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Takeover panorama june 2007 2007-06-01

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  • 1. TAKEOVER PANORAMA A Monthly Journal on development of Takeover Law
  • 2. Insight Contents Page No Recent Updates 3 Latest Open offers 5 Case Study 7 Market Update 9 Regular section 10 Hint of the Month 13 Intermediary Search 14 Disclaimer This paper is a copyright of Corporate Professionals (India) Pvt Ltd. The author and the company expressly disclaim all and any liability to any person who has read this paper, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this paper. 14 2
  • 3. RECENT UPDATE SEBI Circular on Revised Filing Fees SEBI (SAST) (Amendment) Regulations, 2007 SEBI has on 29th May 2007 revised the fee charged on the Fee on the draft letter of offer. Offer size Revised Position - Fee Earlier Position (Rs.) (Rs) Less than or equal to One lakh rupees 1,00,000 one crore rupees. (Rs. 1, 00,000/-). More than one crore Two lakh rupees 2,00,000 rupees, but less than (Rs. 2, 00,000/-). or equal to five crore rupees. More than five crore Three lakh rupees 3,00,000 rupees, but less than (Rs. 3, 00,000/-). or equal to ten crore rupees. More than ten crore 0.5% of the offer size. 0.5% of the offer size rupees, but less than (More than ten crores or equal to one rupees) thousand crore rupees. More than one Five crore rupees (Rs. - thousand crore 5, 00, 00,000/-) plus rupees, but less than 0.125% of the portion or equal to five of the offer size in thousand crore excess of one thousand rupees. crore rupees (Rs.1000, 00, 00,000/). More than five Ten crore rupees - thousand crore (Rs.10, 00, 00,000/-). rupees. Such fees shall be paid by bankers’ cheque or demand draft drawn in favour of the ‘Securities and Exchange Board of India’, payable at Mumbai. 14 3
  • 4. Shri Shantanu R Kothavale in the matter of Rajkumar Forge Ltd. Regulation: Regulations 3(3), 3(4), 3(5), 11(1) and 14(1) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 Issue: In The Matter of Adjudication Proceedings against Shri Shantanu R Kothavale in respect of his shareholding in Rajkumar Forge Ltd. Name of the Adjudicating Authority: Biju. S Facts: The noticee along with other promoters of RFL acquired 18,62,400 shares of RFL in the preferential allotment on April 28, 2001 thereby increasing the aggregate shareholding from 2.05% to 28.86%.In this regard, it is alleged that the noticee failed to submit necessary report to the Board within the prescribed time thereby violating the provisions of Regulation 3(3), 3(4) and 3(5) of the Takeover Regulations. Subsequently the noticee along with the persons acting in concert acquired 28,74,000 equity shares and voting rights in RFL on November 26, 2001 increasing his shareholding in the target company from 28.86% to 49.29 % beyond the prescribed limit of 5% enumerated under Regulation 11(1) of the Takeover Regulations. In this regard it is alleged that the noticee failed to make public announcement to acquire shares of RFL in terms of the provisions of Regulation 11(1) of the Takeover Regulations. Contentions: With regard to the acquisition of shares on November 26, 2001 by the noticee which resulted in increase in his shareholding in the target company from 28.86% to 49.29 %, since the shares were acquired on preferential basis and all the disclosures specified in regulation 3(1) (c)(i) were made in the notice to the shareholders, the said acquisition is exempt under Regulation 3(1)(c) and therefore violation of regulation 11(1) is not violated. However, admittedly there has been a delay in filing of Report under Regulation 3(4) as the same has been filed belatedly on September 22, 2006. Further in regard to both the acquisitions, notice issued to the shareholders contained all the requisite disclosures as required in terms of Regulation 3(I)(c)(ii) of Takeovers Regulation, a Return of allotment, pursuant to sec 75 (1) of the Companies Act was also filed with the Registrar of companies on November 26, 2001. The requisite formalities in respect of the said allotment of shares in terms of FEMA Regulations were also complied 14 4
  • 5. with by the noticee. This shows that there was no intention of the notice to acquire the shares without disclosing the fact of such acquisition to the public. 1. The purpose of acquisition of shares by way of preferential allotment was to bailout the company from the financial crisis, as opposed to acquiring substantial shares or control over the company. 2. There is no disproportionate gain to the notice or loss to the investors. 3. There is no change in control over the company pursuant to such acquisition. Decision: On consideration of above facts, SEBI accepted the first contention of the noticee and held that there is no violation of regulation 11(1). Thus, taking a lenient view, SEBI imposed a penalty of Rupees One Lakh on Shri Shantanu R Kothavale. LATEST OPEN OFFERS Name of the Acquirer Offer details Reason of the Concerned company offer Parties Details STI INDIA Eight Capital Offer to acquire Regulation Manager to the LIMITED Master Fund upto 58,00,000 10 & 12 offer Limited, equity shares of Cayman Islands Rs. 10/- each, SPA to acquire YES Bank Regd. Office & Spinnaker representing 15.84% of the Limited Madhya Global 20.00% of the equity capital of Pradesh Opportunity paid-up capital, the Company for Fund Ltd, at a a purchase Spinnaker Global Price of Rs. consideration of Registrar to the Paid up Capital Emerging 25.00 per share 1,50,00,000/- offer Markets Fund payable in cash. (at the rate of Rs. Ltd and Rs. 3.26 per Mondkar 29,00,00,000/-. Spinnaker Global share). Computers Pvt. Strategic Ltd. Fund Ltd & PAC Motor Industries Robert Bosch Offer to acquire Regulation Manager to the Company Gmbh upto 6410292 11(2) offer Limited (20%) fully paid Citigroup Global equity shares of Voluntary offer Markets India Regd. Office Rs. 10 each at a Pvt. Ltd. Banglore price of Rs. 4000 Registrar to the per share offer Paid up Capital payable in cash. Intime Spectrum Rs.320.51 Million Registry Ltd 14 5
  • 6. Sesa Goa Westglobe Offer to acquire Regulation Manager to the Limited Limited, Mauritius up to 78,72,404 10 and 12 offer and Richter (20%) fully paid- Regd. Office Holding along with up equity shares ICICI Securities Goa Vedanta Resources of the face SPA to acquire Ltd. Plc. value of Rs. 10 100% of the each at a price fully paid-up Registrar to the of Rs. 2,036.30 equity share offer Paid up Capital per share capital of payable in cash. Finsider Karvy Rs. 39.36 crore. International Computershare Ltd. Whereby Private Limited the acquirers have indirectly acquired control over the target company Lumax Stanley Electric Offer to acquire Regulation Manager to the Industries Co., Ltd. 1,869,547 (20%) 11(1) and 11(2) offer Limited fully paid-up equity shares of Preferential Enam Financial Regd. Office Rs. 10/- each, allotment of Consultants at a price of Rs. 1,000,000 (Rs. Private New Delhi 540.03/- per 10) equity Limited fully paid-up shares for cash Equity Share at a price of Rs. Registrar to the Paid up Capital payable in cash 540.03/-, offer whereby the Rs. 93,477,320 shareholding of Karvy acquirer Computershare increased from Private Limited 17.47% to 26.30% and aggregate shareholding of promoter group increased to 62.91%. 14 6
  • 7. CASE STUDY DECCAN AVIATION ACQUISITION BY UB GROUP Vijay Mallya’s UB Holdings has bought 26% stake in Deccan Aviation Ltd (DAL), which runs budget carrier ‘Air Deccan’, for Rs 5.5 bn. The group has agreed to pay Rs 155 per share, valuing DAL at Rs 21.15 bn. Details of the stake sale DAL will make preferential allotment of upto 35.22 mn equity shares of Rs 10 each at a price of Rs 155 which shall be 26% of post issue capital in two tranches to United Breweries Group. The first tranche comprises of 9.68 mn shares at Rs.155 per share which has been paid on May 31, 2007 and in case of the second tranche 25.54 mn shares at Rs 155 per share will be issued by June 29, 2007. Post this deal the UB group will make an open offer in order to acquire additional 20% stake from the market so as to gain complete control of the low cost carrier. The air charter operations of both companies will be merged and run as a separate entity. Benefits arising out of this deal 1/3rd market share - With this strategic alliance, the two airlines will have 71 aircraft mainly dominated by the Airbus, cover around 70 domestic destinations and command a market share of 33 % (Air Deccan – 21% and Kingfisher – 12%), overtaking the combined share of Jet – Jetlite (previously Air Sahara) of 31.5%. Cost synergies - With commonality of fleet and pilots flying these same type of aircrafts, this alliance will enable the two airlines to exploit the synergies that exist in the areas of operations and maintenance, ground handling, vastly increased connectivity, feeder services, distribution penetration etc., thereby resulting in decreased costs, increased efficiencies and improved profitability of both the airlines. Route rationalization - The two airlines are likely to rationalize their network to ensure that they don’t cannabilise each other but the networks support each other. Thus Kingfisher will continue to focus on the premium/business class on the key metro routes and Air Deccan will continue to operate as a low cost carrier largely covering lower traffic density tier-II destinations which are expected to show a good growth in the coming years. In the coming days this strategy is likely to give a tough competition to Jetlite the value carrier being run by 14 7
  • 8. Jet Airways. Impact on the industry – Start of much awaited consolidation Three bigger entities - This alliance brings into light, three big airline combines (Air India – Indian, Jet – Sahara and Kingfisher – Deccan) who now control around 80% of the domestic civil aviation market. As these carriers are able to rationalize routes and integrate operations, the fares are expected to increase gradually – thus improving the financial health of most of the existing players. Industry capacity still higher than demand - In the short term, the fares are expected to be down for the next 3-6 months as the supply from the existing carriers continues to be higher than the demand. However due to the losses suffered by the existing players in the past because of higher fuel prices in H1FY07 and aggressive price competition which continued for 3 years with the launch of Air Deccan in 2003 – a slowdown is being seen in the expansion plans of players, thus giving room for improvement in yields over the medium term. Impact on Deccan Aviation’s Financials Ongoing cash crunch - The Company is facing a severe cash crunch, which has impacted its fleet expansion plans. This deal provides a cash boost for DAL and ensures that it continues its operations for next 2-3 yrs at least. Impact on Deccan Aviation’s Financials With DAL having huge accumulated losses to the tune of Rs 7 bn over the last 3 yrs, it remains a challenge for the management of Kingfisher Airlines on how effectively it manages to turnaround the operations of the loss making company. However by having a decent market share of around 12% within just 2 yrs of operations Kingfisher has demonstrated high standards of operational efficiency. Other triggers to watch out for Relaxation of rules for flying overseas – The Ministry of Civil Aviation has put forward a proposal of reducing the eligibility criterion for flying on international routes to three years of continuous domestic operations from the present five. If this is approved then DAL fits these eligibility criteria. The airline is exploring possibilities of flying to various destinations in South East Asia and the lucrative gulf routes. In case of Kingfisher, the airline commenced operations in May 2005. So in absence of approvals to fly overseas, the airline plans to fly from US to India and has created a subsidiary in US for the same purpose. 14 8
  • 9. MARKET UPDATE TATA TEA TO ACQUIRE MAJORITY STAKE IN MOUNT EVEREST Tata Tea has agreed to buy 24 per cent stake in Mount Everest Mineral Water Limited for Rs 110 crore. It will make an open offer for an additional 20 per cent at Rs 140 per share, for an estimated Rs 100 crore. Tata Tea will acquire a 10.74 per cent of the existing equity base from the promoters and also subscribe to a preferential offer of 15 per cent, making for a 24 per cent stake of the expanded capital. Ownership in Mount Everest No. of Shares Preferential Issue to Tata Tea 50,99,396 Acquisitions from Promoter Foresight 22,50,000 Holdings Pvt. Ltd. From Promoter Vinod Sethi 8,60,440 Total Number of Shares 82,10,836 Expanded Capital Base (Post preferential 3,39,95,973 allotment) Tata Tea’s shareholding 24.15% Funding Tata Tea, which stands to make a bumper profit of Rs 2,000 crore from its investment in Glaceau, will raise debt of roughly the acquisition amount (Rs 210 crore) to fund the Mount Everest acquisition, said the Chief Financial Officer, Mr L.K. Krishnakumar. The company's current debt of Rs 500 crore as well as debentures worth Rs 100 crore will most likely get extinguished in four to six months' time, making it a debt-free company.The acquisition will be EPS accretive in three-four years' time. The promoters, Mr Vinod Sethi and Mr Salim Govani (through Foresight Holdings Pvt Ltd), will continue to hold a 9 per cent stake in Mount Everest. They will also continue to be on the management, said Mr Siganporia. Source: www.blonnet.com – The Hindu Business Line 14 9
  • 10. REGULAR SECTION PENAL PROVISIONS UNDER TAKEOVER CODE In the event of non-compliance of the provisions of SEBI (Substantial Acquisition of Shares & Takeover) Regulations, 1997, commonly known as Takeover Code, the acquirer is liable for the penal provisions contained in the code itself. Regulation 45 of SEBI (Substantial Acquisition of Shares & Takeover) Regulations, 1997 is dealing with the penal provisions for the non-compliance of the obligations contained in the Regulations. As per regulation 45 of the Regulations, for failure to carry out obligations under the regulations, following consequences may follow: 1. The acquirer faces the consequences of the escrow amount being forfeited besides penalties. 2. The Board of Target Company shall be liable for action in terms of regulation and Act. 3. The intermediary would face suspension or cancellation of registration. The penalties stated above may include: i. Criminal prosecution under section 24 of the SEBI Act. In addition to any award of penalty by the Adjudicating Officer under the Act, if any person contravenes or attempts to contravene or abets the contravention of the provisions of this Act or of any rules or regulations thereof., he shall be punishable with imprisonment for a term which may extend to one year, or with fine or with both. Further, non compliance of the directions of the Adjudicating Officer shall be punishable with imprisonment for a term which shall not be less than one month, but which may extend to three years or 14 10
  • 11. with fine which shall not be less than two thousand rupees, but which may extend to ten thousand rupees or with both. ii. Monetary penalties under section 15H of the SEBI Act. If a person fails to disclose the aggregate of his shareholding in the body corporate before he acquires any shares of that body corporate, or make a public announcement to acquire shares at a minimum price, he shall be liable to a penalty of twenty-five crore rupees or three times the amount of profits made out of such failure, whichever is higher iii. Directions under section 11B of the SEBI Act. The Board may, in the interest of securities market, give directions, without prejudice to its right to prosecute under section 24 of the SEBI Act including: a.) Directing the person concerned not to further deal in securities. b.) Prohibiting disposal of securities acquired in violation of these regulations. c.) Direct sale of securities acquired in violation of these regulations. iv. Directions under section 11(4) of the Act; The authority may give the directions to the person in default & the directions may include the following: i. Suspend the trading of any security in a recognised stock exchange; ii. Restrain persons from accessing the securities market and prohibit any person associated with securities market to buy, sell or deal in securities; iii. Suspend any office-bearer of any stock exchange or self-regulatory organisation from holding such position; iv. Impound and retain the proceeds or securities in respect of any transaction which is under investigation 14 11
  • 12. v. Attach bank accounts of persons involved in violation for a period not exceeding one month. vi. Direct any intermediary or any person associated with the securities market in any manner not to dispose of or alienate an asset forming part of any transaction which is under investigation v. Cease and desist order in proceedings under section 11D of the Act; A Cease and desist order can also be passed under section 11D of the SEBI Act from committing or causing any violation of the SEBI (Substantial Acquisition of Shares & Takeover) Regulations, 1997. vi. Adjudication proceedings under section 15HB of the Act. A residual clause has been provided in the Act, wherein it is mentioned that if any violation act is not specifically covered under the provisions, then the person may be held liable for a penalty which may extend to one crores rupees. Further, the acquirer or directors of the acquirer company, directors of the target company, the merchant banker(s) would be liable for action for any misstatement or concealment of material information required to be disclosed to the shareholders. 14 12
  • 13. HINT OF THE MONTH In the Yogi Sungwon (India) Limited, SAT held that for the purpose of compliance under regulation 3(4) i.e. submission of report to SEBI, and regulation 7 i.e. disclosure of shareholding, only the individual shareholding and not the aggregate shareholding of promoter group shall be considered. Further, it has been decided by the Supreme Court in K. K.Modi that mere because a person is co-promoter, he shall not be termed as PAC for the purpose of triggering takeover code unless evidence on record clearly establishes that promoter shares common objective or purpose of substantial acquisition of shares or voting rights for gaining control over Target Company with acquirer. THOUGHT OF THE MONTH To think is easy. To act is difficult. To act as one thinks is the most difficult. 14 13
  • 14. INTERMEDIARY SEARCH Name of Merchant Banker Contact Details Lehman Brothers Securities 708 Powai Plaza, Hiranandani Pvt Ltd Gardens, Powai, Mumbai Elara Capital (India) Pvt. 304, Vaibhav Chambers, Limited Bandra Kurla Complex, Bandra(East) Mumbai – 400 051 Contact for any clarification: Preeti Arora, Neha Pruthi Contact No: 9971966665, 9818188454 email: preeti@indiacp.com 14 14

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