Project on SEBI Takeover CodeApplicability: These regulations shall apply to direct and indirect acquisition of shares or voting rights in, or control over Target Company.Initial trigger point for Open offer:When the acquirer alone or with PAC acquire shares or voting rights in the target companywhich along with the existing holdings would entitle them to exercise 25% or more of the votingrights in the target company, should make public announcement for open offer.Creeping acquisition upto 5% in a financial year:The acquirer alone or together with PAC, when holding 25% or more voting rights but less thanmaximum permissible non-public shareholding i.e. generally 75% [or 90% in case of Publicsector undertakings as per Rule 19 (2) (c) of Securities Contracts (Regulation) Rules, 1957], canacquire upto 5% of shares or voting rights in any financial year without making publicannouncement for open offer.Acquisition of control:Acquisition by way of control whether directly or indirectly would require the acquirer to makepublic announcement for open offer.Indirect acquisition of shares or control:Any acquisition of shares or voting rights in, or control over, the Target Company which ifacquired directly would trigger a public announcement of open offer is considered to be indirectacquisition. Indirect acquisition of control is categorized into three types, based on the value ofthe target company relative to overall transaction. Each such type of indirect acquisition issubject to distinct norms as to offer price computation, disclosures, offer timing, etc.Voluntary Open Offer:Voluntary open offer means public announcement of an open offer given by the acquirervoluntarily without triggering the mandatory open offer obligations.A voluntary offer is subject to certain conditions which includes the following: ⇒ Minimum offer size is 10% of the total shares of the target company; ⇒ The aggregate shareholding of the acquirer and PAC after completion of the open offer cannot exceed the maximum permissible non-public shareholding; ⇒ Voluntary offer cannot be made where an acquirer or PAC has acquired shares of the target company in the preceding 52 weeks without attracting the obligation to make an open offer;
⇒ During voluntary offer period such acquirer shall not be entitled to acquire any shares otherwise than under the open offer; ⇒ An acquirer and PAC who have made a voluntary offer shall not be entitled to acquire any shares of the target company for a period of 6 months after completion of the open offer except pursuant to another voluntary open offer or making a competing offer upon any other person making an open offer or bonus issue or stock splits.Offer Size: ⇒ The minimum offer size of 26% of the total shares of the target company needs to be computed, as of 10th working day from the closure of the tendering period. ⇒ The total shares as of the 10th working day should take into account all potential increases in the number of outstanding shares during the offer period contemplated as of the date of PA. ⇒ In case of an increase in the total number of shares post PA, not contemplated as on the date of PA, the offer size will need to be increased proportionately.Offer Price:Different methods have been provided for determining the offer price of direct acquisition andindirect acquisition. The price is determined at volume weighted average market price at 60 daysrather than simple average.Non-compete fees or control premium or otherwise payable to the exiting sellers shall beincluded to the price payable to the shareholders of the target company. This would mean thatthe promoter and the public shareholder would exit at the same price.General Exemptions:General Exemptions are granted to the following categories of acquisition subject to fulfillmentof specified conditions: ⇒ Interest transfer amongst qualifying persons viz., immediate relatives and promoters as mentioned in shareholding pattern of the Company not less than 3 years prior to the proposed acquisition, a company, its subsidiary or holding company or other subsidiaries of the holding company or persons holding not less than 50% of the shares of the Company etc.
⇒ Acquisition in the ordinary course of business by stock brokers on behalf of their clients, underwriters. ⇒ Acquisitions at subsequent stages, by an acquirer who has made a public announcement of an open offer for acquiring shares pursuant to an agreement of disinvestment. ⇒ Acquisition pursuant to Scheme under Sick Industrial Companies (Special Provisions) Act, 1985 or arrangement involving target company as transferor or transferee company in amalgamation, merger or demerger pursuant to an order of Court or Competent authority ⇒ Acquisition under operation of law: Pursuant to the provisions of Securitization and Reconstruction of Financial Assets and Enforcement of security Interest, to the scheme of SEBI (Delisting of shares), transmission or succession or inheritance. ⇒ Acquisition of voting rights or preference shares carrying voting rights on account of non-payment of Dividend ⇒ The 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 in terms of the Corporate Debt Restructuring Scheme. ⇒ Increase in voting rights in a target company of any shareholder pursuant to buy-back of shares. ⇒ Acquisition of shares by any shareholder of a target company, upto his Entitlement, pursuant to a rights issue; (b) acquisition of shares by any shareholder of a target company, beyond his entitlement, pursuant to a rights issue, subject to fulfillment of the following conditions: ⇒ Acquisition of shares 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 regulations;
⇒ Acquisition of shares in a target company from state-level financial institutions or their subsidiaries or companies promoted by them, by promoters of the target company pursuant to an agreement between such transferors and such promoter; ⇒ Acquisition of shares in a target company from a venture capital fund or a foreign venture capital investor registered with the Board, by promoters of the target company pursuant to an agreement between such venture capital fund or foreign venture capital investor and such promoters.Exemption by the Board:SEBI for reasons recorded in writing may grant exemption from the obligation to make an openoffer and from compliance of procedural requirements of the regulation if it deems fit in theinterest of the investors and securities market.Disclosures:i. Event Based disclosures: a. When the acquirer acquires the shares or voting rights in the Target Company, which taken together with the existing holding of him and PAC’s to 5% or more of shares or voting rights of the Target Company, then disclosure in the prescribed format has to be submitted by the acquirer to the stock exchanges and the target company within 2 days of the receipt of intimation of allotment or acquisition. b. When the acquirer together with the PAC holds more than 5% of the shares or voting rights of the Company, then every acquisition and disposal of shares representing 2% of the shares of the target company has to be informed by the acquirer to the stock exchanges and the target company within 2 days of the acquisition or disposal. c. Encumbrance of shares: When the shares are encumbered by the promoter or by the persons acting in concert with him, shall disclose the details of creation, invocation and release of the encumbrance to the stock exchange and the Target Company within 7 days of such creation, invocation or release.ii. Continual Disclosure:Every person who along with the PAC holds shares or voting rights more than 25% of the sharesor voting rights of the target company has to inform the aggregate shareholding or voting rightsas of 31st March of every year to the stock exchange and the target company within 7 days fromthe end of financial year.
The new regulations provides for detailed procedure for open offer covering important pointslike manager to the open offer, timing, publication of letter of offer, filing with the Board,provision of escrow, payment of consideration, completion of acquisition, withdrawal of offeretc.To sum up, it could be seen that SEBI has made efforts to maintain the balance between theconcerns of investors, promoters and shareholders. The benefits being increase in threshold foropen offer to the investors, more opportunity for fund raising to the promoters, inclusive of non-compete price to be factored in the offer price being beneficial to the shareholders. However italso has negative sides like increase of non-compete price to be factored in offer price willincrease the cost of acquisition, holding of shares in few hands may affect liquidity in the market.