Pavan Kumar Vijay\'s Article Published in Chartered Secretary June 2010

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Pavan Kumar Vijay\'s Article Published in Chartered Secretary June 2010

  1. 1. AN INSIGHT OF THE TRAC RECOMMENDATIONS AND DRAFT TAKEOVER REGULATIONS, 2010 - by Pavan Kumar Vijay, Past President, ICSI Managing Director, Corporate Professionals Capital Private Limited & Founder TakeoverCode.com Introduction The trend of Mergers and Acquisitions (M&As) as an itinerary for the growth of corporate world can be traced back from twentieth century. However, with the liberalization and globalization of Indian economy, the importance of M&A for inorganic growth has become more relevant for systematic growth of the capital market. This new weapon in the armory of corporate 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, of widely held companies, is used to develop the capital market and not to sabotage it. In the year 1992, with the enactment of Securities and Exchange Board of India Act, 1992, the SEBI was established as regulatory body to promote and develop securities market and to protect the interest of investors in securities market. Thereafter, in the year 1994, SEBI formulated the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1994 so that process of takeover is carried out in a fair and transparent manner. After a time gap, a need was felt to review the Regulations to make the regulatory framework more comprehensive and equitable. Thus, SEBI appointed a committee headed by Justice P. N. Bhagwati to analyze the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1994 and to suggest the appropriate changes. In the year 1997, SEBI Takeover Code has been rechristened by enacting SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 substituting SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1994. These regulations also have been amended a number of times to address the changing circumstances and needs of corporate sector and various clarifications, orders and judgments have been given to simplify the complexities involved in these regulations. Thus, a need was felt to review the SEBI Takeover Regulations to remove the ambiguities involved in the Regulations which have been one of the major causes of defiance with the Regulations and to bring it at par with the global practices so as to create a level playing field. Accordingly, in September 2009, market watchdog SEBI constituted a multi-disciplinary expert committee, Takeover Regulations Advisory Committee (TRAC) under the chairmanship of Sh. C. Achuthan, the former Chairman of Securities Appellate Tribunal, with a terms of reference to examine the existing Takeover Regulations and to suggest suitable amendments, as deemed fit. It also invited the suggestions from the Indian corporate, professional bodies and public at large. After a detailed analysis and considering the views of regulators, corporate bodies and public comments for about 9 months, the Committee on July 19, 2010 has released its much awaited report suggesting changes in 1 Vol. XL * Pp 761-904 * June 2010 | Chartered Secretary
  2. 2. the rules of game of takeover with a draft of new Takeover Regulations for the public comments. The Report is comprehensive enough detailing the Key Recommendations; Deliberations and Rationale along with Draft text of the proposed Takeover Regulations. The Committee felt it is appropriate to rewrite the entire Regulations to incorporate all clarifications given in various orders and judgements and to remove all possible ambiguity and issues in the Existing Regulations which are already amended a number of times since 1997. The Committee has framed the Regulations keeping in view the interest of public shareholders on one side and that of the Strategic Investors, Private Equity Players, Target Company and Promoters on the other side. While some of the recommendations which are in favour of the general shareholders have become the concern for the Corporate and Strategic Investors, a few of them may be seen as not in the interest of small shareholders. In this Article, the recommendations of the Committee have been analyzed on the basis of major heads dealing with the Definitions, Triggering Limit for Open Offer and Open Offer Process, Exemptions and Disclosures Requirements. Overview of the Recommendations a) More clarity in the language of various definition; b) Inclusion of various judicial decisions in the Regulations itself to remove the ambiguity and reduce future litigation; c) Insertion of SEBI’s administrative views in the Regulations; d) Effective protection for the small shareholders; e) More Opportunities for Institutional Investors; f) At par with Global Practices prevalent for M&As; g) Simplification in the provisions relating to consolidation of holding; h) Scrub out of Non Compete Fee. An analysis of Key Recommendations in comparison with the Existing SEBI Takeover Regulations IMPORTANT DEFINITIONS Acquirer “Acquirer” means any person who, directly or indirectly, acquires or agrees to acquire whether by himself, or through, or with persons acting in concert with him, shares or voting rights in, or control over a target company; The definition of the acquirer as given in the Draft Regulations is more or less same with the one in the existing SEBI Takeover Regulations with an addition of the word through. In the Existing Regulations, a person is termed as acquirer when he acquires or agrees to acquire the shares or voting rights or control over a target company whether by himself or with person acting in concert with him. Thus, to include a person within the ambit of the definition of Acquirer, the acquisition should be made by him alone or in an association with the person acting in concert i.e. he should be a party to the transaction of acquisition. On the other hand, the Proposed Regulations do also recognize a person as acquirer even where the acquisition whether of shares or voting rights or control has been made by him through person acting in concert with him i.e. through Special Purpose Vehicle or through the controlling entities. 2 Vol. XL * Pp 761-904 * June 2010 | Chartered Secretary
  3. 3. Control “Control” includes the right or the ability to appoint majority of the directors or to control the management or policy decisions of the target company, 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; The Proposed Regulations have widened the scope of term Control to include not only the right but also the situations where the persons have the ability to appoint majority of the directors or to exercise control in any other manner. The existing definition of Control covers within its ambit only the right to appoint majority of the directors or to exercise control in any other manner. Thus, by inserting the word ability in the definition, the scope of term Control has been expanded to mean not only the de jure control but de facto control also. However, the question whether the power to say “No” or to exercise negative control would constitute the Control within the meaning of the SEBI Takeover Regulations have not been addressed in the report. Shares “Shares” means shares in the equity share capital of a target company carrying voting rights, and includes any security which entitles the holder thereof to exercise voting rights; Provided that all depository receipts entitling the holder thereof to exercise voting rights in the target company shall be regarded as shares. The definition of the “Shares” has been broadened to include within its ambit even the depository receipts. Thus, in terms of the Proposed Regulations, the holder of the depository receipts is treated at par with the one who acquired the Equity Shares carrying voting rights. Frequently Traded Shares The term “Infrequently Traded Shares” has been replaced with the term “Frequently Traded Shares”. The Existing Regulations state that for the purpose of checking the status of trading, the trading turnover in that share during the 6 months preceding the month in which PA is made has to be annualized. Whereas in the report, the Committee has recommended that trading turnover during the 12 months preceding the month in which the Public Announcement is made is to be considered. Further, the existing definition provides a trading turnover of 5% to consider the shares as frequently traded whereas the committee has raised the level to 10% to have a more realistic picture. Identified Date Further, the term “Specified Date” has been replaced with the term “Identified Date”. As the purpose of Specified Date is to determine the names of the shareholders to whom the Letter of Offer would be sent and an exit opportunity would be provided, therefore, it is argued by the Committee that the same should not be much before the approval of Letter of Offer and initiation of offer period for tendering the shares. Accordingly, it is recommended that the shareholders list should be finalized on a date falling on 10th business day prior to the commencement of the tendering period. “Tendering Period” is defined under Regulation 2(1)(ab) of the New Draft Takeover Regulations which means the 3 Vol. XL * Pp 761-904 * June 2010 | Chartered Secretary
  4. 4. period within which shareholders may tender their shares in acceptance of an open offer to acquire shares made under these Regulations. Delisting Threshold A definition of Delisting Threshold has been inserted in the New Draft Takeover Regulations which means a shareholding entitling exercise of 90% of the voting rights in a target company, excluding voting rights on shares held by a custodian and against which depository receipts have been issued overseas, with reference to the share capital of the target company as of the last day of the tendering period. Open Offer and related concepts I. Increase in Threshold from 15% to 25%: The existing SEBI Takeover Regulations necessitate the acquirer to give an open offer to the shareholders of Target Company on the acquisition of shares/ voting rights entitling to exercise 15% or more voting rights in the Target Company. Prior to October 28, 1998, the threshold for Open Offer was at 10%. In the Report, the Committee has recommended to increase the threshold limit for Open Offer to 25%. The recommendation has been made considering the average promoters shareholding prevalent in the Listed Companies and the international practices. The recommendation seems to be beneficial from the point of Private Equity and Institutional investors who had to restrict themselves to 14.99% stake in every listed company in terms of Existing Regulations as otherwise it would necessitates the open offer to the shareholders of the Target Company for which they are in no way interested to do as their objective is not to acquire the control over the company. However, it is apprehended that the increase in threshold would reduce the number of open offers and hence might be viewed negatively from the point of view of small shareholders. 4 Vol. XL * Pp 761-904 * June 2010 | Chartered Secretary
  5. 5. Further, in the Proposed Regulations, two most debatable issues with respect to the calculation of threshold for the purpose of open offer have been clarified: a) No Netting off allowed: The Proposed Regulations specifically provide that for the purpose of determining the quantum of acquisition of additional voting rights, the gross acquisitions without considering the disposal of shares or dilution of voting rights owing to fresh issue of shares by the target company shall be taken into account. b) Incremental voting rights in case of fresh issue In the case of acquisition of shares by way of issue of new shares by the target company, the difference between the pre-allotment and the post-allotment percentage voting rights shall be regarded as the quantum of additional acquisition. For instance: Pre Allotment Post Allotment Particulars No. of % Preferential No. of % Shares Allotment Shares (No. of Shares) Promoters 25 25 25 50 25 Non promoters 75 75 75 150 75 Total 100 100 200 100 As can be observed from the above Table, although the allotment made to the Promoters is 25 (in absolute terms), constituting 25% of the Preferential Allotment of 100 shares, but in overall terms, the Promoters’ voting rights percentage has remained intact (earlier, it was 25% of the Paid up capital of 100 shares and after the allotment, it is 25% of the expanded capital of 200 shares). Thus, there is no incremental increase in the voting rights of the Promoters. II. Offer Size: In accordance with the existing SEBI Takeover Regulations, an acquirer of shares or voting rights beyond the limit as prescribed under the Regulations is required to make a statutory open offer to the shareholders of the Target Company for acquisition of a minimum 20% of the voting capital of that Company. The Proposed Regulations have increased the open offer size to as high to 100% of remaining shareholders. The recommendation has been made taking into consideration the interest of the shareholders so that an opportunity to exit from the Target Company can be provided to all the shareholders who desire to exit from the company in the event of substantial acquisition of shares/ change in control. Present provisions allow an offer of only 20% of the total paid-up capital. Thus, all the shareholders do not get the opportunity of selling their shares in the offer, whereas the controlling shareholders can get 100% secured exit by entering into the share purchase agreement. In this way there is no equity for controlling shareholders and the public shareholders. However, the proposal will make the offer a costly affair for the acquirer as it will involve a larger cash outflow and can be a deterrent for takeover offers and might cause negative impact on M&A activities. Further, on account of lacking of proper bank funding in India, the recommendation seems to be impracticable and will put 5 Vol. XL * Pp 761-904 * June 2010 | Chartered Secretary
  6. 6. the foreign acquirers at an advantage in comparison to the Indian acquirers as the foreign acquirers have easy access to the funding opportunities globally. To address this to some extent, the Committee has proposed lower size of offer, only 10%, in case of Voluntary Offers. III. Voluntary Open Offer: The concept of voluntary open offer has been separately dealt in the draft Regulations submitted by the Committee. 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. The rationale of this option of lower size offer is that the purpose of offer is just consolidation of holding and no one is being given preferred treatment as in case of transfer of shares or control. IV. Automatic Delisting: The New Draft SEBI Takeover Regulations provide that where the holding of the acquirer, who has given the open offer in terms of Regulation 3(1) i.e. on the acquisition of 25% or more shares, taken together with the shareholding of the PACs has increased beyond the delisting threshold pursuant to the completion of open offer, then the Target Company shall stand delisted provided that the acquirer has stated his intention to delist at the time of making the detailed public announcement. Otherwise, the acquirer shall be required to either,— a) bring down the non-public shareholding to the level specified and within the time permitted under the listing agreement; or b) proportionately reduce the number of shares acquired under the open offer and under any agreement that attracted the obligation to make such open offer, other than shares acquired by way of allotment by the target company, such that the holding of the acquirer and persons acting in concert does not exceed the maximum permissible non-public shareholding. 6 Vol. XL * Pp 761-904 * June 2010 | Chartered Secretary
  7. 7. V. Acquisition of Control: In the proposed Regulations, 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 existing SEBI Takeover Regulations which provides for the change in control through the special resolution passed by way of postal ballot. The committee has withdrawn this exemption of change in control through special resolution keeping in view the fact that the New Draft Takeover Regulations allows for the acquisition of 24.99% shares in the company with triggering the obligation to make the open offer which is a substantial percentage and thus allowing the exemption will help the new acquirer to acquire the substantial shares and control without providing the exit opportunity to the shareholders of the Target Company. VI. Freedom to complete the acquisition under agreement In the existing SEBI Takeover Regulations, the acquirer is not allowed to complete the acquisition of shares or voting rights in, or control over, the target company under any agreement attracting the obligation to make an open offer for acquiring shares until the completion of offer formalities. The proposed Regulations have removed this restriction and allowed the completion of acquisition under any agreement which has resulted into triggering the open offer obligations after a period of 21 days from the date of Public Announcement subject to the acquirer depositing 100% of the consideration payable under the open offer in the escrow account, assuming full acceptance. The most important point to be noted here is that while allowing the freedom to execute the transaction, the proposed Regulations have also prescribed the maximum time within which the acquisition under the agreement must be completed which is 26 weeks from the expiry of the offer period. In other words, where the acquirer has not taken the advantage of the completion of the acquisition before the expiry of the offer period by not depositing 100% of the consideration payable under the offer, then the acquirer is allowed to do so after the expiry of offer period but not later than 26 weeks from the expiry of such period. VII. Option to withdraw the shares tendered in Offer is withdrawn In the report submitted by the Committee, the option available to the shareholders to withdraw the shares tendered in the Open Offer has been taken back. This has been done considering the point that in the Proposed Regulations, the last of upward revision by the acquirer is prior to the opening of Offer Period and thus, the shareholders were well aware of the particulars necessary for them to take an informed decision as to whether to tender the shares in response to the Open Offer or not. Therefore, there is no need to permit withdrawal of shares tendered in response to the open offer. VIII. Offer Price: The Committee has also recommended changes in the method of computation of offer price. It has proposed volume-weighted average market price of 60 trading days prior to the date of public announcement in place of average of weekly high-low of closing price for 26 weeks and average of daily high-low of last two weeks. This is expected to make the market price more broad based and realistic. A comparison of the calculation for the determination of Offer Price as provided in the existing SEBI Takeover Regulations and in the Proposed Regulations is tabulated below: 7 Vol. XL * Pp 761-904 * June 2010 | Chartered Secretary
  8. 8. Existing Regulations Proposed Regulations The method of determination of Offer Price is Under the Proposed Regulations the Offer provided in Regulation 20 of the existing SEBI Price for any offer under Regulation 3 shall Takeover Regulations. As per the Regulation be the highest of the Following: 20(4) the Minimum Offer Price shall be the highest of the following: 1. Highest Negotiated Price under a Share 1. Highest Negotiated Price under a Share Purchase Agreement; Purchase Agreement; 2. Prior Acquisition Price 2. Prior Acquisition Price (Higher of the two): - Highest of the Price Paid by the Acquirer - The volume-weighted average price during twenty-six weeks prior to the Public paid or payable for acquisitions, Announcement under any public, rights whether by the acquirer or by any person preferential issue; acting in concert with him during the fifty-two weeks immediately preceding the date of the public announcement; [(Q1xP1)+(Q2xP2)+(Q3xP3)….(QnXPn)] -------------------------------------------------------- [Q1+Q2+Q3+ ……… Qn] Where Q = Quantity P = Price 1, 2, 3 …. n denote days of purchase - The highest price paid or payable for any acquisition, whether by the acquirer or by any person acting in concert with him during the twenty-six weeks immediately preceding the date of the public announcement; and 3. Market Price (Higher of the two): 3. Market Price: - Average of weekly high and low of the - The volume-weighted average market closing price quoted on the Stock price of such shares for a period of sixty exchange where the shares of the trading days immediately preceding the Company are most frequently traded date of the public announcement as during last twenty-six weeks; OR traded on the stock exchange where the maximum volume of trading in the shares [(WH1+WL1)/2 + (WH2+WL2)/2…. (WH26+WL26)/2] /26 of the target company are recorded WH = Weekly High Closing Price during such period, provided such shares WL = Weekly Low Closing Price 1, 2, 3…. 26 denote the Weeks are frequently traded; [(T1xWAP1)+(T2xWAP2)+…..(T60 X WAP60)] - Average of daily high and low of the -------------------------------------------------------- prices of the shares as quoted on the [T1+T2+ ……… T60] Stock exchange where the shares of the Where T= Trade Quantity of the Day Company are most frequently traded WAP = Weighted Average Price of the Day during two weeks preceding the date of 1,2,3 …… 60 denote trading days public announcement. [(DH1+DL1)/2+ (DH2+DL2)/2…. (DH10+DL10)/2] /10 DH = Daily High Price DL = Daily Low Price 1,2, … 10 denote days 8 Vol. XL * Pp 761-904 * June 2010 | Chartered Secretary
  9. 9. IX. Non-compete Fee One of the most debated issue relating open offers has been the Non-compete Fee paid to the existing promoters. Presently a Non-compete fee to the extent of 25% of the offer price is allowed to be paid to the controlling shareholders, if the SEBI is convinced of their competing capability. The Committee, however, has recommended to remove this provision keeping in view the spirit of equal treatment for all shareholders. Thus, under the Proposed Regulations any direct or indirect non- compete fee or control premium paid to the controlling shareholders would be added or made part of the offer price. X. Acquisition from the other competing acquirer In the draft Regulations, the Committee has made a provision allowing the competing acquirer to acquire either himself or through or with PACs with him, the shares acquired by the other competing acquirer in the open offer without attracting the obligation to make another Open Offer provided that the acquisition has been made at the price not exceeding the offer price governing the competing offer made by the acquirer acquiring the shares and the acquisition has been made within 21 business days from the expiry of the offer period for such competing offer. Keeping in view the increasing trend of competitive biddings in India this may be taken as an imperative step as compelling two warring groups to continue in a company may not be in the interest of the company and smooth passage to one of the competitive bidders is desirable. XI. No induction on the Board during the pendency of competing offer Regulation 24(3) of the proposed Regulations prohibit the induction of new director on the board of the Target Company during the pendency of the competing offer irrespective of the amount of consideration deposited in the escrow account by the acquirer. The most interesting point to be noted here is that the said sub-regulation prohibits the induction of new director on the board of the Target Company regardless of the fact whether the proposed Director, to be appointed on the Board, belongs to the acquirer or the existing management of the Target Company. XII. Responsibility of the Board of Target Company The Proposed Regulations have casted an obligation on the Board of the Target Company to constitute a committee of independent directors which shall provide its written reasoned recommendations on the open offer to the shareholders of the Target Company and such recommendations shall be published at least two business days before the commencement of the tendering period, in the same newspapers where the public announcement of the open offer was published. However, this recommendation does not seem to be practical as the role of independent director in India is generally considered to be passive. Further, the committee has not prescribed any parameters or criteria which the committee of Independent Director(s) should consider for giving its recommendation on the open offer. In the German Takeover Code, specific provisions have been provided prescribing the criteria’s to be considered while making the recommendation on the open offer. For instance, suppose there are two competing offers of which one open offer is by a Financial Investor who has offered a price of Rs.50 per shares and other is by a Technocrat having a long experience and expertise in the industry in which the Target Company is involved and who has offered an offer price of Rs.45 per share. Now, in this situation which of the offer, the committee should 9 Vol. XL * Pp 761-904 * June 2010 | Chartered Secretary
  10. 10. recommend to the shareholders i.e. whether the committee should consider the High Offer Price or the experience of the acquirer which might be useful for the bright future of the Target Company for giving its recommendations to the shareholders of the Target Company. This is in contrast with the Existing Regulations which have left this requirement at the choice of the directors of the Target Company. XIII. Reduction in Time Line for Open Offer Process: Keeping in view the changing technologies and possibilities of faster execution and dissemination of information, the Committee has recommended substantial reduction of timeline of the whole open offer process. The timeline for the open offer process has been reduced from 95 days to 57 days. Shorter timeline will reduce the cost of process and will also make the acquisitions commercially more viable. Exemptions The exemptions under SEBI Takeover Regulations have been divided into two parts i.e. Automatic Route and Approval Route. Automatic route means the exemption is available to the acquirer subject to the compliance of the conditions as prescribed under the Regulations whereas under the Approval route, an application for exemption is to be made to the Board. In the Committee Report, some of automatic exemptions which have not been used frequently such as allotment of shares pursuant to an application made under a Public Issue, acquisition of shares in the ordinary course of business by a market maker have been removed. On the other hand, a few new categories of the automatic exemptions have been introduced which are detailed below: Increase in shareholding pursuant to Buy Back: The increase in shareholding pursuant to buy back by the Target Company has been covered under the automatic exemption route subject to certain conditions. The exemptions in respect of increase in shareholding pursuant to buy back have been categorized into two parts i.e. where pre holding of the acquirer before the buy back is less than 25% and other where the pre shareholding of the acquirer is between 25% to 75%. Pre Holding less 25% Pre Holding between 25-75% • Exemption subject to the acquirer • In case of shareholder resolution, reducing its shareholding below the approval of shareholders by way of threshold within a period of ninety postal ballot has been obtained and days from the date of such increase. such shareholder has not voted on the resolution. • In case of Board Resolution, such shareholder as a director has not voted. • No change in control. 10 Vol. XL * Pp 761-904 * June 2010 | Chartered Secretary
  11. 11. Acquisition of shares under Corporate Debt Restructuring Scheme Another important exemption that has been introduced in the Committee Report is very much beneficial for the general public shareholders i.e. 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 provided such scheme has been authorized by shareholders by way of a special resolution passed by postal ballot. Voting Right on Preference Shares Similarly, the increase in voting rights arising on preference shares in terms of section 87 of the Companies Act, 1956 has also been included in the automatic exemption category. However, the question which has remained unanswered is whether the acquisition of preference shares carrying voting rights arising out of the operation of law would be exempt from the open offer obligation or not. Inter se transfer of shares amongst the relatives The existing SEBI Takeover Regulations as well as the Proposed Regulations provides the exemption from the open offer obligations in case of inter se transfer of shares amongst the relatives. However, the definition of Relatives in both the Regulations is different. In the existing Regulations, the term Relative means as given in Section 6 of the Companies Act, 1956 whereas in the Proposed Regulations, the concept of Immediate Relative is introduced which means any spouse of a person, and includes parent, sibling or child of such person or of the spouse; Inter se transfer of shares amongst the persons falling in the MRTP Group The exemption from the Open Offer obligations in case of inter se transfer of shares amongst the persons falling in the MRTP Group as provided in the existing SEBI Takeover Regulations has been withdrawn in the Proposed Regulations. Reporting to SEBI u/r 3(4) of Existing SEBI Takeover Regulations Furthermore, at present, there is a lot of confusion about the requirement of reporting to SEBI in case of automatic exemption from offer. In the Proposed Regulations, the Committee has considered this issue and removed the ambiguity by deleting the pre-percentage of the acquirer. In other words, in the draft Regulations submitted by the Committee, the disclosure is required in every circumstance whenever the exemption under the categories as mentioned in the Regulations have been sought irrespective of the pre shareholding of the acquirer seeking the exemptions. Reference to Takeover Panel The existing SEBI Takeover Regulations provide for the compulsory reference to the Takeover Panel of the application filed with SEBI for seeking the exemption from the Open Offer obligations. However, in the draft Takeover Regulations submitted by the committee, the reference to the Takeover Panel is optional on the part of SEBI and SEBI may refer the application to the Takeover Panel in the circumstances considered necessary. 11 Vol. XL * Pp 761-904 * June 2010 | Chartered Secretary
  12. 12. Disclosure Requirements The Committee Report has proposed more frequent and stringent disclosure requirements on the part of the acquirer. The disclosure under the Regulations is divided into parts i.e. Event Based Disclosure and Annual Disclosure. Event Based Disclosure Existing Regulation Proposed Regulation Acquisition of 5 per cent and more shares or Disclosure of acquisition and disposal voting rights of a company Reg. Particulars Reg Particular No. No. 7(1) Disclosure on the acquisition of >5%, 28(1) Disclosure on the acquisition of >5%. 10%, 14%, 54% and 74% 7(1A) Pre holding between 15-55% and change 28(2) Pre holding >5% and change in in shareholding 2% or more. shareholding 2% or more. 7(2) Disclosure is to be given within 2 days of 28(3) Disclosure is to be made within 2 acquisition or receipt of intimation of business days of acquisition or receipt of allotment. intimation of allotment. 7(3) Target Company to give disclosure to the No obligation on the Target Company to give stock exchange on receipt of disclosure disclosure. under 7(1) and 7(1A). Annual Disclosures Existing Regulation Proposed Regulation Continual Disclosures Continual Disclosures Reg. Particulars Reg. Particular No. No. 8(1) Disclosure by person holding more than 15% 29(1) Disclosure by person holding more than to Target Company with 21 days from the 25% to Target Company as well as to March 31. stock exchange with 15 business days from the March 31. 8(2) Disclosure by promoter or every person in 29(2) Disclosure by promoter to Target control to Target Company within 21 days Company as well as to stock exchange from the March 31 as well record date for within 15 business days from March 31 dividend of his own shareholding as well as of his own shareholding as well as that that of PACs. of PACs. 12 Vol. XL * Pp 761-904 * June 2010 | Chartered Secretary
  13. 13. 8(3) Target Company to give disclosure to the No obligation on the Target Company to give stock exchange on receipt of disclosure disclosure. under 8(1) and 8(2) with 30days from the March 31 as well record date for dividend. 8(4) Target Company to maintain the register to No requirement to maintain register. record the information received under sub- regulation (3) of regulation 6, sub-regulation (1) of regulation 7 and sub-regulation (2) of regulation 8. However, it has not been prescribed whether the promoter who is not holding any shares in the company but is having the control over it would also be required to file the Continual Disclosures or not. The most important point to be noted here is that the acquisition and holding of any security or instrument that would entitle the acquirer to receive shares in the target company, including warrants and convertible debentures, shall also be regarded as shares for the purpose of making the disclosures whether continual disclosure or otherwise. This amendment is in line with well accepted international norms. Recommendation made to other Regulators I. Finance Ministry for Taxation In the Draft Regulations, the committee has also touched an important issue i.e. Tax treatment with respect to the shares tendered in the Open Offer. As the Open Offer is highly regulated and all the parties involved in the process are required to follow the provisions laid in the Takeover Regulations, therefore, according to the Committee, it would not be justified to treat the activity of tendering the shares in the open offer at par with the Off market deal for the taxation purpose as the off market deal is a private transaction between the parties. II. Reserve Bank of India for funding The Committee is of the view that more flexible norms for grant of loans for strategic investment in Indian listed companies particularly for funding open offers under SEBI Takeover Regulations should be prescribed so as to create a level playing for domestic acquirers’ vis-à-vis foreign acquirers for speedy deal execution. III. SEBI for changes in ICDR In order to ensure that issuance of shares as a consideration for the shares tendered in the Open Offer does not lead to undue delay in completion of offer formalities by the acquirer, therefore, the committee has suggested that SEBI should amend the ICDR Regulations to facilitate a smooth issuance of equity shares in such cases in a clear and transparent manner and further, the disclosures and other procedural requirements to be followed for such issue of shares should be appropriately spelt out. Conclusion: Based on these deliberations, it can be concluded that the Committee has tried to make takeover battles a level playing field for controlling as well as non-controlling shareholders. The increase in threshold would make listed companies more attractive to institutional investors and consequently would lead to more Investment in Indian Listed Companies. On the other hand it may reduce the 13 Vol. XL * Pp 761-904 * June 2010 | Chartered Secretary
  14. 14. number of offers as even 25% stake could be sufficient to control a company keeping in view the passive nature of small shareholders. The 100% offer requirement is good for the cause of equity but might also cause deterrent for acquisitions, which is a major concern. The increase in the offer size upto 100% has made the Open Offer process a costlier affair for the acquirers. The Committee has also made attempts to address many of the unintentional confusions and non-clarities and make the takeover law less complicated in understanding and compliance. The India Inc. will look forward to an early implementation of these new Regulations with some further modifications as per the comments and suggestions of industry chambers, professional bodies and public at large. For any query feel free to refer www.takeovercode.com or write to pkvijay@indiacp.com 14 Vol. XL * Pp 761-904 * June 2010 | Chartered Secretary

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