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.
T AKEOVER SHARES CONTROL BOTH SHARES & CONTROL Acquisition LIFTING THE VEIL
MEANING OF EXEMPTIONS Regulation 3 of the SEBI (Substantial Acquisition of Shares & Takeover) Regulations, 1997 deals with Exemptions. It states: “ Nothing contained in regulations 10, 11 and 12 of these regulations shall apply to...” contd.. Thus, Regulation 3 gives exemption only from the provisions of Regulation 10, 11 & 12 of SEBI (Substantial Acquisition of Shares & Takeover) Regulations, 1997, and other provisions of the takeover code are required to be complied with in every case.
WHAT ARE REGULATION 10, 11 & 12? NO DISTINCTION BETWEEN PROMOTERS & NON-PROMOTERS Regulation Existing holding (Any person already holding…) Shall not acquire shares or voting rights entitling him to exercise Voting rights Maximum Allowable Holding 10 0-15% 15% or more voting rights 11(1) 15%-55% Additional 5% more voting rights 11(2) 55%-75% Any single share 12 Shall not acquire control over the target company Unless such person makes a PUBLIC ANNOUNCEMENT to acquire such shares in accordance with the regulations.
Regulation 11(2) – “ The Analysis ” “ No acquirer, who together with persons acting in concert with him holds, fifty five per cent. (55%) or more but less than seventy five per cent. (75%) of the of the shares or voting rights in a target company, shall acquire either by himself or through persons acting in concert with him any additional shares or voting rights therein, unless he makes a Public Announcement to acquire shares in accordance with these Regulations:
IMPLICATION OF REGULATION 3 REGULATION 3 PROVIDES AN EXEMPTION FROM THE REQUIREMENT OF MAKING PUBLIC ANNOUNCEMENT TO ACQUIRE SHARES & CONTROL. WHAT IS PUBLIC ANNOUNCEMENT? Public announcement is an exit opportunity in the form of an offer to the shareholders of the target company to sell their shares to the acquirer if they don’t want to continue with the new management.
PUBLIC ISSUE Firm Allotment REGULATION 3(1)(a) - Public Issue Net Offer to public or Reservation PUBLIC ISSUE EXEMPT Only if the disclosures are made in the prospectus
Up to Entitlement Always exempt Takeover code will never be attracted because on acquisition of shares up to the entitlement, there will be no increase in percentage shareholding. Up to the limits specified in Regulation 11 Always exempt This will be the case when a shareholder acquires shares beyond his entitlement but his aggregate shareholding does not exceeds the limits specified in Regulation 11* , i.e. by 5%. Beyond the limits specified in regulation 11 Only if The acquirer is presently in control of the company and he has in the rights letter of offer made disclosures that he intends to acquire additional shares beyond their entitlement, if the issue is under subscribed. MAX UPTO 75% However, in any case the exemption shall not be available in case the acquisition of securities results in the change of control of management. RIGHT ISSUE REGULATION 3(1)(b) - Right Issue Regulation 11*,- Regulation 11(1) where the limit of 5% is available for FY RIGHT ISSUE
ACQUISITION BY UNDERWRITERS REGULATION 3(1)(d) Underwriters are not required to make Public Announcement for the acquisition made pursuant to the underwriting agreement signed with the company when the issue is undersubscribed.
INTER-SE TRANSFER <ul><li>Amongst Group </li></ul><ul><li>Amongst Relatives </li></ul><ul><li>Amongst Qualifying promoters & Foreign Collaborators </li></ul><ul><li>Amongst Qualifying Promoters </li></ul><ul><li>Amongst Acquirers & Persons acting in concert </li></ul>REGULATION 3(1)(e)
INTER-SE TRANSFER BETWEEN GROUP Main Features <ul><li>Group here is signifying the group as </li></ul><ul><li>defined under MRTP Act, 1959. </li></ul><ul><li>Where persons constituting such group </li></ul><ul><li>have been shown as group in the last </li></ul><ul><li>published Annual Report of the Target </li></ul><ul><li>Company. </li></ul>
Category I – Group… contd Definition of Group SECTION 2(ef) OF MRTP ACT, 1969 DEFINES GROUP INTO TWO PARTS: <ul><li>Associated Persons </li></ul><ul><li>Group of persons having control without exercising controlling interest. </li></ul><ul><li>Associated persons such as relatives of director of a company, partner of a firm & any trustee in relation to a trust. </li></ul><ul><li>Any associated person in relation to associated person. </li></ul>Two or more Individuals, AOI, firms, trusts, body corporates who are in the position to exercise control , whether directly & indirectly over any body corporate, firm or trust.
INTER-SE TRANSFER AMONGST RELATIVES Main Features <ul><li>Relatives under this regulation means the </li></ul><ul><li>Relatives defined under Section 6 & </li></ul><ul><li>Schedule 1A under Companies Act, 1956. </li></ul><ul><li>The definition of relative u/s 6 includes </li></ul><ul><ul><li>Spouse </li></ul></ul><ul><ul><li>Members of HUF </li></ul></ul><ul><ul><li>Relative mentioned in Schedule 1A. </li></ul></ul><ul><li>Schedule 1A gives a list of 22 persons. </li></ul>
INTER-SE TRANSFER FOR QUALIFYING PROMOTERS Qualifying Indian Promoter & Foreign Collaborator, who are shareholders. Qualifying Promoters
Who is a Qualifying Promoter? Primary Category: (i) Any person who is directly or indirectly in control of the company; or (ii) Any person named as promoter in any document for offer of securities to the public or existing shareholders or in the shareholding pattern disclosed by the company under the provisions of the Listing Agreement, whichever is later. Body Corporate Individual Relative Its subsidiary or holding company Qualifying Promoter Qualifying Promoter of the Body corporate Relative, Firm or HUF in which the of Promoter is a partner or coparcener Secondary Category Firm or Company controlled by
ACQUIRER AND PERSONS ACTING IN CONCERT ACQUIRER Reg 2(b) PAC Reg2(e) 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 (Group) Category II (Relative) Category III (Qualifying Promoter) Category IV (Acquirer & PAC) i. Transfer is at a price > 25% of the price determined in terms of Reg 20(4) & 20(5) of SEBI (SAST) Regs, 1997. N N Y Y ii. 3 yrs holding of shares by transferee & transferor. N N Y Y (PAC & Acquirer) iii. Compliance of Regulation 6, 7 & 8. Y Y Y Y
MATTER OF DEBATE: HELD: On strict compliance automatic exemption under R.3 is not available. However, Since, the ultimate ownership will remain in same hands after the transfer in which it was before the transfer. Therefore the exemption under regulation 4 will be available to the acquirer THOMAS COOK (INDIA) LIMITED Whether the transfer of shares by a company to the other company within the same group will be exempt under takeover regulations where the acquirer company has not been shown as Group Company in the last published annual report of the target company because it was formed subsequent to the last published annual report of the target company.
MATTER OF DEBATE: HELD: Regulation 3(4) and 7(1) of the 1997 Regulations contemplates holding of an individual and not the total holding of promoter group therefore where acquisition was from other shareholder in same group and as result of acquisition holding of group had not changed, regulation 3(1)(e) will be applicable to the said transaction. YOGI SUNGWON (INDIA) LTD. VS. SEBI) Whether regulation 3(4) and 7(1) of the 1997 Regulations contemplates holding of an individual or total holding of promoter group?
CASE STUDY Transferee shareholding Increased from 12.40% to 15.59% Regulation 3(1)(e) will be applicable Particulars Pre Acquisition Holding Proposed acquisition Post Acquisition Holding Shares % Shares % Shares % Transferee 19424377 12.40 +5000000 3.19% 24424377 15.59 Transferor 15053102 9.61 -5000000 3.19% 10053102 6.42 Other Promoters 67837367 43.30 67837367 43.30 TOTAL 102314846 65.31 102314846 65.31
<ul><li>a registered stock-broker of a stock exchange on behalf of clients </li></ul><ul><li>( ii ) a registered market maker of a stock exchange in respect of shares for which he is the market maker, during the course of market making </li></ul><ul><li>( iii ) by Public Financial Institutions on their own account </li></ul><ul><li>( iv ) by banks and public financial institutions as pledgees </li></ul><ul><li>( v ) the IFC, ADB, International Bank for Reconstruction and Development, Commonwealth Development Corporation and such other international financial institutions </li></ul><ul><li>( vi ) a merchant banker or a promoter of the target company pursuant to a scheme of safety net. </li></ul>ACQUISITION IN THE ORDINARY COURSE OF BUSINESS REGULATION 3(1)(f)
Acquisition of shares by a person in exchange of shares received under a public offer made under these regulations Aggregate shareholding in Mr. ABC Ltd. after receipt of consideration is, say, 18% Acquisition of 20% shares Open offer to shareholders of X Ltd. EXEMPT REGULATION 3(1)(ff) Target Company Acquirer X Ltd. (Listed) Y Ltd. (Listed) Mr. ABC (Shr of TC) 0% 10% Payment of consideration by issue of shares of Y Ltd.
TRANSMISSION OR SUCCESSION OR INHERITANCE Acquisition of Shares through Transmission Inheritance Succession E.G, In case of death of a shareholder, his shares devolve on his legal representative. Similarly, in case of insolvency of a shareholder, his shares devolve on his official assignee. REGULATION 3(1)(g)
GOVERNMENT COMPANIES & STATUTORY CORPORATIONS Acquisition of Shares by Government Companies and Statutory Corporations However, the Regulations does not provide the exemption, if Government Company acquire shares pursuant to competitive bidding process initiated by Central Government or State Government entered in the course of disinvestments of Public Sector Undertaking. REGULATION 3(1)(h)
STATE LEVEL FINANCIAL INSTITUTIONS REGULATION 3(1)(i) Transfer Transfer State level financial institutions Subsidiary Company Promoter or Co-promoter Successors or Assignees Acquirer of Shares pursuant to an agreement between the SFI and the promoter
REGULATION 3(1)(ia) VENTURE CAPITAL FUNDS Transfer Venture capital funds or foreign venture capital investors registered with the Board Promoters of a Venture capital undertaking or Venture capital undertaking Agreement
Transfer pursuant to a scheme framed under section 18 of the Sick Industrial Companies (Special Provisions) Act REGULATION 3(1)(j) SCHEME OF ARRANGEMENT
Transfer pursuant to a scheme of arrangement or reconstruction including amalgamation or merger or demerger under any law or regulation, Indian or foreign REGULATION 3(1)(j) MAX ACQUISITION IS UPTO 75% X Ltd. (Amalgamated Company) Y Ltd. (Amalgamating Company) Y (Shareholder) 20% 10%% Payment of consideration by issue of shares of Y Ltd. Aggregate shareholding in Y Ltd. after receipt of consideration is, say, 26% Merger or amalgamation EXEMPT
MATTER OF DEBATE: HELD: No, transfer precedent to merger will not be exempt under Takeover Provisions. LUXOTTICA GROUP SPA VS. SEBI Whether subsequent merger of companies to give effect to acquisition of shares would absolve acquirer from obligation arising out of triggering of regulations 10 and 12?
MATTER OF DEBATE: HELD: Yes, it will be exempt from takeover provisions EATON CORPORATION VS. SEBI Whether change in control over the target company pursuant to scheme of merger approved under the law of a country outside India will be exempt under regulation 12?
Change in control by takeover of management of the borrower target company by the secured creditor or, By restoration of management to the said target company by the said secured creditor (Pursuant to Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.) ACQUISITION PURSUANT TO SECURITIZATION ACT REGULATION 3(1)(ja)
Acquisition of shares in companies whose shares are not listed on any stock exchange. The exemption under clause ( k ) above shall not be applicable if by virtue of acquisition or change of control of any unlisted company, whether in India or abroad, the acquirer acquires shares or voting rights or control over a listed company. REGULATION 3(1)(k) X Ltd. (Acquirer) Y Ltd. (Holding Company) (Unlisted) Z Ltd. (Subsidiary Company) (Listed) Acquisition of 51% shares Indirect Acquisition of Control NOT EXEMPT EXEMPT
QUERY Holding Company Subsidiary Company ?? Acquirer Open Offer Whether Acquirer has to give open offer to the Subsidiary company also as change in control in holding Company will automatically be considered as change in control of subsidiary Company?
EXEMPTION UNDER REGULATION 3 is AUTOMATIC WHEREAS EXEMPTION UNDER REGULATION 4 IS SOUGHT FROM TAKEOVER PANEL (Exemption under regulation 4 can be claimed in those circumstances where the technical conditions of the takeover code can not be complied with but at the same time giving of public announcement of offer also will not serve any purpose. For example, in some of the following cases, SEBI has given exemption from making of Public announcement.) EXEMPTION UNDER REGULATION 4 REGULATION 3(1)(l)
MATTER OF DEBATE: HELD: NO, the purpose of giving an exit opportunity will be fulfilled by sending the offer letters individually by registered post, there is no need to make public announcement of offer which will not only delay the formalities of the proposed acquisition but also avoidable expenses will be saved. Held in: Bhoruka Financial Services Limited Kharikatia Tea And Industries Limited Whether an acquirer is required to give public announcement of offer where the number of shareholders of the target company is very small, each one of whom can be reached effectively by issuing registered acknowledgment due letters to them?
MATTER OF DEBATE: HELD: Where there will be no change in control and management of the Target Company and sole purpose of acquisition is to save the company from financial crisis, exemption can be granted. However, exemption on the basis of this submission will be available only if the acquirer proves that the funds cannot be raised from any other source like public issue or right issue etc. Pearl Polymers Ltd, Rainbow Denim Limited Satia Paper Mills Limited, Balasore Alloys Limited Salguti Plastics Limited Whether the exemption from making public announcement of offer will be available to the promoter acquirer where the shares are being acquired to comply with the conditions of financial institution imposed on the target company as a part of the scheme of providing financial assistance?
MATTER OF DEBATE: HELD: Yes, because the purpose of acquisition is not to acquire the control and management of the target company and there will be no change in the shareholding pattern even after the acquisition. Held in: Shriram Pistons and Rings Limited Specialty Papers Limited Whether the transfer of shares by a person to himself in another capacity i.e. promoters of the target company to a family benefit trust in which the promoters himself are the trustees and beneficiaries will be exempted under takeover code?
DISCLOSURES C O M P L I A N C E Reg 3(3) Reg 3(4) Reg 3(5) Advance Intimation (4 days in Advance) Report (21 days of acquisition) Fees to be accompanied with Report (Rs 25000)
MATTER OF DEBATE: HELD: Regulation 3(4) is applicable to all cases wherever the acquisition exceeds the limit prescribed in the regulations irrespective of the existing holding of the acquirer. NAAGRAJ GANESHMAL JAIN V P.SRI SAI RAM Whether Reporting under Regulation 3(4) is one time reporting?
MATTER OF DEBATE Whether the provision of regulation 3(4) is applicable only in respect of a company and its group companies, acting in concert, together holding less than 10 per cent of the paid up capital before the Right Issue in the target company and by virtue of the Right Issue increasing their holding beyond 10 per cent and not in a case where promoters were already holding 42.48 per cent of the paid up capital before the Right Issue? HELD: No even persons holding more than allowable limits are required to file report with SEBI under regulation 3(4). GODREJ & BOYCE MFG. CO. LTD. VS. SEBI )
MATTER OF DEBATE Whether increase in voting rights of the acquirers from 66.11% to 66.40% will warrant the open offer in terms of Regulation 11(2) of SEBI (Substantial Acquisition of Shares & Takeover) Regulations, 1997? regulation 11(2). HELD: The acquisition of shares pursuant to corporate action should be exempt if it complying with the Listing Agreement. However, an specific exemption is to be sought from Panel GUJARAT AMBUJA EXPORTS LTD.
EXEMPTIONS vis-à-vis 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 the exemption under regulation cannot exceed the provisions of listing agreement,i.e.the minimum public holding of 25% cannot be exceeded by the exemptions
EXAMPLE <ul><li>X ltd (Target Company) </li></ul><ul><li>Minimum Public Shareholding: 25% </li></ul><ul><li>Promoter’s Shareholding: 50 </li></ul><ul><li>Merger of X Ltd with Y Ltd (unlisted company) </li></ul><ul><li>Promoter’s Shareholding raised from 50% to 75% </li></ul><ul><li>EXEMPT </li></ul>ABC ltd (Target Company) Minimum Public Shareholding: 10% Promoter’s Shareholding: 60 Merger of ABC Ltd with XYZ Ltd (unlisted company) Promoter’s Shareholding raised from 60% to 90% EXEMPT