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In the wake of India emerging as one of the fastest growing economies in the world, Mergers & Acquisitions (M&A) have become one of the most common types of restructuring. They have become popular because of the enhanced competition, breaking of trade barriers, free flow of capital across countries and globalisation of businesses. SEBI is the nodal authority regulating entities that are listed on stock exchanges in India. Takeover regulations have been framed by SEBI to protect the interest of all stakeholders of the concerned entity i.e the investee company, acquirer, promoter and shareholder. The objective of the article is to give an overall idea on the key concepts of the New Take over regulations, 2011.
Securities Exchange Board of India (SEBI) has introduced SEBI (Substantial Acquisitions of Shares and Takeover) Regulations 2011 to regulate the acquisition of shares and voting rights in Public Listed Companies in India.
The regulation applies to direct or indirect acquisition of shares or voting rights or control over Target Company.
Acquisition means directly or indirectly acquiring or agreeing to acquire shares or voting rights in or control over Target Company.
Acquirer means any person either directly or indirectly or with Person acting in Concert (PAC) engages in acquisition.
Shares mean any security which entitles the holder to voting rights. Now preference shares, depository receipts are also included in shares.
Person acting in Concert (PAC):
1. Common objective: PAC means any such person or persons who with common objective of Acquisition as defined earlier directly or indirectly cooperate for acquisition of shares or voting rights in or exercise of control over Target Company.
2. Deemed to be PAC: Earlier regulation 1997 provided that Acquirer has to be a party and there should be substantial acquisition of shares. Now the regulation has been modified that the acquirer can act through other persons and the scope of PAC to include person or persons directly or indirectly cooperates for acquisition of shares or voting rights in or exercise control over Target Company. Hence a company, its holding company, subsidiary company and any company under same management, directors and any persons entrusted with management of the Company are deemed to be PAC unless proved otherwise
3. Deemed to be acting in concert: Now the persons acting in concert has been widened to include persons who are entrusted with the management of the Company rather than management of funds of the Company, as provided in earlier regulation.
Control includes right to appoint majority of directors or control the management or control the policy decision exercisable directly or indirectly by individual or along with Person acting in concert by virtue of shareholding pattern or shareholders agreement or voting agreement or management rights
Director or officer of Target Company shall not be constructed to be in control over Target Company mainly because of holding such a position.
Target Company means a Public Listed Company.
Initial trigger point for Open offer - increased from 15% to 25%.
When the acquirer alone or with PAC acquire shares which would entitle them to shares or voting rights in the target company more than 25% of the voting rights along with the existing holdings, should make public announcement for open offer. Now that the investors can increase their stake holding upto 24.99% without open offer. Erstwhile regulation 1997 provided the initial trigger point for open offer as 15%.
The increase in the limit for open offer will help companies to get in more investment. At the same time the promoters will be concerned about any acquirer misutilising the new provision and controlling the decision making of the Company.
Creeping acquisition upto 5% in financial year:
When the acquirer alone or together with PAC holding more than 25 % but less than maximum permissible non-public shareholding i.e 75% (or 90% in case of Public sector undertakings) can acquire upto 5% of shares or voting rights in any financial year without making public announcement for open offer.
The open offer will be triggered either when the individual shareholding of the acquirer or the consolidated shareholding of the acquirer with PAC exceeds the threshold limit.
Acquisition of control:
Acquisition by way of control whether directly or indirectly would require the acquirer to make public announcement for open offer. Erstwhile regulation 1997, provided that change in control can be through passing of special resolution through postal ballot is now been withdrawn.
Indirect acquisition of shares or control.
Any acquisition of shares or voting rights in or control over Target Company which if acquired directly would trigger a public open offer is considered to be indirect acquisition.
Open Offer size increased from 20% to 26%
The open offer size has been increased from 20% to 26% of the total shares of the target Company.
Different methods have been provided for determining the offer price of direct acquisition and indirect acquisition. The price is determined at volume weighted average market price at 60 days rather than simple average.
Non-compete fees or control premium or otherwise payable to the exiting sellers shall be included to the price payable to the shareholders of the target company. This would mean that the promoter and the public shareholder would exit at the same price.
Voluntary open offer:
Voluntary open offer means open offer given by the acquirer voluntarily without triggering the mandatory open offer obligations.
An acquirer can make an open offer of 10% of total shares of target company provided -he directly or with PAC already holds 25% of the shares and
-Has not acquired any shares in the preceding 52 weeks except through open offer. --- He is also restricted to make any acquisition for a period of 6 months after the completion of open offer except through another voluntary open offer or competing offer.
-Post acquisition should not result in maximum permissible non public shareholding.
The Target Company has an obligation to constitute a committee of independent directors to provide reasoned recommendations to the shareholders about the open offer. This will improve the shareholders confidence and would lead to good corporate governance.
Increase in shareholding beyond the maximum permissible non-public shareholding due to open offer:
When after the completion of the open offer, the shareholding of the acquirer along with the PAC is more than the permissible limit of non-public shareholding (i.e 75% or 90% in some Companies) then;
- It is obligatory on the acquirer to bring down the non-public shareholding to the specified limit (i.e 75% or 90% in PSU’s) as permitted by Securities Contract (Regulation) Rules 1957 within one year.
- Further the acquirer is also not eligible to delist the shares from the stock exchanges for a period of twelve months from the completion of the offer period.
Exemptions from making Open offer:
-General Exemptions are granted to the following categories of acquisition subject to fulfillment of specified conditions.
Interest transfer amongst qualifying persons viz., immediate relatives, promoters as mentioned in shareholding pattern of the Company not less than 3 years prior to the proposed acquisition, a company, its subsidiary or holding company or other subsidiaries of the holding company or persons holding not less than 50% of the shares of the Company etc.
Acquisition in the ordinary course of business by stock brokers on behalf of their clients, underwriters.
Acquisitions at subsequent stages, by an acquirer who has made a public announcement of an open offer for acquiring shares pursuant to an agreement of disinvestment.
Acquisition pursuant to Scheme under Sick Industrial Companies (Special Provisions) Act, 1985 or arrangement involving target company as transferor or transferee company in amalgamation, merger or demerger pursuant to an order of Court or Competent authority
Acquisition under operation of law: Pursuant to the provisions of Securitisation and Reconstruction of Financial Assets and Enforcement of security Interest, to the scheme of SEBI (Delisting of shares), transmission or succession or inheritance.
Acquisition of voting rights or preference shares carrying voting rights on account of non payment of dividend
The acquisition of shares of a target company, not involving a change of control over such target company, pursuant to a scheme of corporate debt restructuring in terms of the Corporate Debt Restructuring Scheme.
Increase in voting rights in a target company of any shareholder pursuant to buy-back of shares.
Acquisition of shares by any shareholder of a target company, upto his
Entitlement, pursuant to a rights issue; (b) acquisition of shares by any shareholder of a target company, beyond his entitlement, pursuant to a rights issue, subject to fulfillment of the following conditions:
Acquisition of shares in a target company by any person in exchange for shares of another target company tendered pursuant to an open offer for acquiring shares under these regulations;
Acquisition of shares in a target company from state-level financial institutions or their subsidiaries or companies promoted by them, by promoters of the target company pursuant to an agreement between such transferors and such promoter;
Acquisition of shares in a target company from a venture capital fund or a foreign venture capital investor registered with the Board, by promoters of the target company pursuant to an agreement between such venture capital fund or foreign venture capital investor and such promoters
Exemption by the Board (Regulation 11):
SEBI for reasons recorded in writing may grant exemption from the obligation to make an open offer and from compliance of procedural requirements of the regulation if it deems fit in the interest of the investors and securities market
The New regulations, 2011 has made it obligatory for the acquirer to make the disclosures whereas it was on the Target Company in erstwhile regulations, 1997.
i. Event Based disclosures:
a. When the acquirer acquires the shares or voting rights in the Target Company, which taken together with the existing holding of him and PAC’s to 5% or more of shares or voting rights of the Target Company, then disclosure in the prescribed format has to be submitted by the acquirer to the stock exchanges and the target company within 2 days of the receipt of intimation of allotment or acquisition.
b. When the acquirer together with the PAC holds more than 5% of the shares or voting rights of the Company, then every acquisition and disposal of shares representing 2% of the shares of the target company has to be informed by the acquirer to the stock exchanges and the target company within 2 days of the acquisition or disposal.
c. Encumbrance of shares:
When the shares are encumbered by the promoter or by the persons acting in concert with him, shall disclose the details of creation, invocation and release of the encumbrance to the stock exchange and the Target Company within 7 days of such creation, invocation or release.
ii. Continual Disclosure:
Every person who along with the PAC holds shares or voting rights more than 25% of the shares or voting rights of the target company has to inform the aggregate shareholding or voting rights as of 31st March of every year to the stock exchange and the target company within 7 days from the end of financial year
The new regulations provides for detailed procedure for open offer covering important points like manager to the open offer, timing, publication of letter of offer, filing with the Board, provision of escrow, payment of consideration, completion of acquisition, withdrawal of offer etc.
To sum up it could be seen that SEBI has made efforts to maintain the balance between the concerns of investors, promoters and shareholders. The benefits being increase in threshold for open offer to the investors, more opportunity for fund raising to the promoters, inclusive of non compete price to be factored in the offer price being beneficial to the shareholders. However it also has negative sides like increase of non compete price to be factored in offer price will increase the cost of acquisition, holding of shares in few hands may affect liquidity in the market.