KEYWORDS IN TAKEOVER CODE When an "acquirer" takes over the “shares” or “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.
LIFTING THE VEIL SHARES CONTROL BOTH SHARES & CONTROL AKEOVER
UNDERSTANDING SHARES Reg 2 (k) Shares carrying voting rights & anyREG 2(k) security which would entitle to receive shares with voting rights in future But shall not include PREFERNCE SHARES What is the status of partly paid shares under SAST Regulations, 1997?ISSUE The partly paid up shares are also shares under Takeover Code as voting rights is embedded in partly paid up shares.
UNDERSTANDING CONTROL Control is the right to “ Appoint majority of the directors To control the managementREG 2(c) Control the policy decisions By virtue of Shareholding or Management rights or Shareholders Agreements or Voting Agreements or in any other manner.
THRESHOLDS DEFINED FOR COMPLIANCE Acquisition of more than 5%, 10%, 14%, 54% & 74% [Regulation 7] Persons, who are holding between 15% - 55%, acquisition/ sale aggregating more than 2% or more voting rights [Regulation 7(1A)]
THRESHOLDS DEFINED FOR OPEN OFFER Acquisition more than 15% or more voting rights [Regulation 10] Persons, who are holding between 15% - 55%, acquisition more than 5% or more voting rights in a financial year.[Regulation 11(1)] Persons, who are holding more than 55%, acquisition of single share or voting right [Regulation 11(2)]
Legal Insight: Inter-se Transfer • REGULATION 3(1)(e) OF SEBI (SAST) REGULATIONS, 1997 GOVERNS THE ACQUISITIONS THROUGH INTER SE TRANSFERS.• EXEMPTION FROM APPLICABILITY OF REGULATION 10,11 & 12 i.e. REQUIREMENT FROM MAKING PUBLIC OFFER.
Categories for Inter-se transfer Qualifying Group under Promoters MRTP Act, 1969 Categories Relatives under Acquirer & Companies Persons Act, 1956 acting in concert
Category I – Inter-se Transfer amongst GroupMain Features Group here is signifying the group as defined under MRTP Act, 1959. Another important feature is where persons constituting such group have been shown as group in the last published Annual Report of the Target Company.
Category I – Group… contd Definition of GroupSECTION 2(ef) OF MRTP ACT, 1969 DEFINES GROUP INTO TWO PARTS: Associated Two or more Persons Individuals, AOI, firms, trus Group of persons having control ts, body corporates who without exercising controlling interest. are in the position to Associated persons such as relatives of director of a company, partner of a exercise control , whether firm & any trustee in relation to a trust. directly & indirectly over Any associated person in relation to any body corporate, firm or associated person. trust. -
Category II – Inter-se transfer amongst relatives Relatives under this regulation means theMain Features Relatives defined under Section 6 & Schedule 1A under Companies Act, 1956. The definition of relative u/s 6 includes Spouse Members of HUF Relative mentioned in Schedule 1A. Schedule 1A gives a list of 22 persons.
Category III – Promoters… contdCategory III – Inter-se transfer for Qualifying Promoters Qualifying Indian Promoter & Qualifying Foreign PromotersCollaborators , who areshareholders.
Category III – Promoters… contd Qualifying Promoters - Defined Who is named as Promoter Any person who in anyDIRECTLY OR INDIRECTLY Offer Document OR is in control Shareholding of the company Disclosure, Whichever is later & includes….
Category III – Promoters… contd When person is When person is body individual corporateHis relatives as Defined Holding & Subsidiary u/s 6 of Co. Act 1956.Any company controlled Any company controlled by P/R by P/R Firm or HUF in whichFirm or HUF in which P/R P/R is partner oris partner or coparcener coparcener ; stake ;stake not < 50% not < 50%
Category III – Promoters… contdCategory IV – Acquirer and Persons acting in concert. PAC ACQUIRER Reg2(e) Reg 2(b) Exemption available only after 3 years from the date of closure of open offer made under these Regulations.
Pre- Conditions for availing Inter- se transfer.Conditions Category I Category II Category III Category IV (Group) (Relative) (Qualifying (Acquirer & Promoter) PAC)i. Transfer is at a N N Y Yprice > 25% of theprice determinedin terms of Reg20(4) & 20(5) ofSEBI (SAST) Regs,1997.ii. 3 yrs holding of N N Y Nshares bytransferee &transferor.iii. Compliance of Y Y Y YRegulation 6, 7 &8.
Checks & Balances under Regulation 3 C O M P L Advance Report Fees to beIntimation I (21 days of accompanied(4 days in acquisition) with Report AAdvance) (Rs 10000 N 25000) C Reg 3(3) Reg 3(4) Reg 3(5) E
Checks & Balances under Regulation 7 Acquirer : Compliance of regulation 7(1) or 7(1A) Seller: Compliance of regulation 7(1A) Target Company:Compliance of Regulation 7(3)
Taxation Issues..contd. A Comparative StudySecurities Transaction Tax LTCG/STCG STT is levied when the transfer is LTCG/STCG is levied when the made through stock exchange. transfer is made in off market mode. STT is @ 0.125% of the sale value. LTCG – 20% with indexation benefit on the amount of capital gain . 10% without indexation benefit on amount of capital gain . STCG – 10% on the amount of capital gain.
INTER- SE TRANSFER : A STRATEGICAL MOVE Good means for consolidation of holdings in a Company.
INTER- SE TRANSFER: Clause 40A Regulation 3(1A) “Nothing contained in sub-regulation (1) shall affect the applicability of the listing requirements.” Effect of Regulation 3(1A)The above-mentioned regulation is giving the effect that theexemption under regulation cannot exceed the provisions of listing agreement,i.e.the minimum public holding of 25% cannot be exceeded by the exemption of Inter- se Transfer
MATTER OF DEBATE:Whether Reporting under Regulation 3(4) is one timereporting?HELD:Regulation 3(4) is applicable to all cases whereverthe acquisition exceeds the limit prescribed in theregulations irrespective of the existing holding of theacquirer.NAAGRAJ GANESHMAL JAIN V P.SRI SAI RAM, THE SAT
MATTER OF DEBATE:Whether the belated filing of report should not beconsidered as commission of offence when there is nosubstantial loss to the investors?HELD:It was held that when the belated filing of the reportunder 3(4) does not resulted in any gain to theappellant & also no loss to the invested, theimposition of the penalty is not justified. SAMRAT HOLDINGS V SEBI
Concluding RemarksInter-se transfer is a good tool forconsolidation of holdings…………..However,the exemption is availablesubject to strict compliance of Regulation3(3),3(4) & 3(5).
An issue by a company Of Equity shares / Securities convertible into equity/ FCDs/Warrants/PCDs/ Convertible Preference Sharespursuant to a resolution u/s. 81(1A) of Act, to any select group of persons by way of private placement.
BENEFITSSimple way to raise capital of the CompanyNo need to appoint Merchant Banker.Economical way to raise capital.Minimum Formalities.
GOVERNING LAWThe Companies Act, 1956SEBI (Disclosure and Investor Protection) Guidelines, 2000(Chapter – XIII & XIIIA)Listing AgreementSEBI (SAST) Regulations, 1997Unlisted Public Companies (Preferential Allotment)Rules, 2003
Proposed Allottees Chapter – XIIIA of Chapter – XIII of SEBI (DIP) Guidelines SEBI (DIP) GuidelinesAllotment to QIBs (not in Promoter Group) by companies OTHERS listed on NSE / BSE
Time Line- Preferential Allotment 15 days (12 months in case of QIBs) 30 days 25 days Shareholders’ Resolution must be implemented within 15 days (12 months in case of QIBs) except in case of pending regulatory approvals
Lock-in Requirement QIBs Others Existing Preferential Existing Preferential Holding Allotment Holding Allotment PROMOTERS –No Lock in For One Year, For Six 20% of Total Capital - for 3 except in case Months Years of Remaining – for one Year Trading through Stock Exchange OTHERS – For One Year
Currency of Security Convertible into Equity Shares QIBs OTHERS FCDs/ PCDs/ any other FCDs/ PCDs/ any otherconvertible Security –60 convertible Security –No Months from the time prescribed for conversion date of allotment Warrants convertible intoWarrants convertible into Equity Shares - 18 months Equity Shares – from the date of allotment can’t be issued to QIBs
Preferential Allotment:- In- Principle & Listing Process of identification of allottees. Bank Statements DIP Compliances – Pricing, Lock in , Identity Clause 40A of Listing Agreement Change in Management/Control
Limit for Preferential AllotmentLimits are calculated taking into account the EXPANDED CAPITAL of the Company & not the EXISTING CAPITAL of the Company.
Illustration I Acquirer(holding 20%) Through Preferential Allotment Acquirer’s holding cannot exceed 24.99% of Expanded Capital.
Illustration II Acquirer(holding 5 %) Through Preferential Allotment Acquirer’s holding cannot exceed 14.99% of Expanded Capital.
Illustration III Acquirer(holding 0%) Through Preferential Allotment Acquirer’s holding cannot exceed 14.99% of Expanded Capital.
Example:Category Existing Maximum Shares & shares Allotment in % of &% Preferential Expanded allotment. Capital Non- 0 14.99% 1764700Promoter (14.99% of the Expanded Capital) Present Capital= Expanded Capital=11764700 1 cr
Queries Query 1What is the exact formula for calculating the % of shareholding, incase of issue of warrants? At what point of time, the number ofwarrants would be taken into account – on the day of issuingwarrants or on the date of conversion of warrants into shares?Query 2Suppose the present holding of a promoter is 54% and afterpreferential allotment the holdings of the promoter remains same asthat of 54% of the expanded capital. The question is whether anydisclosure or compliance required in the present situation
Queries Query 3What is the maximum limit of preferential allotment? Cana Company through preferential allotment expand itscapital without any limit?
Queries Query 4Suppose the present holding of a promoter is 54% and afterpreferential allotment the holdings of the promoter remains same asthat of 54% of the expanded capital. The question is whether anydisclosure or compliance required in the present situation?What, if, the same question arises in case the promoter is holding60%? The issue is as there is acquisition of shares but such acquisitionhas not change the voting rights. The question is what is relevant interms of takeover code, acquisition or voting rights?
Conclusion To sum up… preferential allotment is becoming a buzz word these days…However, it is subject to various checks & balances.