SEBI (Substantial acquisition of shares and takeover Regulations, 2011)

1. SEBI (substantial acquisition of
shares and takeover) Regulation
2011

2. BRIEF BACKGROUND
It applies in case of “substantial acquisition” of
shares, or
voting rights, or
control
by an acquirer by itself or together with
Persons Acting in Concert,
The Takeover Code, 2011 adheres to the framework
and principles of the Takeover Code, 1997 but the
changes that it brings are significant.

3. MEANING AND CONCEPT OF TAKEOVER
„Takeover‟
generally refers to
the acquisition of
one company by
another company,
which is a prelude
to the mergers of
companies.
In order to promote fairness in the securities market
and also to protect the interest of small investors,
SEBI, the market regulator has framed Regulations,
providing for acquisition of shares and takeover of
listed companies known as SEBI (Substantial
Acquisition of Shares And Takeover) Regulations,
2011.
The term
Takeover is not
defined in the
Companies Act,
1956/2013.

4. KINDS OF TAKEOVER
FRIENDLY TAKEOVER :- In this type of takeover, there is an
agreement between the management of two Companies through
negotiations and the takeover bid may be with the consent of majority
or all shareholders of the target company.

5. KINDS OF TAKEOVER cont.
HOSTILE TAKEOVER :- When an acquirer company does not offer the
Target Company the proposal to acquirer its undertaking but silently and
unilaterally pursues efforts to gain control against the wishes of existing
management, such acts of the Acquirer are known as “Hostile Takeover.”

6. IMPORTANT DEFINITIONS
 “ACQUIRER ”
means any person
THUS, Acquirer may be “any person” even a foreign company
(company incorporated outside India. If a Foreign Company acquires
shares of its listed Indian subsidiary Company, the acquirer is bound to
make a open offer by way of public announcement before acquiring shares
or voting rights in listed Indian subsidiary Company.
Further the term any person also include natural persons as well as
artificial persons .
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
Target Company

7. ACQUISITION
“Acquisition” means, directly or indirectly, acquiring or agreeing to acquire
shares or voting rights in, or control over, a target company.
CONTROL
“Control” includes the right to appoint majority of the directors or to control the
management or policy decisions exercisable by a person or persons acting
individually or in concert, directly or indirectly, including by virtue of their
shareholding or management rights or shareholder‟s 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;
Thus, Control includes :
Right to appoint
majority of the
Directors,
Right to control the
management,
Right to control
the policy
decisions .

8. Explanation :
The controling rights can be acquired by the acquirer, either singly or
jointly with persons acting in the concert with him, either by virtue of
agreement or in any other manner .
The agreement may be management agreement or a shareholders’
agreement or a voting rights agreement or a combination of them .
The word “ in any manner” are vary wide to cover many situations
including the exercise of voting rights through executed power of
attorney.
It may be noted that , proviso of this regulation clarifies that a
director or officer of the Target company would not be regarded as
being in control merely by virtue of holding such position.
We shall also remember that the definition of control is inclusive, so
we have to refer the ordinary and dictionary meaning also .

9. Substantial acquisition of shares or voting rights.
INITIAL TRIGGER THRESHOLD
[REGULATION 3(1)]
CREEPING ACQUISITION
[REGULATION 3(2)]
Regulation 3(1) caste an obligation on the
acquirer to make a public announcement of
an open offer for acquiring shares of any
target company where acquirer acquires
shares or voting rights in the target
company which taken together with shares
or voting rights, if any, held by PACs with
him in such target company, entitled them
to exercise 25% or more of the voting rights
in such target company.
The creeping acquisition route is meant to facilitate
consolidation by person already in control or
holding substantial number of shares.
An acquirer who together with PACs holds 25% or
more voting rights in a target company , but less
than the maximum permissible non- public
shareholdings {Maximum permissible non- public
(Promoters) shareholdings is 75% and Minimum
permissible public shareholdings is 25%} is allow to
acquire additional voting rights in the target
company to the extent of upto 5% with in a financial
year ending on 31st March, without making an open
offer .

10. Initial Threshold and creeping acquisition
Regulation Who When Public
Announcement
Reg. 3 (1) Acquirer + PAC Acquire more
than 25 % shares
or voting rights
Make P.A of an
open offer
Reg. 3 (2) Acquirer + PAC
Who hold shares
between 25 % - 75%
Acquisition up to
5% voting rights.
No Public
Announcement
Required
Reg. 3 (2) Acquirer + PAC
Who hold shares
between 25 % - 75%
Acquisition of
more than 5%
voting rights
Make P.A of an
open offer

11. NOTE:
Regulation 3(1) and Regulation 3(2) are mutually exclusive so that an acquisition
can trigger either Regulation 3(1) or Regulation 3(2) .
DECIDED CASE LAW
In Kosha Investment Ltd. v. SEBI, SEBI took a remarkable view that it would
not net off sales made by acquirer during a financial year so that if on a gross basis,
the acquirer‟s purchase of sales in the year exceeding 5%, he would be considered
as having triggered an open offer.
There is authority from CLB that a voilation of regulation 3 would entitled the
target company to refuse to register shares.

12. VOLUNTARY OFFER [REGULATION 6]
OFFER SIZE [REGULATION 7]
According to this regulation,
any offer would be for at least
26% of total shares of the target
company, as of tenth working
day from the closure of the
tendering period.
A voluntary open offer can be
made for the acquisition of
shares representing at least
10% but shall not exceeds such
number of shares which will
take the holding of acquirer and
PACs beyond maximum
permissible non - public
shareholding permitted under
listing Regulations.
Shareholders holdings shares entitling
them to exercise 25% or more of the
voting rights in the target company
may, without breaching minimum
public shareholding requirement under
the Listing Regulations, voluntarily
make an open offer to consolidate their
shareholding subject to their aggregate
shareholding after completion of the
open offer not exceeding the maximum
permissible non- public shareholding.
NOTE:
The facility to voluntarily make an
open offer shall not be available if in
proximate past (preceding 52 weeks),
acquirer and PACs holding 25% or
more voting rights have made
acquisitions without open offer within
the creeping acquisition limit of 5% .

13. DIFFERENCE BETWEEN REGULATION 3(2) AND REGULATION 6
REGULATION 3(2) REGULATION 6
Open offer is always MANDATORY. Open offer is Generally VOLUNTARY.
Acquirer has choice to opt regulation
3(2) or regulation 6.
There is no choice in regulation 6
Minimum offer size is 26% Minimum offer size is 10%

14. OFFER PRICE [REGULATION 8]
Offer Price in Case of Direct Acquisition and Deemed Direct Acquisition
of Shares, Voting Rights or Control of the Target Company.
The minimum open offer price shall be the highest of the following:
1 Highest negotiated price per share of the Target Company under the agreement that
attracted the open offer.
2 Volume-weighted average price paid or payable for acquisitions by the Acquirer or PAC
during 52 weeks preceding the date of the public announcement.
3 Highest price paid or payable for any acquisition by the Acquirer or PAC during 26 weeks
preceding the date of the public announcement.
4 If shares are frequently traded - volume weighted average market price of the Target
Company during 60 trading days immediately preceding the date of the public
announcement.
5 Where shares are infrequently traded - the price determined by the Acquirer and Manager to
the open offer taking into account valuation parameters, including, book value, comparable
trading multiples and such other parameters as are customary for valuation of shares of such
companies.
6 In case of Deemed Direct Acquisition where net assets value or sales turnover or market
capitalization of the Target Company is more than 15% of the consolidated net asset or sales
turnover or the enterprise value of the entity or business being acquired as per the latest
audited annual financial statements, the per share value of the Target Company computed by
the Acquirer.

15. [REGULATION 9]
MODE OF PAYMENT
Issue, exchange,
transfer of listed
shares .
any
combination
of the above.
Cash.
issue, exchange,
transfer of listed
secured debt
instruments.
Issue,
exchange,
transfer of
convertible debt
instruments.

16. EXEMPTIONS [REGULATION 10 & 11 ]
GENERAL EXEMPTIONS [REGULATION 10 (1)]
EXEMPTION FROM REGULATION 3 & 4 {But not from disclosure
obligations}
1 Transfer between qualifying parties such as (Group Companies, Immediate Relatives,
Promoters).{subject to fulfillment of certain conditions}
2 Some Acquisition in the ordinary course of business of Stock Brokers, Underwriters,
Merchant Bankers, Scheduled Commercial Banks.
3 Acquisition pursuant to Disinvestment in the Government Companies.
4 Acquisition pursuant to Scheme made under Section 18 of SICA, 1985 OR Pursuant to Order
of Court or other statutory authority under any Indian or Foreign Law.
5 Acquisition pursuant to SARFAESI Act, 2002
6 Acquisition under SEBI (Delisting of Equity Shares) Guidelines
7 Acquisition by the way of transmission, Succession, or Inheritance.
8 Voting rights on Preference Shares under Companies Act, 1956.
9 Acquisition of equity shares by the consortium of Banks, Financial Institutions, and other
secured Lenders pursuant to conversion of their debt as part of the Strategic Debt
Restructuring Scheme .
10 Increase in voting rights arising out of the operation of sub-section(1) of Section
106 of CA, 2013 OR pursuant to a forfeiture of Shares by the target company,
undertaken in compliance with the provisions of the Companies Act, 2013 and
its AOA.

17. Compliances for Exemption
Regulation 10(5) – Acquirer shall give advance intimation
to the Stock Exchange at least 4 working days prior to the
proposed acquisition.
Regulation 10(6) – Any acquirer seeking exemption shall
file a report with the Stock Exchanges not later than four
working days from the acquisition.
Regulation 10(7) - The Acquirer shall file a report to SEBI
within 21 working days of the date of acquisition along with
supporting documents to the Board giving all details in
respect of acquisitions and fee of Rs 1,50,000 (w.e.f March
23, 2014)

18. GENERAL EXEMPTIONS FROM REGULATION 3
Increase in voting
rights to 25% through
buy back.
Acquisition of shares
in a target company by
Promoter from venture
capital fund or a foreign
venture capital investor
registered with SEBI.
Acquisition of shares
in target company from
State- Level Financial
Institution by
promoters of the target
Company.
Acquisition
through rights
issue, subject
to certain
conditions.
Acquisition under
corporate debt restructuring
not involving change of
control provided such
scheme authorized by
special resolution by postal
ballot.
Acquisition of share in a
target company by any person
in exchange for shares of
another target company
tendered pursuant to an open
offer for acquiring shares under
these regulation.
Increase in voting rights through
buy back in excess of threshold
under Regulation 3(2), subject to
certain conditions.

19. OPEN OFFER PROCESS [REGULATION 12 TO 23]
• Before making any P.A. of mandatory public
offer, the acquirer shall appoint a Merchant
Banker, who is not associated to the
acquirer.
[REGULATION 12]
MANAGER TO THE OPEN
OFFER
• A short P.A. should be made on the same date
as the date of transaction which triggered the
open offer.
• A D.P.S. should be made with a period of 5
working days.
[REGULATION 13]
TIMING OF PUBLIC
ANNOUNCEMENT AND
DETAILED PUBLIC
STATEMENT

20. CONTENTS OF PUBLIC ANNOUNCEMENT OF OFFER [REGULATION 15]
It specifies that the contents of the P.A. and D.P.S. shall not contain any misleading
information.
FILING OF LETTER OF OFFER TO SEBI [REGULATION 16]
Within 7 working days from the date of the D.P.S., the acquirer shall, through
the manager to the open offer, file with SEBI the draft letter of offer in the format
prescribed by SEBI along with prescribed fees.
SEBI shall give its comments on the draft letter of offer, as expeditiously as
possible but not later than 15 working days of the receipt of the draft letter of
offer.
In the event SEBI specifies any changes, the manager to the open offer and the
acquirer shall carry out such changes in the letter of offer before it is dispatched to
the shareholders.

21. PUBLICATION OF PUBLIC ANNOUNCEMENT AND DETAILED PUBLIC
ANNOUNCEMENT [REGULATION 14]
Regulation 14(1)
provides
that
• PA shall be sent all the stock exchanges on which the shares
of the target company are listed, and Stock Exchange shall
immediately disseminate such information to the public.
Regulation
14(2) provides
that
• A copy of PA shall be send to SEBI and to the target company
at its registered office within 1 working days of the date of
PA.
Regulation 14(3)
requires
that
• The DPS shall be published in all editions of any one English
national daily with wide circulation, any one Hindi
national daily with wide circulation, and any one Regional
Language daily with wide circulation at the place where the
registered office of the Target Company is situated .

22. ESCROW ACCOUNT [REGULATION 17]
The acquirer shall, at least 2 working days prior to the date of the detail public
statement, open a escrow account which shall consist of :-
1 Cash deposit with a schedule commercial bank, or
2 Bank guarantee in favor of the merchant banker, or
3 Deposit of acceptable securities with appropriate margin with the
merchant banker, or
4 Combination of the above.

23. ESCROW ACCOUNT [REGULATION 17] Cont.
The Escrow amount shall be calculated in the following manner:-
(a) For consideration payable under the
open offer upto Rs. 500 crores.
25% of the consideration payable .
(b) For consideration payable under the
open offer exceeding Rs. 500 crores.
25% of rs. 500 crores + 10% of the
balance amount.
NOTE:-
It may be noted that where an offer is made conditional upon minimum level
of acceptance, 100% of the consideration payable in respect of minimum level
of acceptance or 50% of the consideration payable under the open offer,
whichever is higher, shall be deposited in cash in escrow account.

24. COMPETING OFFER [REGULATION 20]
Any person other than
the acquirer
who has made public
announcement
within 15 working days
of the date of DPS made
by acquirer
who has made the first PA
for such target Company.
is entitled to make a PA of
open offer

25. GENERAL OBLIGATION UNDER REGULATION 25 ARE DIRECTORY IN NATURE
The High Court of Andhra Pradesh in the case M.V. Subramanyam v.
Union of Indian considered the open offer made by Damanis and counter
offer made by British American Tobacco P/c UK (BAT group) for
acquisition of 20% of equity share capital of VST. In this case, the
petitioners sought a writ of mandamus directing SEBI to conduct
investigation into statutory violations and thereby deny permission to the
acquirers to proceed with public offer. It was held that Regulation 25
dealing with general obligations of acquirer was only directory
in nature and there was no merit in contention that non-
adherence to time schedule would invalidate letter of offer. It
was further stated that the petitioners having failed to established
prejudice caused to shareholders in extending letters of offers or allowing
acquirers to acquire would result in unforeseen circumstances,
jeopardizing industrial growth or interest of shareholders, petitioners were
disentitled to seek mandamus from Court.

26. GENERAL OBLIGATION OF THE MANAGER TO OPEN OFFER
[REGULATION 27]
Prior to PA being made, ensure that
 the acquirer is able to implement the open
offer; and
firm arrangements for funds through
verifiable means have been made by the
acquirer to meet the payment obligations
under the open offer.
Ensure that the contents of the
PA, the DPS, and the letter of
offer are true, fair and adequate in
all material aspects.
Furnish to
SEBI a due
diligence
certificate along
with the draft
letter of offer.
Not to deal with
his own account
in the shares of
the target
company during
the offer period.
File a report with
SEBI within 15 working
days from the expiry of
tendering period,
conforming status of
completion of various
open offer
requirements.

27. DISCLOSURES [REGULATION 28-31]
Promoter of the target company shall disclose details of shares
encumbered, creation / invocation / disposal of pledge within 7 working
days from the creation or invocation or release of encumbrance.
Persons holdings together with PACs 25% or more voting rights and
Promoters of every Target Company shall disclose their aggregate holding
as on 31st March, to S.Ex & Co within 7 w.d. from the end of each financial
year.
Acquisition includes pledge.
EXEMPTION TO :- Com. Banks, Pubic Financial Inst. (in ordinary course
of business)
Disclosure to Stock Exchange & Company within 2 working days of :-
 Acq. of 5% or more voting rights by
Acquirer with his PACs of target
company.
 Once above 5%, every acq. or disposal
of more than 2% of the voting rights of
target company .