquisition of which would otherwise

trigger open offer obligation, shall be considered as an indirect acquisition of shares or voting

rights in, or control over the target company necessitating an open offer.

Voluntary offer

An acquirer, who together with PAC, holds shares or voting rights in a target company

entitling them to exercise 25% or more but less than the maximum permissible non-public

shareholding, shall be entitled to voluntarily make a PA of an open offer for acquiring shares.

A voluntary offer is subject to certain conditions which includes the following:

a. Minimum offer size is 10% of the total shares of the target company;

b. The aggregate shareholding of the acquirer and PAC after completion of the open

offer cannot exceed the maximum permissible non-public shareholding;

c. Voluntary offer cannot be made where an acquirer or PAC has acquired shares of the

target company in the preceding 52 weeks without attracting the obligation to make

an open offer;

d. During voluntary offer period such acquirer shall not be entitled to acquire any shares

otherwise than under the open offer;

e. An acquirer and PAC who have made a voluntary offer shall not be entitled to acquire

any shares of the target company for a period of 6 months after completion of the


open offer except pursuant to another voluntary open offer or making a competing

offer upon any other person making an open offer or bonus issue or stock splits.

Minimum open offer size

Trigger for Open Offer Minimum Open Offer Size Other Conditions/Observations

• Direct acquisition of

shares or voting rights or

control over the target

company

• Indirect acquisition

26% of the total shares of

the target company as of

10th working day from the

closure of the tendering

period.

Where post open offer

shareholding of acquirer and PAC

is in excess of the maximum

permissible non public

shareholding:

• it must be reduced within

1 year;

• it shall not be eligible to make a

voluntary delisting offer under

SEBI Delisting Regulations for 12

months from the date of the

completion of the offer period.

Voluntary open offer 10% of the total shares of

the target company. The

post acquisition holding in

such cases shall not exceed

the maximum permissible

non-public shareholding.


Any open offer shall be made to all shareholders of the target company, other than the

acquirer, PAC and the parties to any underlying agreement including persons deemed to be

PAC with such parties, for the sale of shares of the target company.

Minimum open offer price shall be the highest of the following:

In cases of direct and deemed direct

acquisition of shares or voting rights or

control over the target company

In case of an indirect acquisition of

shares, voting rights or control over the

target company

Highest negotiated price per share of the

target company under the agreement that

attracted the open offer.

Highest negotiated price per share, if any of

the target company, under the agreement

attracting open offer.

Volume-weighted average price paid or

payable for acquisitions by the acquirer or

PAC during 52 weeks preceding the date of

PA.

Volume-weighted average price paid or

payable for any acquisition by the acquirer

or PAC during preceding 52 weeks

immediately preceding the earlier of:

• the date on which the primary acquisition

is contracted, and

• date on which intention or decision to

make primary acquisition is announced in

public domain.

Highest price paid or payable for any

acquisition by the acquirer or PAC during

26 weeks preceding the date of PA

Highest price paid or payable by the acquirer

or PAC for any acquisition during 26 weeks

preceding the earlier of:

• date on which the primary acquisition is

contracted, and




public domain.

Where shares are frequently traded - volume

weighted average market price of the target

company during 60 trading days

immediately preceding the date of PA

Where shares are frequently traded - volume

weighted average market price during 60

trading days immediately preceding the

earlier of:

• the date on which the primary acquisition

is contracted, and



public domain.

Where shares are infrequently traded - the

price determined by the acquirer and

manager to open offer taking into account

valuation parameters, including, book value,

comparable trading multiples and such

other parameters as are customary for

valuation of shares of such companies.

Where minimum offer price cannot be

computed as per any of the parameters, it

shall be fair price determined by acquirer

and manager to the open offer taking into

account valuation parameters including,

book value, comparable trading multiples,

and such other parameters as are customary

for valuation of shares of such companies.

In case of Deemed Direct Acquisition where

net assets value or sales turnover or market

capitalization of the target company is more

than 15% of consolidated net asset or sales

turnover or the enterprise value of the entity

Where net assets value or sales turnover or

market capitalization of the target company

is more than 15% of consolidated net asset

or sales turnover or the enterprise value of

the entity or business being acquired as per


or business being acquired as per latest

audited annual financial statements, the per

share value of the target company computed

by the acquirer.

latest audited annual financial statements,

the per share value of the target company

computed by the acquirer.

Highest price paid or payable for any

acquisition by the acquirer or PAC during

the earlier of:

• date on which the primary acquisition is

contracted;



public domain;

• date of PA under SAST 2011.

Other parameters for determining offer price:

1. Where acquirer or PAC has any outstanding convertible instruments convertible into

shares of the target company at a specific price, the price at which such instruments

are to be converted shall be considered.

2. Where acquirer or PAC has acquired any shares of the target company during the

period of 26 weeks after the tendering period at a price higher than the offer price

paid, the acquirer and PAC shall pay the difference between the highest acquisition

price and offer price, to all the shareholders whose shares were accepted in the open

offer, within 60 days from the date of such acquisition except where acquisitions are

pursuant to SEBI Delisting Regulations or open market purchases made in the


ordinary course on the stock exchanges which are not negotiated deals or bulk deals

or block deals or in any other form.

3. Minimum price shall include any price paid or payable in any form or manner and

includes:

a) control premium, if any;

b) non-compete fees or otherwise

4. Adjustment to minimum open offer price in following cases:

a) If during the offer period acquirer directly or through PAC agrees or acquires any

shares or voting rights in the target company in any manner at a price higher than

the minimum offer price, the minimum offer price shall stand revised to such

higher price.

b) Where the open offer is subject to minimum level of acceptances and the open

offer does not receive the minimum acceptance, the acquirer may indicate lower

price for acquiring all the acceptances.

c) For corporate actions like rights issue / bonus issue/ stock splits / dividend / de-

mergers / reduction of capital etc. where the record date for effecting the same falls

3 business days prior to the commencement of the tendering period.

5. In case of an indirect acquisition, the minimum offer price would stand increased by

10% p.a. for the period earlier of the date on which primary transaction is contracted,

or date on which the intention / decision to make primary acquisition is announced in

public domain, and the date of detailed public statement, provided such period is more

than 5 working days.

General exemptions from making an Open Offer


Illustrative list of acquisition which are exempted from making an open offer requirement

(subject to conditions) are as under:

1. Acquisition pursuant to inter-se transfer of shares among qualifying persons. Such

transactions are to be intimated to the stock exchange 4 working days in advance. List

of qualifying persons include:

a) Immediate relatives;

b) Persons named as promoters in the shareholding pattern filed by the target

company for not less than 3 years;

c) Persons acting in concert for not less than 3 years and disclosed to stock

exchange;

d) Specified ensemble of persons etc.

2. Acquisition in the ordinary course of business in specified cases like scheduled

commercial bank acting as an escrow agent or invocation of pledge by scheduled

commercial bank or public financial institution as a pledgee etc.

3. Acquisition at subsequent stages by an acquirer pursuant to an agreement of

disinvestment.

4. Acquisition pursuant to a scheme –

a) Made under section 18 of SICA;

b) Of arrangement involving target company or reconstruction of the target company

including amalgamation, merger, de-merger pursuant to an order of court or an

authority whether Indian or foreign;

c) Of arrangement not directly involving target company or reconstruction not

involving target company’s undertaking including amalgamation, merger, de-

merger pursuant to an order of court or an authority whether Indian or foreign.

This exemption is subject to the following specific conditions viz:


i. Cash and cash equivalent paid is less than 25% of the consideration paid; and

ii. After the implementation of the scheme, the persons holding minimum 33% of

the voting rights in the combined entity are the same persons who held the entire

voting rights before the implementation of the scheme.

5. Acquisition pursuant to SARFAESI Act.

6. Acquisition pursuant to SEBI Delisting Regulations.

7. Acquisition by way of transmission, succession or inheritance.

8. Acquisition of voting rights or preference shares carrying voting rights arising out of

operation of section 87 (2) of the Companies Act.

9. Acquisition of shares of a target company not involving a change in control pursuant

to scheme of CDR notified by RBI subject to such scheme being authorized by the

shareholders of the target company by postal ballot.

10. An increase in voting rights in a target company pursuant to buy-back of shares which

necessitate making an open offer shall be exempt provided such shareholder reduces

his shareholding so that the voting rights fall below the threshold within 90 days from

the date on which the voting rights so increase.

11. Acquisition of rights shares or voting rights in the target company in excess of

creeping limit (5%):

a) upto one’s entitlement;

b) beyond one’s entitlement if the following conditions are fulfilled viz;

i. the acquirer has not renounced any of his entitlements in such rights issue; and

ii. the price at which the rights issue is made is not higher than the ex-rights price

of the shares of the target company computed in a specified manner

12. Increase in voting rights in a target company of any shareholder in excess of the

creeping limit (5%) pursuant to buy-back of shares subject to conditions that:


a) such shareholders have not voted in favour of buy back resolution which is to be

passed through postal ballot mechanism; or

b) such shareholder in capacity as a director or any other interested director has not

voted in favour of buy back at the board meeting of the target company where

buy back is through board approval route; and

c) the increase in voting rights does not result in an acquisition of control by such

shareholder over the target company.

If the above conditions are not met and such shareholders reduce the increase in

shareholding within 90 days to the creeping acquisition limit, open offer obligations

will not be attracted.

13. Acquisition of shares in a target company from a venture capital fund or a foreign

venture capital investor registered with SEBI, by promoters of the target company

pursuant to an agreement between such venture capital fund or foreign venture capital

investor and such promoters.

14. SEBI may grant an exemption from the obligation to make an open offer for acquiring

shares subject to such conditions as it deems fit.

Open Offer Process

The open offer process is broadly divided into following sequential stages:

1. Public Announcement (PA) for an open offer for acquiring shares of the target

company shall be made by the acquirer through the SEBI registered merchant banker

to be appointed as the manager to the open offer in a specified manner. PA is to be

sent to all stock exchanges where shares of the target company are listed for

dissemination to the public.


2. The Public Announcement shall be sent to all the stock exchanges on which the shares

of the target company are listed. Further, a copy of the same shall also be sent to the

Board and to the target company at its registered office within one working day of the

date of the public announcement. The time within which the Public Announcement is

required to be made to the Stock Exchanges under different circumstances is tabulated

below:

Applicable

Regulations

Particulars Time of making PA

13(1) Agreement to Acquirer Shares or

Voting Rights or Control Over The

Target Company

On the same day of entering into agreement

to acquire share, voting rights or control

over the Target Company.

13(2)(a) Market Purchase of shares Prior to the placement of purchase order

with the stock broker.

13(2)(b) Acquisition pursuant to conversion

of Convertible Securities without a

fixed date of conversion or upon

conversion of depository receipts

for the underlying shares

On the same day when the option to convert

such securities into shares is exercised.

13(2)(c) Acquiring shares or voting rights

or control pursuant to conversion

of Convertible Securities with a

fixed date of conversion

On the second working day preceding the

scheduled date of conversion of such

securities into shares.

13(2)(d) In case of disinvestment On the date of execution of agreement for

acquisition of shares or voting rights or


control over the Target Company.

13(2)(e) In case of Indirect Acquisition

where the parameters mentioned in

Regulation 5(2) are not met

Within four working days of the following

dates, whichever is earlier:

a. When the primary acquisition is

contracted; And

b. Date on which the intention or decision to

make the primary acquisition is announced

in the public domain.

13(2)(f) In case of Indirect Acquisition

where the parameters mentioned in

Regulation 5(2) are met

On the same day of the following dates,

whichever is earlier:

a. When the primary acquisition is

contracted; And

b. Date on which the intention or decision to

make the primary acquisition is announced

in the public domain.

13(2)(g) Acquisition of shares, voting rights

or control over the Target

Company pursuant to Preferential

Issue

On the date when the Special Resolution is

passed for allotment of shares under Section

81(1A) of Companies Act 1956.

13(2)(h) Increase in voting rights pursuant

to a buy-back not qualifying for

exemption under Regulation 10

Not later than 90th day from the date of

increase in voting rights.

13(2)(i) Acquisition of shares, voting rights

or control over the Target

Company where the such

Not later than two working days from the

date of receipt of such intimation.


acquisition is beyond the control of

acquirer

13(3) Voluntary Offer On the same day when the Acquirer decides

to make Voluntary Offer

3. Detailed Public Statement (DPS) is to be published by the acquirer in the newspaper

within 5 working days from the PA. However in case of Indirect Acquisition where

none of condition specified in Regulation 5(2) are satisfied, the Detailed Public

Statement shall be published not later than five working days of the completion of the

primary acquisition of shares or voting rights in or control over the company or entity

holding shares or voting rights in, or control over the target company.

Regulation 14 of SEBI (SAST) Regulation, 2011 provides the requirements relating to

publication of Public Announcement and Detailed Public Statement which are

tabulated below:

Regulatio

n

Particulars Time To whom

14(1) Public

Announcement

On the same day All the stock exchanges on which the shares

of the target company are listed.

The stock exchanges shall forthwith

disseminate such information to the public.

14(2) Public

Announcement

One working

day of the date

of the public

announcement

Board and to the target company at its

registered office

14(3) Detailed Public 5 working days Publication in the following newspaper:


Statement from the date of

Public

Announcement.

(a) One Hindi national language daily with

wide circulation

(b) One English national language daily

with wide circulation

(c) One regional national language daily

with wide circulation language at a place

where registered office of the company is

situated.

(d) One regional language daily with wide

circulation at the place of the stock

exchange where the maximum volume of

trading in the shares of the target company

is recorded during the sixty trading days

preceding the date of the public

announcement.

14(4) Detailed Public

Statement

A copy of ‘Detailed Public Statement shall

be sent to followings:

(a) Board

(b) All the stock exchanges in which the

shares of the target company are listed

(c) The target company at its registered

office


4. Upon completion of the process of PA and DPS, the acquirer is required to file a draft

Letter of Offer (LO) with SEBI and once the same is approved by SEBI, it has to be

given to the shareholders of the target company.

5. Escrow account is to be created not later than 2 working days prior to the date of DPS.

6. Competing offers can be made within 15 working days from the date of the DPS

published by the acquirer who has made the first PA.

7. The acquirer shall not complete the acquisition of shares or voting rights in or control

over the target company until the expiry of offer period except in following cases:

Nos. Event Completion Time

1. An offer under preferential

allotment

Within 15 days from the date of passing special

resolution by shareholders

2. Acquirer depositing in the

escrow account 100% of the

consideration payable under

the open offer assuming full

acceptance of the open offer

The parties to such agreement may after the expiry of

21 working days from the date of DPS, act upon the

agreement and the acquirer may complete the

acquisition of shares or voting rights in, or control over

the target company as contemplated.

Upon receipt of the DPS, board of directors of the target company shall constitute a

committee of independent directors to provide reasoned recommendations on open offer, and

the same shall be published in the newspapers.


INTERNATIONAL APPLICATION

Comparison between the International Applications of the Concept of Takeover in

various countries

Areas of

comparison

INDIA AUSTRALIA U.K. USA

Are takeovers

regulated

Yes Yes Yes Yes

Who Regulates SEBI SIC FSA Securities and

Exchange

Commission

(SEC)

Threshold limit

(Initial

Acquisition)

25% 20% 30% Offers are only

voluntary

Creeping

Acquisition limit

(subsequent

acquisitions for

consolidation of

holdings)

5% in each Financial

Year for shareholders

holding between 25%

to 75%.

3%

in 6 months

No No

Concept of

Control

No % specified for

acquisition of

control.

20% 30% No

Public To be made. −Short To be made To be made To be made


announcement PA −Detailed PA

Letter of offer To be sent Target response

statement to be sent

To be sent To be sent.

Offer size Minimum 26 % of

the voting capital of

the company

All the securities of

a class or a

specified proportion

Conditional on

holding more

than 50% of

voting rights

"As much as

5% called

“Tender Offers

Less than –

‘Mini tender

offer’”

Offer price Parameters specified

under Regulation 8

parameters

specified

parameters

specified

-

Escrow Account 25% of consideration

payable

No escrow. But

disclosure of the

basis of funding is

required.

Confirmation

from a third

party that there

are resources.

-

Form of

consideration

Cash and / or

securities

Cash and /

securities

Cash as well as

cash alternatives

Cash/

securities

Competitive bids

allowed

Yes Yes Yes -

Can offer be

withdrawn

Yes, under certain

conditions:

- Refusal of statutory

approvals.

- Death of sole

acquirer

Yes, only with

permission of ASIC

Yes, If a

competitive bid

is made at a

higher price.


- Conditions

specified in

agreement not met

- As and when SEBI

deems fit

Can offer price

be revised

Yes Only upward

revision allowed

Yes. Yes

Can shares be

acquired after

PA is made

Yes Yes Yes

Can

shareholders

withdraw the

acceptances

tendered?

No Limited withdrawal

rights

Yes. Under

certain

circumstances.

Yes, up to

seven days of

the copies of

the offer are

sent.

Continuous

disclosures

required

Event Based: On

acquisition of 5% or

more shares. For

shareholders holding

5% or more shares on

acquisition or sale of

2% or more

shares/voting rights.

Continual

Disclosure: By

Disclosure if

shareholder has

interest in voting

shares 5%+. And

every change + or –

1% triggers further

disclosure.

Disclosure at

acquisition of

15% or more

When

shareholding is

10% or more,

then reporting

has to be made

to SEC


persons along with

PAC holding 25% or

more shares or voting

rights.

Timing of

disclosures to be

made

Event Based: Within

2 working days from

the date acquisition

or receipt of

intimation of

allotment or

acquisition of shares,

as the case may be.

Continual

Disclosure: Within 7

working days from

the end of financial

year.

Within 2 working

days. Otherwise,

when the bid is

open, then at 9:30

p.m. next working

day.

Concept of

Indirect

acquisitions

Specified in

Regulation 5

Present Yes, chain rule

is existing

subject to

condition of

significant

shareholding

-


Defence

Techniques

Competitive bids Competitive bids Competitive

Bids

-

Concept of

persons acting in

concert

Yes, as defined in

Regulation 2(1)(q)

Not defined Yes Yes

Any exemptions

from Open offer

Automatic under

Regulations

The legislation has

a list of exceptions

Panel appears to

have the

discretion

Yes, as

specified by

the SEC

Penalties Civil and Criminal

Liabilities

Criminal & civil

penalties.

Reprimand,

public censure,

etc.

Civil penalties

OPEN OFFERS MADE UNDER SEBI (SAST) REGULATIONS,

2011


On September 23, 2011, the market watchdog SEBI has notified the New Takeover

Regulations i.e. “Securities and Exchange Board of India (Substantial Acquisition of

Shares and Takeovers) Regulations, 2011” (hereinafter called as SEBI (SAST)

Regulations, 2011) applicable w.e.f. October 22, 2011. Some of the Open Offers made under

New Takeover Regulations are given below:

1. Open Offer for Andhra Cements Limited

About Andhra Cements Limited (Target Company)

Andhra Cements Limited was incorporated on December 9, 1936 under the Indian

Companies Act, 1913 with the Registrar of Companies, Vizagapatam. The shares of the

Target Company are presently listed on the Bombay Stock Exchange Limited (BSE) and the

National Stock Exchange of India Limited (NSE).

About the Jaypee Development Corporation Limited

The Acquirer, Jaypee Development Corporation Limited was incorporated on December 5,

2007 and is engaged in the business of providing Industrial Security and Medical Services to

various companies engaged in the infrastructure development. The Acquirer is a part of the

Jaypee Group and is a wholly owned subsidiary of Jaypee Ventures Private Limited. The

shares of the Acquirer are not listed on any Stock Exchange.

Background of the Offer

The Acquirer has entered into a Share Subscription and Share Purchase Agreement dated

November 15, 2011 (“SSSPA”) with the promoter and promoter group of the Target

Company and the Target Company, to acquire by way of transfer and subscription

195,619,550 equity shares representing 66.646% of the Expanded Paid up Share Capital of


the Target Company post preferential allotment approved by the meeting of Board of

Directors dated November 15, 2011 comprising of:

i. 48,119,550 Equity Shares being purchased from the Sellers; and

ii. to subscribe to 147,500,000 Equity Shares pursuant to a Preferential Allotment to be

made by the Target Company at a price of Rs. 12/- per equity share.

Details of the offer

Pursuant to the above acquisition, the Acquirer has made a Public Announcement of an Open

Offer to the shareholders of the Target Company to acquire upto 76,315,328 equity shares

representing 26% of the expanded paid up Share Capital of the Target Company at a price of

Rs. 12 per fully equity share payable in cash.

2. Open Offer for Swadeshi Industries and Leasing Limited

About Swadeshi Industries and Leasing Limited (Target Company)

Established in October 31, 1983, the Target Company was originally incorporated in the

name of Swadeshi Leasing Company Limited. The name of the Target Company then

changed to Swadeshi Industries and Leasing Limited. The Equity Shares of the Target

Company are listed on Bombay Stock Exchange Limited ("BSE") and Delhi Stock Exchange

Association Limited ("DSE").

About Chin Info Tech Private Limited (Acquirer)

Located in Mumbai, the Acquirer was incorporated with the main object to carry on the

business to manufacture, alter or deal in electrical and electronic appliances and in the

business of computers. There are no other PACs with the Acquirer.

Background of the Offer


On November 09, 2011, the Acquirer has entered into a Share Purchase Agreement (SPA)

with the Promoters of Target Company for acquisition of 6,31,300 fully paid up equity shares

representing 16.15% of the total paid-up equity share capital of Target Company at a price of

Rs.15 per fully paid up equity share payable in cash. Further, on the same day the Target

Company has made preferential allotment of 15,00,000 Equity Shares to the Acquirer which

amount to 27.74% of the total paid up equity shares (post allotment of shares) of the Target

Company. Consequent upon acquiring the shares pursuant to the execution of SPA &

proposed allotment of equity shares on preferential basis the post shareholding & voting

rights of the Acquirer will increase to 39.41% of the total paid up equity shares of the Target

Company post preferential allotment. The Acquirer also intends to acquire control over the

Target Company and make changes in the Board of Directors of the Target Company

subsequent to the completion of this Open Offer in accordance hereof. Thus this mandatory

offer is being made by the acquirer in accordance with Regulations 3 and 4 of SEBI (SAST)

Regulations, 2011.

Details of the Offer

The Acquirer has made an offer for acquisition of upto 14,06,067 equity shares representing

26% of the total paid up equity share capital of the Target Company at a price of Rs 15 per

fully equity share payable in cash to the shareholders of the Target Company. If the Target

Company doesn't receive the approvals as required in order to allot 15,00,000 Equity Shares

to the Acquirer on Preferential Basis for which it has passed Special Resolution under Section

81 (1A) of Companies Act, 1956 then the acquirer will withdraw the offer under regulation

23 of SEBI (SAST) Regulations, 2011.

3. Open Offer for Swaraj Automotives Limited


About the Swaraj Automotives Limited (Target Company)

Incorporated in the year 1974, Swaraj Automotives Limited (Target Company) is engaged in

the business of manufacturing seats & seating systems for tractors, commercial vehicles, cars

and passenger vehicles. The shares of the Target Company are listed at Delhi Stock Exchange

Ltd. (DSE).

About the Mahindra & Mahindra Ltd. (Acquirer)

The Acquirer is a part of the Mahindra Group and is engaged in the business of

manufacturing and marketing of tractors utility vehicles and light commercial vehicles. The

Acquirer belongs to the promoter group of the Target Company and holds 10, 59,543 equity

shares constituting 44.19% of the Voting Share Capital of the Target Company. The Acquirer

is listed on the Bombay Stock Exchange Limited (“BSE”) and National Stock Exchange of

India Limited (“NSE”). The Global Depositary Receipts (“GDRs”) of the Acquirer are listed

on the Luxembourg Stock Exchange and are also admitted for trading on International Order

Book (IOB) of the London Stock Exchange.

Details of the Offer

The Acquirer is already in control of Target Company and the proposed acquisition under the

offer is for the purpose of consolidation of shareholding in the Target Company. Thus this

voluntary offer is made by the Acquirer under Regulation 6 of SEBI (SAST) Regulations,

2011 to acquire upto 6,47,382 fully paid up equity shares representing 27% of the voting

share capital of Target Company at a price of Rs.90 per share.


CASE STUDY

Analysis of Takeover Open Offer of Kamat Hotels (India) Limited

Kamat Hotels (India) Limited (“KHIL/Target Company”) was incorporated on 21st March,

1986, Kamat Hotels (India) Limited is engaged in the business of hospitality and allied

businesses, and its activities may be broadly categorized into (i) operation of hotels owned by

the Company, (ii) management of hotels owned by other parties under contract (iii) catering

services and (iv) timeshare. The Company has established four brands viz. Gadh, Orchid,

Vits and Lotus. The shares of the Target Company are listed on Bombay Stock Exchange

Limited (BSE) and National Stock Exchange Limited of India Limited (NSE).

About Clearwater Capital Partners (Cyprus) Limited (“Acquirer”)

Clearwater Capital Partners (Cyprus) Limited was incorporated in 2004 as a ‘Limited

Liability Company’ having its registered office in Cyprus for the purpose of investment in

securities particularly in Asia. The Acquirer belongs to “Clearwater Capital Partners” group.

The Acquirer holds 3,941,803 equity shares representing 23% of the total existing paid-up

and voting capital of the Target Company.

About Clearwater Capital Partners Singapore Fund III Private Limited (“PAC”)

Incorporated on August 28, 2007 under the companies Act in the Republic of Singapore,

Clearwater‐Singapore is a financial investor and belongs to “Clearwater Capital Partners”

group. The shares of the company are not listed on any stock exchange in India or/and

abroad. At present, the PAC holds 257,431 equity shares aggregating to 1.50% of the total

existing paid-up and voting capital of the Target Company.


Triggered Event

The Acquirer had subscribed to the bonds offered by the Target Company in terms of the

Offering circular dated March 13, 2007 of which US$ 5,966,000 Bonds are still held by the

acquirer and are mandatorily due for conversion on January 30, 2012. The Acquirer has

exercised its right to convert the remaining US$ 5,966,000 Bonds into equity shares of the

Target Company and to effect the conversion, a written “Conversion Notice” is served to the

Principal Paying and Conversion Agent after the Board of Directors of Clearwater‐Cyprus

has passed a resolution to convert the remaining Bonds on January 11, 2012.

Shareholding of the Acquirer and PAC before and after the conversion:

Acquirer PAC Total

Pre Transaction shareholding

Number of equity shares

% of total share capital/voting

rights

3,941,803

23%

257,431

1.50%

4,199,234

24.50%

Proposed shareholding after the

acquisition of equity shares which

triggered the Open Offer

5,895,999

30.88%^

257,431

1.35%

6,153,430

32.23%^

^Calculated on post‐conversion equity share capital of the Target Company.

Pursuant to conversion of remaining Bonds into equity shares, the Acquirer along with PAC

has triggered Regulation 3(1) of SEBI (SAST) Regulations, 2011; accordingly a Public

Announcement was made to BSE and NSE by the Acquirer and PAC on January 11, 2012.


Takeover Open Offer

Pursuant to above conversion of bonds into equity shares, the Acquirer along with PAC has

made Open Offer to the shareholders of the Target Company for acquisition of 4,964,283

equity shares representing 26% of the post‐conversion paid‐up equity share and voting capital

at Rs.135 per equity share payable in Cash.

If the ongoing ‘Composite Scheme of Arrangement and Amalgamation’ (“the Scheme”) of

promoters’ group entities of the Target Company is completed within 10 working days from

the closure of the Tendering Period, the Acquirer and the PAC will increase the Offer Size to

the extent of 26% of the post-amalgamation equity share capital of the Target Company in

accordance with Regulation 7(1) of the said Regulations.

Compliance with Regulation 22(1) of SEBI (SAST) Regulations, 2011

The Manager to the Offer has opened a “Demat Escrow Account” wherein the Conversion

Equity Shares will be kept in compliance with Regulation 22(1) of the Regulations which

restrict the completion of acquisition of shares or voting rights in, or control over, the target

company, whether by way of subscription to shares or a purchase of shares attracting the

obligation to make an open offer for acquiring shares, until the expiry of the offer period.

Upon fulfilment of the Offer related formalities, the Conversion Equity Shares will be

transferred to the Acquirer’s DP account.

The relevant text of regulation 22(1) of SEBI (SAST) Regulations, 2011 is reproduced herein

below:

The acquirer shall not complete the acquisition of shares or voting rights in, or control over,

the target company, whether by way of subscription to shares or a purchase of shares

attracting the obligation to make an open offer for acquiring shares, until the expiry of the

offer period:


Provided that in case of an offer made under sub-regulation (1) of regulation 20, pursuant to

a preferential allotment, the offer shall be completed within the period as provided under

sub-regulation (1) of regulation 74 of Securities and Exchange Board of India (Issue of

Capital and Disclosure) Regulations, 2009.


CONCLUSION

The new regulation is indeed a path breaking legislation which is likely to change the

landscape of corporate India in the near future. With the increased threshold limit, the level of

activity in listed companies by PE’s/ strategic investors will increase to more material stakes

(up to 24.99%). Also, “head room” for foreign technical collaborators / minority foreign

partners to increase their shareholding without triggering cumbersome and costly takeover

regulations will increase. Companies would be able to raise expansion capital in a more cost

effective manner (i.e. without triggering open offer till 25% stake);

For the economy, more investment from PE/foreign partners should be expected in the

coming months, which should give a fillip to FDI numbers which have been languishing in

the recent past.

With a 24.99% threshold limit, the acquirers would be able to block special resolutions in

target companies with relative ease. Let us assume a promoter who holds 45% stake in the

target company. If a hostile acquirer were to reach 24.99%, such acquirer can effectively

have ~ 35% voting right (24.99/(24.99+45)) and therefore can easily block special resolutions

(assuming that the participation by minority public shareholders either in physical meeting or

postal ballot is negligible (which is invariably the case)).

Further, with the possibility of acquiring 24.99% without triggering open offer, acquirers

would practically be able to get a Board position in target-company and therefore having a

greater say in the company’s operations. The role of minority public shareholders holding

significant stake (say 1-5%) would also increase. Strategic long-term acquirers can easily

acquire up to 24.99% and then negotiate with these significant minority shareholders to

consolidate their shareholding / trigger open offer for takeover of the target companies.


Expect off-market transactions at higher than market valuations for such strategic buy-outs to

rise.

Even if the promoter has more than 25% stake, they may seek to consolidate their holding by

5% through creeping acquisition route with a view to strengthening their position in the

Company. Similarly, with the market indices/ stock prices pegged low due to the

international market scenario and also local factors, strategic/ long term players may be

inclined to ramp up shareholding in value stocks with an intention of having a material and

influential stake in such companies in the future.

In light of the above, expect some serious action in stocks of such companies in the coming

weeks. This one step of increasing the open offer threshold limit to 25% is a significant

development and changes the landscape for promoters significantly. There is likely to be a

war for retaining/ takeover of good companies (especially with the market multiples currently

being really attractive) and promoters with low shareholding and high public float should be

worried.

The new regulation will facilitate consolidation of promoter shareholding to the maximum

permissible level i.e. 75% which was a challenge in the earlier regulation. This would be

welcome move for the Promoters who will have more flexibility to bump-up their

shareholding. However, the reduction of “public float” due to this measure and consequential

impact on trading volumes/ reflection of real “market” price of such scrips on bourses would

need to be watched.

With the increase in the initial threshold to 25% and the increase in open offer size to 26%,

there is a possibility of the acquirer getting simple majority (25% + 26%). This would be

welcome for M&A transactions because there is significant comfort that acquirers get when


they hold more than 50% stake directly and therefore do not need to depend on other

shareholders for passing simple corporate law resolutions.

With a view to facilitate consolidation of holdings in excess of 5% (creeping acquisition) by

substantial shareholders, the concept of voluntary offer for 10% stake has been introduced.

This will provide flexibility to substantial shareholders (holding 25% or more) to increase

their shareholding (of course by following the process of open offer) without being an

obligation to make the offer for additional 26% stake thereby reducing the overall outflow

from such consolidation.

Of course, at a practical level, the experience in open offers has been that the public does not

fully subscribe to such public offers. Therefore, practically, time will tell in how many cases

the 26% limit (or 10% in case of voluntary offer) would be reached. However, the fact that

the regulatory mechanism has been enabled is commendable.

In case the public offer results in public shareholding falling below 25%, then the acquirer is

obligated to reduce his shareholding so that the minimum 25% public float is maintained.

Thus, the revised norms will change the dynamics of mergers and acquisitions in India.

Although, the revisions are not as dynamic as proposed by Takeover Committee, which

proposed an open offer size of 100 per cent after the trigger was hit. However, even under the

current norms the cost of acquisitions goes up substantially. Because earlier after the 15 per

cent trigger, the acquirer had to seek another 20 per cent and hold a cumulative 35 per cent in

the target company. The cost would now be higher as the acquirer needs to hold 51 per cent

subsequent to the open offer.

It would not be surprising to see promoters allotting convertible warrants to themselves,

especially in companies where promoter holding is thin. There are 24 companies in the BSE


500 index where promoter holding is below 26 per cent, and the number of companies where

promoter holding is 51 per cent or below is 210.

For smaller investors, removal of non-compete fees which is in line with Takeover

Committee recommendations, is good news. That largely serves the purpose of protecting the

interests of minority shareholders. Going forward, we will not see the non-compete fees

element in the mergers and acquisition deals.


LIST OF REFRENCES

Books:

1. S. Ramanujam, Mergers et al, 2007, Tata McGraw Hill, New Delhi

2. H. R. Machiraju, Mergers, Acquisitions and Takeovers, 2006, New Age International

Publishers, New Delhi.

3. Ch. Rajeshwar, Mergers and Amalgamation: New Perspective, 2001, ICFAI Press,

Hyderabad.

Articles:

1. Takeovers in India – An overview, by Vijay Sambamurthi & Siddharth Shah

2. Corporate Governance Structure, Mergers and Takeovers in India in the Post

Liberalization Regime-Proposals and Policies, by Nandita Das Gupta

Websites:

1. www.sebi.gov.in

2. www.capitalmarket.com

3. www.takeovercode.com

4. www.corporateprofessional.com

5. www.indiainfoonline.com

6. www.deloitte.com

7. www.financialexpress.com

8. www.businesstoday.intoday.in

9. www.rediff.com/money

Newspapers:

1. Economic Times

2. Financial Express


http://www.rediff.com/money

http://www.businesstoday.intoday.in/

http://www.financialexpress.com/

http://www.deloitte.com/

http://www.indiainfoonline.com/

http://www.corporateprofessional.com/

http://www.takeovercode.com/

http://www.capitalmarket.com/

http://www.sebi.gov.in/

3. Business Line

Reports:

1. Bhagwati Committee Report

2. Takeover Regulations Advisory Committee (TRAC) Report

Journal:

1. Takeover Panorama


Documents

Project-Sebi Takeover Code