Procedure for Takeover The takeover could take place through different methods. A company may acquire the shares of a unlisted company through what is called acquisition under Section 395 of the Companies Act , 1956. However where the shares of the company are widely held by the general public, it involves the process as set out in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, as amended in 2002, 2004 and 2006 . In this paper the researcher shall limit his analysis to listed companies.
The term ‘Takeover’ has not been defined under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 , the term basically envisages the concept of an acquirer taking over the control or management of the target company . When an acquirer, acquires substantial quantity of shares or voting rights of the target company, it results in the Substantial acquisition of Shares
For the purposes of understanding the implications arising from the aforementioned paragraph, it is necessary for us to dwell into what is the actual meaning of [I] Acquirer, [ii] Target Company, [iii] Control, [iv] Promoter, [v] Persons acting in concert and [vi] substantial quantity of shares or voting rights.
[I] Acquirer- An Acquirer means (includes persons acting in concert (PAC) with him) any individual/company/any other legal entity which intends to acquire or acquires substantial quantity of shares or voting rights of target company or acquires or agrees to acquire control over the target company
[ii] Target Company - A Target company is a listed company i.e. whose shares are listed on any stock exchange and whose shares or voting rights are acquired/ being acquired or whose control is taken over/being taken over by an acquirer
[iii] Control - Control includes the right to appoint directly or indirectly or by virtue of agreements or in any other manner majority of directors on the Board of the target company or to control management or policy decisions affecting the target company. However, in case there are two or more persons in control over the target company the cesser of any one of such persons from such control shall not be deemed to be a change in control of management nor shall any change in the nature and quantum of control amongst them constitute change in control of management provided this transfer is done in terms of Reg. 3(1)(e). Also if consequent upon change in control of the target company in accordance with regulation 3, the control acquired is equal to or less than the control exercised by person (s) prior to such acquisition of control, such control shall not be deemed to be a change in control
[iv] Promoter- The definition of promoter after amendment in 2006 now includes “any person who is in control of the target company” or “named as promoter in an offer document or shareholding pattern filed by the target company with the stock exchanges according to the listing agreement, whichever is later.”
The clauses that formed part of the earlier definition but now stand deleted are, “any persons who is directly or indirectly in control of the company” and “any person named as person acting in concert with the promoter in any disclosure made in terms of the listing agreement with the stock exchange or any other regulations or guidelines made or issued by the board under the Act. ”
The takeover code has also modified the definition of individual. The new definition of individual includes: 1.Spouse, parents, sisters, brothers and children of the promoter.
2. A company in which 10% or more of the share capital is held by the promoter or his immediate relative or a firm/HUF in which the promoter or his immediate relative is a member holding an aggregate share capital of 10% or more.
3. Any company in which the company specified in sub-clause above, holds 10% or more of the share capital. (The earlier threshold was 26%)
[v] Persons acting in concert- PACs are individual(s) /company(ies)/ any other legal entity(ies) who are acting together for a common objective or for a purpose of substantial acquisition of shares or voting rights or gaining control over the target company pursuant to an agreement or understanding whether formal or informal. Acting in concert would imply co-operation, co-ordination for acquisition of voting rights or control. This co-operation/ co-ordinated approach may either be direct or indirect.
The concept of PAC assumes significance in the context of substantial acquisition of shares since it is possible for an acquirer to acquire shares or voting rights in a company "in concert" with any other person in such a manner that the acquisition made by them may remain individually below the threshold limit but may collectively exceed the threshold limit.
Unless the contrary is established certain entities are deemed to be persons acting in concert like companies with its holding company or subsidiary company, mutual funds with its sponsor / trustee/ Asset management company, etc
[vi] The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 has defined substantial quantity of shares or voting rights distinctly for two different purposes:
I. Threshold of disclosure to be made by acquirer(s): 1) 5% and more shares or voting rights: A person who, along with PAC, if any, (collectively referred to as " Acquirer" hereinafter) acquires shares or voting rights (which when taken together with his existing holding) would entitle him to more than 5% or 10% or 14% shares or voting rights of target company, is required to disclose at every stage the aggregate of his shareholding to the target company and the Stock Exchanges within 2 days of acquisition or receipt of intimation of allotment of shares
2) Any person who holds more than 15% but less than 55% shares or voting rights of target company, and who purchases or sells shares aggregating to 2% or more shall within 2 days disclose such purchase/ sale along with the aggregate of his shareholding to the target company and the Stock Exchanges.
3) Any person who holds more than 15% shares or voting rights of target company and a promoter and person having control over the target company, shall within 21 days from the financial year ending March 31 as well as the record date fixed for the purpose of dividend declaration, disclose every year his aggregate shareholding to the target company
4) The Target company, in turn, is required to inform all the stock exchanges where the shares of target company are listed, every year within 30 days from the financial year ending March 31 as well as the record date fixed for the purpose of dividend declaration
(II) Trigger point for making an open offer by an acquirer 1) 15% shares or voting rights: An acquirer who intends to acquire shares which alongwith his existing shareholding would entitle him to exercise 15% or more voting rights, can acquire such additional shares only after making a public announcement (PA) to acquire atleast additional 20% of the voting capital of target company from the shareholders through an open offer.
2) Creeping acquisition limit: An acquirer who holds 15% or more but less than 55% of shares or voting rights of a target company, can acquire such additional shares as would entitle him to exercise more than 5% of the voting rights in any financial year ending March 31 only after making a public announcement to acquire atleast additional 20% shares of target company from the shareholders through an open offer . However in the case where only 5% or less shares or voting rights could be acquired in aggregate , whether the person acquired it individually or together with persons acting in concert Public announcement is not required to be made. This is called creeping acquisition . An acquirer who seeks to acquire further shares shall not acquire such shares during th period of 6 months from the date of closure of public offer at a price higher than the offer price. However this shall not be applicable where the acquisition is made through stock exchanges
3) Consolidation of holding: An acquirer who holds 55% or more but less than 75% shares or voting rights of a target company, can acquire further shares or voting rights only after making a public announcement to acquire atleast additional 20% shares of target company from the shareholders through an open offer. no acquirer, (including persons acting in ) who holds 55 per cent or more but less than 75 per cent of the shares or voting rights in a target company, shall acquire any additional shares or voting rights, unless he makes a public announcement to acquire shares in accordance with these regulations
In order to appreciate the implications arising here from, it is pertinent for us to consider the meaning of the term ‘public announcement’
III. Public Announcement A Public announcement is generally an announcement given in the newspapers by the acquirer, primarily to disclose his intention to acquire a minimum of 20% of the voting capital of the target company from the existing shareholders by means of an open offer
However, an Acquirer may also make an offer for less than 20% of shares of target company in case the acquirer is already holding 75% or more of voting rights/ shareholding in the target company and has deposited in the escrow account in cash a sum of 50% of the consideration payable under the public offer
The Acquirer is required to appoint a Merchant Banker registered with SEBI before making a PA and is also required to make the PA within four working days of the entering into an agreement to acquire shares, which has led to the triggering of the takeover, through such Merchant Banker.
The other disclosures in this announcement would inter alia include the offer price, the number of shares to be acquired from the public, the identity of the acquirer, the purposes of acquisition, the future plans of the acquirer, if any, regarding the target company, the change in control over the target company, if any, the procedure to be followed by acquirer in accepting the shares tendered by the shareholders and the period within which all the formalities pertaining to the offer would be completed.
The basic objective behind the PA being made is to ensure that the shareholders of the target company are aware of the exit opportunity available to them in case of a takeover / substantial acquisition of shares of the target company. They may, on the basis of the disclosures contained therein and in the letter of offer, either continue with the target company or decide to exit from it.
IV. Procedure to be followed after the Public Announcement In pursuance of the provisions of Reg. 18 of the said Regulations, the Acquirer is required to file a draft Offer Document with SEBI within 14 days of the PA through its Merchant Banker, along with filing fees of Rs.50,000/- per offer Document (payable by Banker’s Cheque / Demand Draft). Along with the draft offer document, the Merchant Banker also has to submit a due diligence certificate as well as certain registration details .The filing of the draft offer document is a joint responsibility of both the Acquirer as well as the Merchant Banker.
Thereafter, the acquirer through its Merchant Banker sends the offer document as well as the blank acceptance form within 45 days from the date of Public Announcement , to all the shareholders whose names appear in the register of the company on a particular date
The offer remains open for 30 days. The shareholders are required to send their Share certificate(s) / related documents to the Registrar or Merchant Banker as specified in the PA and offer document.
The acquirer is obligated to offer a minimum offer price as is required to be paid by him to all those shareholders whose shares are accepted under the offer, within 30 days from the closure of offer.
V. Exemptions The transactions being allotment to underwriter pursuant to any underwriting agreement, acquisition of shares in ordinary course of business by Registered. Stock brokers on behalf of clients, by a) Registered. Market makers, b) public financial institutions on their own account, c) banks & Financial Institution as pledgees, etc. Acquisition of shares by way of transmission on succession or by inheritance are however exempted from making an offer and are not required to be reported to SEBI, acquisition of shares by Govt. companies, acquisition pursuant to a scheme framed under section 18 of SICA 1985, of arrangement/ restructuring including amalgamation or merger or de-merger under any law or Regulation Indian or Foreign; Acquisition of shares in companies whose shares are not listed,. However, if by virtue of acquisition of shares of unlisted company, the acquirer acquires shares or voting rights (over the limits specified) in the listed company, acquirer is required to make an open offer in accordance with the Regulations.
VI. Minimum Offer Price and Payments made It is not the duty of SEBI to approve the offer price, however it ensures that all the relevant parameters are taken in to consideration for fixing the offer price and that the justification for the same is disclosed in the offer document. The offer price shall be the highest of : - Negotiated price under the agreement, which triggered the open offer. - Price paid by the acquirer or PAC with him for acquisition if any, including by way of public rights/ preferential issue during the 26-week period prior to the date of the PA - Average of weekly high & low of the closing prices of shares as quoted on the Stock exchanges, where shares of Target company are most frequently traded during 26 weeks prior to the date of the Public Announcement
In case the shares of target company are not frequently traded, then the offer price shall be determined by reliance on the following parameters, viz: the negotiated price under the agreement, highest price paid by the acquirer or PAC with him for acquisition if any, including by way of public rights/ preferential issue during the 26-week period prior to the date of the PA and other parameters including return on net worth, book value of the shares of the target company, earning per share, price earning multiple vis a vis the industry average.
Acquirers are required to complete the payment of consideration to shareholders who have accepted the offer within 30 days from the date of closure of the offer. In case the delay in payment is on account of non-receipt of statutory approvals and if the same is not due to willful default or neglect on part of the acquirer, the acquirers would be liable to pay interest to the shareholders for the delayed period in accordance with Regulations. Acquirer(s) are however not to be made accountable for postal delays .
If the delay in payment of consideration is not due to the above reasons, it would be treated as a violation of the Regulations.
VII. Safeguards incorporated so as to ensure that the Shareholders get their payments Before making the Public Announcement the acquirer has to create an escrow account having 25% of total consideration payable under the offer of size Rs. 100 crores (Additional 10% if offer size more than 100 crores) [xxiii]. The Escrow could be in the form of cash deposited with a scheduled commercial bank, bank guarantee in favor of the Merchant Banker or deposit of acceptable securities with appropriate margin with the Merchant Banker. The Merchant Banker is also required to confirm that firm financial arrangements are in place for fulfilling the offer obligations. In case, the acquirer fails to make payment, Merchant Banker has a right to forfeit the escrow account and distribute the proceeds in the following way.
1/3 of amount to target company 1/3 to regional Stock Exchanges, for credit to investor protection fund etc. 1/3 to be distributed on pro rata basis among the shareholders who have accepted the offer.
The Merchant Banker advised by SEBI is required to ensure that the rejected documents which are kept in the custody of the Registrar / Merchant Banker are sent back to the shareholder through Registered Post.
Besides forfeiture of escrow account, SEBI can take separate action against the acquirer which may include prosecution / barring the acquirer from entering the capital market for a period etc.
VIII. Penalties The Regulations have laid down the general obligations of the acquirer, target company and the Merchant Banker. For failure to carry out these obligations as well as for failure / non-compliance of other provisions of the Regulations, Reg. 45 provides for penalties. Any person violating any provisions of the Regulations shall be liable for action in terms of the Regulations and the SEBI Act.
If the acquirer or any person acting in concert with him, fails to carry out the obligations under the Regulations, the entire or part of the sum in the escrow amount shall be liable to be forfeited and the acquirer or such a person shall also be liable for action in terms of the Regulations and the Act.
The board of directors of the target company failing to carry out the obligations under the Regulations shall be liable for action in terms of the Regulations and SEBI Act.
The Board may, for failure to carry out the requirements of the Regulations by an intermediary, initiate action for suspension or cancellation of registration of an intermediary holding a certificate of registration under section 12 of the Act. Provided that no such certificate of registration shall be suspended or cancelled unless the procedure specified in the Regulations applicable to such intermediary is complied with.
For any mis-statement to the shareholders or for concealment of material information required to be disclosed to the shareholders, the acquirers or the directors where he acquirer is a body corporate, the directors of the target company, the merchant banker to the public offer and the merchant banker engaged by the target company for independent advice would be liable for action in terms of the Regulations and the SEBI Act.
The penalties referred to in sub-regulation (1) to (5) may include - criminal prosecution under section 24 of the SEBI Act; monetary penalties under section 15 H of the SEBI Act; directions under the provisions of Section 11B of the SEBI Act
Regulations have laid down the penalties for non-compliance. These penalties may include forfeiture of the escrow account, directing the person concerned to sell the shares acquired in violation of the regulations, directing the person concerned not to further deal in securities, monetary penalties, prosecution etc., which may even extend to the barring of the acquirer from entering and participating in the Capital Market. Action can also be initiated for suspension, cancellation of registration against an intermediary such as the Merchant Banker to the offer.
D) Takeover Code- A necessary tool or an inept legislation AFTER five long years, the first major amendments to the SEBI's Takeover Code, 1997 finally came into force. The loopholes in preferential allotments and inter-se transfers areas were exposed in the first year of the Takeover Code itself and the promoters/ potential acquirers exploited them to the hilt since then.
This overhaul was based on the recommendations of the Committee set up under the Chairmanship of Justice P. N. Bhagwati, opinions solicited from the investor community and the experience of SEBI officials in handling more than half a dozen high-profile offers.
Some of the shareholder-friendly changes made in the amended Takeover Code, which are at variance with the recommendations of the Bhagwati Committee were 1) Creeping acquisition: In its draft recommendations, the Bhagwati Committee had proposed the extension of the creeping acquisition limit at 10 per cent, which was set to expire by September 30, 2002, to March 2004. However, in the final amended Takeover Code, SEBI has acted prudently by reducing the creeping acquisition limit from 10 per cent to 5 per cent with effect from October 1, 2002. This was a prudent measure as there was no justification for pegging the creeping acquisition limit at 10 per cent. The promoters/persons in control of target companies have mainly used the creeping acquisition limit as a strategic ploy to deter takeovers rather than as a healthy attempt to shore up their equity stake in these companies.
2) Preferential allotments: The Bhagwati Committee had recommended that the current exemption for preferential allotments from open offer be allowed to continue. The only condition it prescribed was postal ballots (to enable greater shareholder participation) while passing the resolution for preferential allotment.
But, in the final amended Takeover Code, SEBI has done well to remove the exemption altogether. Hereafter, all preferential allotment of shares aggregating to an equity stake of 15 per cent or more will be automatically referred to the Takeover Panel for applicability of open offers.
Since 1997, scores of promoters/persons in control of Indian companies (both domestic and multinational) have employed the preferential allotment route conveniently to enhance their equity stakes or allow potential acquirers to acquire equity stakes, thereby avoiding the open offer obligation altogether. The removal of this exemption will prove favourable to minority shareholders to a large extent.
The Bhagwati Committee recommendations were incorporated without any changes as it sufficiently addressed crucial subject matters. Some of these areas are inter-se transfers, change in the offer pricing formula, asset stripping, composite offers (cash-cum-security offer) and withdrawal of acceptances tendered. Of these, the two highly progressive change, from the point of view of minority shareholders, were the withdrawal of acceptances tendered and inter-se transfers.
Hereafter, shareholders were allowed the option of withdrawing the form of acceptance tendered up to three working days prior to the closure of the offer. This allowed shareholders to opt for a higher offer price in competitive open offers of the Indal-Sterlite genre.
Second, in the case of inter-se transfer of shares among promoters, the exemption from such transfers will not be available if the transfer takes place at a 25 per cent premium to the market price. This, again, is a good move as it affords an exit option to minority shareholders.
However many of the recommendations of the Bhagwati Committee has been accepted in toto in the amended takeover code , though many of these moves are shareholder-unfriendly and lack clarity. The following are the loopholes:
Disclosure of holdings: The Bhagwati Committee had proposed that any acquirer acquiring shares or voting rights has to make a three stage disclosure — at 5 per cent, 10 per cent and 14 per cent of equity to the target company and the stock exchanges vis-a-vis the current requirement of disclosure at the 5 per cent level. And in the amended Takeover Code, SEBI has adopted this disclosure practice in toto.
However a three-staged disclosure mechanism has the potential of stifling the development of a vibrant market for corporate control in India. As long as the widest possible dissemination of shares acquired by the acquirer is made (say, through the stock exchanges or even SEBI), a single-stage disclosure at the 5 per cent level is more than adequate.
Changes in control: The Bhagwati Committee recommended that "change in control" is possible only when a special resolution (as against a general resolution applicable currently) is passed by shareholders in a general meeting. In addition, postal ballots are to be allowed at such meetings. In the amended Takeover Code, SEBI has incorporated this change.
But this amendment will make little difference on the ground, primarily because the word "control" continues to have a loose and ambiguous definition. No attempt has been made by the Committee to simplify this definition.
Indirect acquisitions/global level arrangement: According to the Bhagwati Committee recommendations, "in the case of indirect acquisition or change in control, a public announcement has to be made by the acquirer within three months of the consummation of such acquisition or change in control or restructuring of the parent or the company holding shares of or control over the target company in India."
And this complex provision has been adopted fully by SEBI in the amended Takeover Code.
Such a complex provision is only going to add to the prevailing confusion over applicability of indirect acquisition in individual cases. For that matter, even a distinction between a merger and an acquisition (at the global level) has not been spelt out in the provisions. It is obvious that this lack of clarity will continue to haunt the regulator in the future.
A positive measure taken by SEBI was the amendment of Takeover Code in 2004 has to specify that it (the code) would not be applicable in cases where actions taken by lenders under the Securitisation Act leads to a change in management control in the defaulting companies.
The move to amend the code has been necessitated by representations from lenders that it might become a hindrance in enforcing provisions of the Securitisation Act relating to change in management. Apprehensions had been expressed that the absence of an explicit exemption under the takeover code could lead to legal complications during the recovery process.
Besides providing powers to attach and sell the assets of defaulting borrowers, the Securitisation Act (The Securitisation and Reconstruction and Financial Assets and Enforcement of Security Interest Act, 2002) gives powers to lenders to also effect a change in management of such companies. Banks and institutions can proceed with such action only after serving due notice to the borrower asking for settlement of the dues.
This progressive move would substantially smoothen the process of recovery of bad debts, SEBI has said that the takeover code would not get triggered in when change of management control in defaulting companies has taken place due to action taken by lenders under the Securitization Act.
In a far-reaching move, the Securities and Exchange Board of India on changed the universe of securities laws and regulations, hinging on the critical definition of minimum public shareholding in listed companies at 25 per cent. Even open offers have to comply with 25% public shareholding norm.
As a consequence Acquirers will have to either issue new shares or sell from their existing shareholding to maintain public shareholding .Acquirers will have to either issue new shares or sell from their existing shareholding to maintain public shareholding . Companies that do not wish to comply with revised norms will have to delist unless such non compliance is a result of acquisition by virtue of global arrangement which may result in indirect acquisition of shares or voting rights or control of the target company . Such a step is instrumental in ensuring that takeover does not become a deterrent to public participation in the target company
Further it was incorporated that promoters could use the creeping acquisition route to raise their stakes only up to 51 percent. If shareholding increases beyond 51% then an open offer would be required to be made. Its implication was that promoters holding more than 51 per cent of the paid-up equity of a company cannot take the creeping acquisition route to raise their stakes. Earlier, Sebi had allowed promoters holding up to 75 per cent of the equity to acquire an additional 5 per cent of the equity from the markets through creeping acquisition. This change in the creeping acquisition clause, as also for open offers and delisting activity, is subject to a caveat that companies maintain the minimum public shareholding at the level specified in the listing agreement with stock exchanges, if they wish to remain listed.
Where an offer results in the public shareholding being reduced to a level below the limit specified, the acquirer shall acquire only such number of shares as to maintain minimum public shareholding if the takeover is subject to an agreement. But where the acquisition is through "a mode other than agreement", the acquirer is required to raise the level of public shareholding to the levels specified for continuous listing within a period of six months from the date of closure of the public offer. This means that after making the open offer that results in the public shareholding falling below 25 per cent the acquirer has to take steps to raise the latter to the minimum specified level.
In cases of indirect acquisition of control--applying the chain rule of change in management of parent companies--if the public shareholding falls below the specified level the acquirer shall either make an offer to buy the outstanding shares remaining with the shareholders within a period of six months or undertake to raise the level of public shareholding to the minimum level by issue of new shares or divestment or secondary market sales.
E) Conclusion This paper has attempted to analyze the various aspects the Takeover Laws in India. In conclusion apart from a few loopholes the Code which has been addressed by amendments made by Securities and Exchange Board of India the Takeover Code has effectively managed to regulate the practice of Takeovers of companies by ensuring that there are substantial disclosures and compliances so that investors are shielded from being prejudicially effected by the takeovers by companies which in the modern corporate era has become the most effective medium of market capitalization and diversification.