Draft SEBI Takeover Regulations


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Draft SEBI Takeover Regulations

  2. 2. AGENDA 15/07/2011 1. Need of SEBI Takeover Regulations 2. Salient Features of Proposed Takeover Regulations and Industry Perspective 2.1. Key Definitions 2.2. Initial Threshold and Creeping Acquisition 2.3. Open Offer and its Related Concepts 2.4. Exemptions-Automatic and Approval Route 3. Conclusion
  3. 3. NEED OF SEBI TAKEOVER REGULATIONS 15/07/2011 <ul><li>The concept of takeover emerged in late 19th century in some countries like US, UK etc. when the first wave of mergers and acquisitions started. </li></ul><ul><li>However, in India it was only in 20th century that the concept of takeover took birth; </li></ul><ul><li>With the announcement of the policy of globalization, the doors of Indian economy were opened for the overseas investors; </li></ul><ul><li>In this changed scenario, mergers and acquisitions were the best option available for the corporates; </li></ul><ul><li>This created a need for some regulation to protect the interest of Investors and develop the security market; </li></ul><ul><li>In 1994, SEBI enacted SEBI Takeover Regulations, 1994; </li></ul><ul><li>In 1997, SEBI Takeover Code has been rechristened by enacting SEBI Takeover Regulations, 1997; </li></ul><ul><li>Thereafter, these regulations have been amended a number of times. </li></ul>
  5. 5. 15/07/2011 KEY DEFINITIONS
  6. 6. 15/07/2011 ACQUIRER Means any person who Directly or indirectly , acquires or agrees to acquire whether or Himself through With person acting in concert with him shares or voting rights in, or control over a target company by or The proposed regulations 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.
  7. 7. CONTROL 15/07/2011 <ul><li>“ Control” includes the right or the ability </li></ul><ul><li>to appoint </li></ul><ul><li>majority of the directors or </li></ul><ul><li>to control the management or </li></ul><ul><li>policy decisions of the target company, </li></ul><ul><li>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 </li></ul>The scope of term Control has been widen 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.
  8. 8. CHANGE IN CONTROL 15/07/2011 Regulation 12 of the existing SEBI Takeover Regulations allows for the change in control without giving the open offer provided that the approval of shareholders has been obtained by way of special resolution through postal. Now the only Route available for Change in Control is way of Open Offer to the shareholders of Target Company. In other words, now only the monetary power will help in the acquisition of control i.e. through open offer to the 100% public shareholders of the Target Company.
  9. 9. INDUSTRY PERSPECTIVE 15/07/2011 <ul><li>The term “ability” is too vague and would result in unwanted regulatory work of the corporate; </li></ul><ul><li>“ Control” should be defined to include not only the acquisition of shares or voting rights but the acquisition of substantial part of business of the company; </li></ul><ul><li>Need to clarify the term “Negative Control”;. </li></ul>
  10. 10. FREQUENTLY TRADED SHARES 15/07/2011 <ul><li>Replaced with the definition of Infrequently traded shares. </li></ul><ul><li>Trading turnover during the 12 months preceding the month in which PA is made to be considered instead of 6 months. </li></ul><ul><li>Trading turnover increased from 5% to 10% to consider the shares as frequently traded shares. </li></ul>
  11. 11. SHARES 15/07/2011 <ul><li>The scope of definition has been Broadened; </li></ul><ul><li>Inclusion of Depository Receipts within the ambit of term shares. </li></ul><ul><li>Holder of the depository receipts is treated at par with the one who acquired the Equity Shares carrying voting rights. </li></ul>
  12. 12. IDENTIFIED DATE 15/07/2011 Specified Date Identified Date Means the date falling on the tenth business day prior to the commencement of the tendering period. Means a date which shall not be later than the thirtieth day from the date of the public announcement.
  14. 14. INCREASE IN THRESHOLD 15/07/2011 <ul><li>Increase in Threshold limit from 15% to 25%. </li></ul><ul><li>This recommendation is made considering the average promoters shareholding prevalent in the Listed Companies and the international practices. </li></ul>INITIAL THRESHOLD Malaysia Hong Kong Australia U.K. 33 30 20 30
  15. 15. INDUSTRY PERSPECTIVE 15/07/2011 <ul><li>The raising of the initial acquisition threshold to 25% is a welcome step and aligns more closely with global practices in other countries; </li></ul><ul><li>The new threshold will support capital inflows from private equity players and is likely to be a stable and important source of capital for Indian businesses in coming years; </li></ul><ul><li>No Transitional Provisions; </li></ul><ul><li>Hostile takeover threat to the listed companies with lower promoter shareholding.; </li></ul><ul><li>Mismanagement of companies - Any large investor can acquire some shares from the market to keep his holding upto 25% which is sufficient to block any Special Resolution and keep a check on the management; </li></ul><ul><li>Reduction in the Number of Open Offers; </li></ul><ul><li>Contradictory with CCI Regulations. </li></ul>
  16. 16. 15/07/2011 PROMOTER HOLDING IN LISTED COMPANIES Source: TRAC Report Total Promoter Holding (%) Companies With Promoter Holding Between Market Cap Range (Rs. Mn) No. of Companies Mean Median 0-15% 15-20% 20-25% 25-30% 0-500 2,477 (61.1%) 45.50% 46.40% 274 (11.1%) 87 (3.5%) 97 (3.9%) 138 (5.6%) 500-2,000 649 (16.0%) 52.60% 54.90% 34 (5.2%) 19 (2.90%) 12 (1.8%) 19 (2.9%) 2,000-5,000 312 (7.7%) 54.30% 55.00% 10 (3.2%) 8 (2.6%) 1 (0.3%) 10 (3.2%) 5,000-10,000 157 (3.9%) 52.20% 54.50% 5 (3.2%) 1 (0.6%) 3 (1.9%) 8 (5.1%) 10,000 and above 459 (11.3%) 55.20% 54.30% 15 (3.3%) 5 (1.1%) 11 (2.4%) 16 (3.5%) Overall 4,054 (100%) 48.90% 50.50% 340 (8.4%) 120 (3.0%) 124 (3.1%) 191 (4.7%)
  17. 17. CREEPING ACQUISITION 15/07/2011
  18. 18. INDUSTRY PERSPECTIVE 15/07/2011 <ul><li>It will help the promoters in the consolidation of holdings; </li></ul><ul><li>Flexibility to acquire 10% shares or voting rights within 2 days without triggering the open offer requirement. </li></ul>
  20. 20. INCREASE IN OFFER SIZE 15/07/2011
  21. 21. INDUSTRY PERSPECTIVE 15/07/2011 <ul><li>This would make acquisitions an expensive proposition for companies, while at the same time ensuring only serious players participate. </li></ul><ul><li>Foreign investors might be in a better position to leverage finance compared to domestic acquirers. </li></ul><ul><li>Greater clarity is required on how this rule would be applicable in the case of FDI caps in certain sectors. </li></ul><ul><li>There are tax issues as well for tendering Open Offers. </li></ul><ul><li>Funding is not easily available in India for purchase of shares </li></ul><ul><li>If more companies get delisted, the market cap of India Inc. will get reduced and investors will have lesser investment opportunities. </li></ul><ul><li>Very few offers get oversubscribed, no need to increase the size. </li></ul>
  22. 22. 15/07/2011 OFFER SIZE ANALYSIS Source: TRAC Report Offer size (% of total equity capital of Target Company) FY Total <=20% >20% 2006-07 89 77 12 2007-08 118 100 18 2008-09 113 95 18 2009-10 75 65 10 Total 395 337 58 % of Cases 100% 85.32% 14.68%
  23. 23. VOLUNTARY OPEN OFFER 15/07/2011
  24. 24. FREEDOM TO COMPLETE ACQUISITION UNDER SPA 15/07/2011 This provision will allow the acquire to have the representation in the Target Company even before the completion of open offer and to exercise the control over it. Existing Regulations Proposed Regulations 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. Completion of acquisition under any agreement attracting the obligation to make an open offer for acquiring shares allowed after a period of 21 days subject to acquirer depositing 100% consideration payable under the open offer.
  25. 25. TAKEOVER OF SMALL COMPANY 15/07/2011 In line with Delisting Regulations, there is a need for separate provisions for Takeover of Small Company
  26. 26. ACQUISITION FROM OTHER COMPETING ACQUIRER 15/07/2011 The new provision will help in removing the obstacle which arise in the matter of battle for Great Offshore Limited when ABG Shipyard wants to sell the shares receive in the offer to Bharati Shipyard.
  27. 27. NON COMPETE FEES 15/07/2011 More beneficial for the shareholders as they will be entitled to get the same price as have been received by the promoters/sellers from the acquirer.
  28. 28. INDUSTRY PERSPECTIVE 15/07/2011 Shareholder Promoter Investor Investor + Management+ Control Thus, Payment of Non compete fees or control premium should be allowed.
  29. 29. OPTION TO WITHDRAW SHARES 15/07/2011 The option available to the shareholders to withdraw the shares tendered in the Open Offer has been taken back considering the point that in the proposed regulations, the last of upward revision by the acquirer is prior to the opening of Offer Period.
  30. 30. NO INDUCTION ON BOARD 15/07/2011 Prohibition on the Induction of new director on the board of the Target Company during the pendency of the competing offer
  31. 31. RECOMMENDATION BY INDEPENDENT DIRECTORS 15/07/2011 Board of Target Company to Constitute a committee of Independent Directors to provide written reasoned recommendations on the Open Offer to the shareholders of the Target Company and publication of such recommendation.
  32. 32. REDUCTION IN TIME LINE 15/07/2011 The timeline for completion of the open offer has been reduced from 95 calendar days To 57 Business Days
  33. 33. 15/07/2011 EXEMPTIONS
  34. 34. WITHDRAWAL OF EXEMPTION 15/07/2011 <ul><li>The following exemptions have been withdrawn from automatic exemption category </li></ul><ul><li>Allotment of shares pursuant to an application made under a Public Issue; </li></ul><ul><li>Acquisition of shares in the ordinary course of business by a market maker; </li></ul><ul><li>Acquisition of shares in the ordinary course of business by Public Financial Institutions on their own account. </li></ul>
  35. 35. 15/07/2011 NEW EXEMPTIONS INTRODUCED Increase in shareholding pursuant to Buy Back
  36. 36. 15/07/2011 <ul><ul><li>Approval of the scheme by shareholders by way of Special Resolution passed by Postal Ballot; and </li></ul></ul><ul><ul><li>Increase in shareholding has not resulted in change in control. </li></ul></ul>NEW EXEMPTIONS INTRODUCED Increase in shareholding pursuant to CDR Scheme
  37. 37. ISSUE 15/07/2011 Simultaneously with the Buy Back and CDR, Increase in Shareholding pursuant to Forfeiture of shares should also be exempted .
  38. 38. REPORTING OF EXEMPTION AVAILED TO SEBI 15/07/2011 <ul><li>The ambiguity involved in regulation 3(4) of the existing regulations with respect to the fact whether it’s a one time compliance or not has been removed. </li></ul><ul><li>New Regulations requires the reporting in every event whenever the exemption is sought under the sub clauses as mentioned under it. </li></ul>
  40. 40. 15/07/2011 CONCLUSION
  41. 41. POSITIVE IMPACT 15/07/2011 <ul><ul><li>Beneficial for the small public shareholder due to: </li></ul></ul><ul><ul><ul><li>Increase in the Offer size which means exit opportunity to all the shareholders; </li></ul></ul></ul><ul><ul><ul><li>More Stringent and frequent disclosure requirement on the part of the acquirer. </li></ul></ul></ul><ul><ul><ul><li>More Investment in the shares of listed Indian Company on account of increase in threshold. </li></ul></ul></ul><ul><ul><ul><li>More clarity in the provisions. </li></ul></ul></ul>
  42. 42. NEGATIVE IMPACT 15/07/2011 <ul><li>Loss to the shareholders because of the Reduction in Number of Open Offer on two accounts: </li></ul><ul><ul><li>Increase in threshold limit from 15% to 25% </li></ul></ul><ul><ul><li>Increase in offer size from 20% to 100%. </li></ul></ul><ul><ul><li>Costlier affair for the acquirers. </li></ul></ul><ul><ul><li>Offer to all public shareholders without bank funding will not possible. </li></ul></ul><ul><ul><li>Complicated Offer Price Determination. </li></ul></ul>
  43. 43. 15/07/2011 Pavan Kumar Vijay Managing Director Corporate Professionals Capital Private Limited SEBI Registered Merchant Banker THANK YOU
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