: DEMYSTIFYING TAKEOVER CODE   Pavan Kumar Vijay
KEYWORDS IN TAKEOVER CODE When an  " acquirer "   takes over the  “shares”  or  “control”  of the  "target ...
T AKEOVER SHARES  CONTROL  BOTH SHARES & CONTROL Acquisition  LIFTING THE VEIL
UNDERSTANDING SHARES   Reg 2 (k) REG 2(k) Shares carrying voting rights & any security which would entitle to receive shar...
UNDERSTANDING CONTROL  REG 2(c) <ul><li>Control is the right to </li></ul><ul><li>Appoint majority of the directors  </li>...
THRESHOLDS DEFINED  FOR COMPLIANCE  Acquisition of more than  5%, 10%, 14%, 54% & 74%  [ Regulation 7] Persons, who are ho...
THRESHOLDS DEFINED  FOR OPEN OFFER Acquisition more than  15% or more voting rights  [ Regulation 10] Persons, who are hol...
INTER – SE TRANSFER  Reg  3(1)(e) An Insight
Legal Insight: Inter-se Transfer    <ul><li>REGULATION 3(1)(e) OF SEBI (SAST) REGULATIONS,  </li></ul><ul><li>1997 GOVERNS...
Categories for Inter-se transfer Acquirer & Persons acting in concert Relatives under Companies Act, 1956 Group under MRTP...
DETAILED ANALYSIS
Category I – Inter-se Transfer amongst Group  Main Features  <ul><li>Group here is signifying the group as </li></ul><ul><...
Category I – Group… contd  Definition of Group  SECTION 2(ef) OF MRTP ACT, 1969 DEFINES GROUP INTO TWO PARTS: <ul><li>Asso...
Category II – Inter-se transfer amongst relatives  Main Features  <ul><li>Relatives under this regulation means the </li><...
Qualifying Indian Promoter & Foreign Collaborators, who are shareholders. Category III – Inter-se transfer for Qualifying ...
Category III – Promoters… contd  Qualifying  Promoters - Defined Any person who DIRECTLY OR INDIRECTLY is in control  of t...
Category III – Promoters… contd  Qualifying promoters..defined..contd Firm or HUF in which P/R is partner or coparcener ;s...
Category IV –… contd  Category IV – Acquirer and Persons acting in concert.  ACQUIRER Reg 2(b) PAC  Reg2(e) Exemption avai...
Pre- Conditions for availing Inter- se transfer.  N Y  N N ii. 3 yrs holding of shares by transferee & transferor.  Y Y Y ...
Checks & Balances
Checks & Balances under Regulation 3   C O M  P L I A N C E Reg 3(3) Reg 3(4) Reg 3(5) Advance Intimation (4 days in Advan...
Checks & Balances under Regulation 7   Acquirer  : Compliance of regulation 7(1) or 7(1A) Seller : Compliance of regulatio...
Taxation Issues STT  vs.  LTCG/STCG
Taxation Issues..contd . Securities Transaction Tax LTCG/STCG <ul><li>STT is levied when the transfer is </li></ul><ul><li...
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...
I SSUES
MATTER OF DEBATE: HELD:  Regulation 3(4) is applicable to all cases wherever the acquisition exceeds the limit prescribed ...
MATTER OF DEBATE: HELD: It was held that when the belated filing of the report under 3(4) does not resulted in any gain to...
<ul><li>Inter-se transfer is a good  tool  for </li></ul><ul><li>consolidation of holdings………….. </li></ul><ul><li>However...
PREFERENTIAL ALLOTMENT OF SECURITIES
An issue by a company Equity shares  /  Securities convertible into equity /   FCDs / Warrants / PCDs / Convertible Prefer...
BENEFITS  <ul><li>Simple way to raise capital of the Company </li></ul><ul><li>No need to appoint Merchant Banker except i...
The Companies Act, 1956 SEBI (Disclosure and Investor Protection) Guidelines, 2000  (Chapter – XIII & XIIIA) SEBI (SAST) R...
Allotment to QIBs (not in  Promoter Group)  by companies  listed on  NSE / BSE OTHERS Chapter – XIIIA of  SEBI (DIP) Guide...
Time Line- Preferential Allotment Relevant Date 30 days General Meeting Filing of application of in-principal approval  De...
Pricing Schedule General Meeting Relevant Date 30 days 2 weeks 6 months
QIBs Others Existing Holding  Preferential  Allotment  Existing Holding  Preferential  Allotment  No Lock in  For One Year...
Currency of Security Convertible into Equity Shares   QIBs OTHERS FCDs/ PCDs/ any other  convertible Security –60   Months...
O RVATIONS BSE Preferential Allotment:- In- Principle & Listing  <ul><li>Process of identification of allottees. </li></ul...
Preferential Allotment  viz-a-viz  Takeover Code
Limit for Preferential  Allotment Limits are calculated taking into account the EXPANDED CAPITAL   of  the Company   & not...
Acquirer (holding 20%)  Through Preferential Allotment   Acquirer’s holding cannot exceed 24.99% of Expanded Capital. Illu...
Acquirer (holding 5 %)  Through Preferential Allotment   Acquirer’s holding cannot exceed 14.99% of Expanded Capital. Illu...
Illustration III  Acquirer (holding 0%)  Through Preferential Allotment   Acquirer’s holding cannot exceed 14.99% of Expan...
Example: Acquisition by  a new entity upto allowable limit  Existing Capital of Company: 1,00,000 shares Maximum Allowable...
Example: Acquisition by  a existing entity holding 50% presently  Existing Capital of Company: 1,00,000 shares Maximum All...
Queries Suppose the present holding of a promoter is 54% and after preferential allotment the holdings of the promoter rem...
Suppose the present holding of a promoter is 54% and after preferential allotment the holdings of the promoter remains sam...
Conclusion To sum up… preferential allotment is becoming a buzz word these days… However, it is subject to various checks ...
Thanks a lot....  Pavan Kumar Vijay
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  • A very good Evening to all of you Distinguished Chief Guest Shri L K Advani, Hon’ble Deputy Prime Minister of India, Justice Shri M N Venkatachalliah, Shri M M K Sardana, Shri G N Bajpai, Shri S Gangopadhyay, Shri N K Jain, Members of the Jury, My Fellow Council Members, Senior Government officials, Corporate Executives, Invitees, Members of Profession, Students, Ladies and Gentlemen.
  • Ladies and Gentlemen Corporate Governance rests with the Vision and Perception of the Corporate Leadership
  • and The ICSI has adopted a Vision for Corporate Governance itself
  • Takeover code presentation ludhiana 17.9.06

    1. 1. : DEMYSTIFYING TAKEOVER CODE Pavan Kumar Vijay
    2. 2. KEYWORDS IN TAKEOVER CODE When an &quot; acquirer &quot; takes over the “shares” or “control” of the &quot;target company&quot;, it is termed as Takeover . When an acquirer acquires &quot; substantial quantity of shares or voting rights&quot; of the Target Company, it results into substantial acquisition of shares.
    3. 3. T AKEOVER SHARES CONTROL BOTH SHARES & CONTROL Acquisition LIFTING THE VEIL
    4. 4. UNDERSTANDING SHARES Reg 2 (k) REG 2(k) Shares carrying voting rights & any security which would entitle to receive shares with voting rights in future But shall not include PREFERNCE SHARES ISSUE What is the status of partly paid shares under SAST Regulations, 1997? The partly paid up shares are also shares under Takeover Code as voting rights is embedded in partly paid up shares.
    5. 5. UNDERSTANDING CONTROL REG 2(c) <ul><li>Control is the right to </li></ul><ul><li>Appoint majority of the directors </li></ul><ul><li>To control the management </li></ul><ul><li>Control the policy decisions </li></ul><ul><li>By virtue of S hareholding or M anagement rights or S hareholders A greements or V oting A greements or in any other manner. </li></ul>
    6. 6. 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)]
    7. 7. 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)]
    8. 8. INTER – SE TRANSFER Reg 3(1)(e) An Insight
    9. 9. Legal Insight: Inter-se Transfer <ul><li>REGULATION 3(1)(e) OF SEBI (SAST) REGULATIONS, </li></ul><ul><li>1997 GOVERNS THE ACQUISITIONS THROUGH INTER </li></ul><ul><li>SE TRANSFERS. </li></ul><ul><li>EXEMPTION FROM APPLICABILITY OF REGULATION </li></ul><ul><li>10,11 & 12 i.e. REQUIREMENT FROM MAKING </li></ul><ul><li>PUBLIC OFFER. </li></ul>
    10. 10. Categories for Inter-se transfer Acquirer & Persons acting in concert Relatives under Companies Act, 1956 Group under MRTP Act, 1969 Qualifying Promoters Categories
    11. 11. DETAILED ANALYSIS
    12. 12. Category I – Inter-se Transfer amongst 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>
    13. 13. 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.
    14. 14. Category II – 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>
    15. 15. Qualifying Indian Promoter & Foreign Collaborators, who are shareholders. Category III – Inter-se transfer for Qualifying Promoters Qualifying Promoters Category III – Promoters… contd
    16. 16. Category III – Promoters… contd Qualifying Promoters - Defined Any person who DIRECTLY OR INDIRECTLY is in control of the company Who is named as Promoter in any Offer Document OR Shareholding Disclosure, Whichever is later & includes….
    17. 17. Category III – Promoters… contd Qualifying promoters..defined..contd Firm or HUF in which P/R is partner or coparcener ;stake not < 50% Any company controlled by P/R His relatives as Defined u/s 6 of Co. Act 1956. When person is individual Firm or HUF in which P/R is partner or coparcener ; stake not < 50% Any company controlled by P/R Holding & Subsidiary When person is body corporate
    18. 18. Category IV –… contd Category IV – 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 .
    19. 19. Pre- Conditions for availing Inter- se transfer. N Y N N ii. 3 yrs holding of shares by transferee & transferor. Y Y Y Y iii. Compliance of Regulation 6, 7 & 8. Y Y N N i. Transfer is at a price > 25% of the price determined in terms of Reg 20(4) & 20(5) of SEBI (SAST) Regs, 1997. Category IV (Acquirer & PAC) Category III (Qualifying Promoter) Category II (Relative) Category I (Group) Conditions
    20. 20. Checks & Balances
    21. 21. Checks & Balances under Regulation 3 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 10000 25000)
    22. 22. 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)
    23. 23. Taxation Issues STT vs. LTCG/STCG
    24. 24. Taxation Issues..contd . Securities Transaction Tax LTCG/STCG <ul><li>STT is levied when the transfer is </li></ul><ul><li>made through stock exchange . </li></ul><ul><li>STT is @ 0.125% of the sale value. </li></ul><ul><li>LTCG/STCG is levied when the </li></ul><ul><li>transfer is made in off market </li></ul><ul><li>mode. </li></ul><ul><li>LTCG – </li></ul><ul><li>20% with indexation benefit on </li></ul><ul><li>the amount of capital gain . </li></ul><ul><li>10% without indexation benefit on </li></ul><ul><li>amount of capital gain . </li></ul><ul><li>STCG – </li></ul><ul><li>10% on the amount of capital gain. </li></ul>A Comparative Study
    25. 25. INTER- SE TRANSFER : A STRATEGICAL MOVE Good means for consolidation of holdings in a Company.
    26. 26. 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 the exemption 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
    27. 27. I SSUES
    28. 28. 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, THE SAT Whether Reporting under Regulation 3(4) is one time reporting?
    29. 29. MATTER OF DEBATE: HELD: It was held that when the belated filing of the report under 3(4) does not resulted in any gain to the appellant & also no loss to the invested, the imposition of the penalty is not justified. SAMRAT HOLDINGS V SEBI Whether the belated filing of report should not be considered as commission of offence when there is no substantial loss to the investors?
    30. 30. <ul><li>Inter-se transfer is a good tool for </li></ul><ul><li>consolidation of holdings………….. </li></ul><ul><li>However,the exemption is available subject to strict compliance of Regulation 3(3),3(4) & 3(5). </li></ul>Concluding Remarks
    31. 31. PREFERENTIAL ALLOTMENT OF SECURITIES
    32. 32. An issue by a company Equity shares / Securities convertible into equity / FCDs / Warrants / PCDs / Convertible Preference Shares pursuant to a resolution u/s. 81(1A) of Act, to any select group of persons by way of private placement.  Of What is Preferential allotment of shares?
    33. 33. BENEFITS <ul><li>Simple way to raise capital of the Company </li></ul><ul><li>No need to appoint Merchant Banker except in the case </li></ul><ul><li>of QIP. </li></ul><ul><li>Economical way to raise capital. </li></ul><ul><li>Minimum Formalities. </li></ul>
    34. 34. The Companies Act, 1956 SEBI (Disclosure and Investor Protection) Guidelines, 2000 (Chapter – XIII & XIIIA) SEBI (SAST) Regulations, 1997 Listing Agreement GOVERNING LAW
    35. 35. Allotment to QIBs (not in Promoter Group) by companies listed on NSE / BSE OTHERS Chapter – XIIIA of SEBI (DIP) Guidelines Chapter – XIII of SEBI (DIP) Guidelines Proposed Allottees
    36. 36. Time Line- Preferential Allotment Relevant Date 30 days General Meeting Filing of application of in-principal approval Despatch of Individual Notices 25 days 15 days (12 months in case of QIBs) Board Meeting Allotment of Shares Shareholders’ Resolution must be implemented within 15 days ( 12 months in case of QIBs) except in case of pending regulatory approvals
    37. 37. Pricing Schedule General Meeting Relevant Date 30 days 2 weeks 6 months
    38. 38. QIBs Others Existing Holding Preferential Allotment Existing Holding Preferential Allotment No Lock in For One Year, except in case of Trading through Stock Exchange For Six Months PROMOTERS – 20% of Total Capital - for 3 Years Remaining – for one Year OTHERS – For One Year Lock-in Requirement
    39. 39. Currency of Security Convertible into Equity Shares QIBs OTHERS FCDs/ PCDs/ any other convertible Security –60 Months from the date of allotment Warrants convertible into Equity Shares – can’t be issued to QIBs FCDs/ PCDs/ any other convertible Security – No time prescribed for conversion Warrants convertible into Equity Shares - 18 months from the date of allotment
    40. 40. O RVATIONS BSE Preferential Allotment:- In- Principle & Listing <ul><li>Process of identification of allottees. </li></ul><ul><li>Bank Statements </li></ul><ul><li>DIP Compliances – Pricing, Lock in , </li></ul><ul><li>Identity </li></ul><ul><li>Clause 40A of Listing Agreement </li></ul><ul><li>Change in Management/Control </li></ul>
    41. 41. Preferential Allotment viz-a-viz Takeover Code
    42. 42. Limit for Preferential Allotment Limits are calculated taking into account the EXPANDED CAPITAL of the Company & not the EXISTING CAPITAL of the Company.
    43. 43. Acquirer (holding 20%) Through Preferential Allotment Acquirer’s holding cannot exceed 24.99% of Expanded Capital. Illustration I
    44. 44. Acquirer (holding 5 %) Through Preferential Allotment Acquirer’s holding cannot exceed 14.99% of Expanded Capital. Illustration II
    45. 45. Illustration III Acquirer (holding 0%) Through Preferential Allotment Acquirer’s holding cannot exceed 14.99% of Expanded Capital.
    46. 46. Example: Acquisition by a new entity upto allowable limit Existing Capital of Company: 1,00,000 shares Maximum Allowable Limit: 14.99% USUAL WAY OF CALCULATION 100000* 14.99% = 14,990 THE RIGHT WAY 100000* 14.99% / 85.01 = 17633 The difference is because of the calculation on expanded Capital Base. 17633- 14990 = 2643
    47. 47. Example: Acquisition by a existing entity holding 50% presently Existing Capital of Company: 1,00,000 shares Maximum Allowable Limit: 4.99% USUAL WAY OF CALCULATION 100000* 4.99% = 4,990 THE RIGHT WAY Non-promoter holding / 45.01% 50000/45.01%= 11108 The promoters will get extra 11108 equal to 4.99%. So, the resultant promoter shareholding = 50000 +11108 61108 shares equal to 54.99%
    48. 48. Queries Suppose the present holding of a promoter is 54% and after preferential allotment the holdings of the promoter remains same as that of 54% of the expanded capital. The question is whether any disclosure or compliance required in the present situation Query 1 Query 2 What is the maximum limit of preferential allotment? Can a Company through preferential allotment expand its capital without any limit?
    49. 49. Suppose the present holding of a promoter is 54% and after preferential allotment the holdings of the promoter remains same as that of 54% of the expanded capital. The question is whether any disclosure or compliance required in the present situation? What, if, the same question arises in case the promoter is holding 60%? The issue is as there is acquisition of shares but such acquisition has not change the voting rights. The question is what is relevant in terms of takeover code, acquisition or voting rights? Query 3 Queries
    50. 50. Conclusion To sum up… preferential allotment is becoming a buzz word these days… However, it is subject to various checks & balances.
    51. 51. Thanks a lot.... Pavan Kumar Vijay

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