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2. The concept of voluntary open offer has been separately dealt in the draft Regulations submitted by the Committee.
3. In case of voluntary open offer, the offer size may be of 10% or more of the voting rights at the will of the Acquirer. The rationale of this option of lower size offer is that the purpose of offer is just consolidation of holding and no one is being given preferred treatment as in case of transfer of shares or control.
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5. proportionately reduce the number of shares acquired under the open offer and under any agreement that attracted the obligation to make such open offer, other than shares acquired by way of allotment by the target company, such that the holding of the acquirer and persons acting in concert does not exceed the maximum permissible non-public shareholding.
7. In the proposed Regulations, the exemption from open offer available in case of change in control without acquisition of substantial shares, through a special resolution by postal ballot process, has been withdrawn and now the only route available for change in management and control is through the Open Offer to the shareholders of the Target Company. This is in contrast with the Regulation 12 of the existing SEBI Takeover Regulations which provides for the change in control through the special resolution passed by way of postal ballot.
8. The committee has withdrawn this exemption of change in control through special resolution keeping in view the fact that the New Draft Takeover Regulations allows for the acquisition of 24.99% shares in the company with triggering the obligation to make the open offer which is a substantial percentage and thus allowing the exemption will help the new acquirer to acquire the substantial shares and control without providing the exit opportunity to the shareholders of the Target Company.
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11. The Committee is of the view that more flexible norms for grant of loans for strategic investment in Indian listed companies particularly for funding open offers under SEBI Takeover Regulations should be prescribed so as to create a level playing for domestic acquirers’ vis-à-vis foreign acquirers for speedy deal execution.
12. SEBI for changes in ICDRIn order to ensure that issuance of shares as a consideration for the shares tendered in the Open Offer does not lead to undue delay in completion of offer formalities by the acquirer, therefore, the committee has suggested that SEBI should amend the ICDR Regulations to facilitate a smooth issuance of equity shares in such cases in a clear and transparent manner and further, the disclosures and other procedural requirements to be followed for such issue of shares should be appropriately spelt out. <br />Conclusion:<br />Based on these deliberations, it can be concluded that the Committee has tried to make takeover battles a level playing field for controlling as well as non-controlling shareholders. The increase in threshold would make listed companies more attractive to institutional investors and consequently would lead to more Investment in Indian Listed Companies. On the other hand it may reduce the number of offers as even 25% stake could be sufficient to control a company keeping in view the passive nature of small shareholders. The 100% offer requirement is good for the cause of equity but might also cause deterrent for acquisitions, which is a major concern. The increase in the offer size upto 100% has made the Open Offer process a costlier affair for the acquirers. The Committee has also made attempts to address many of the unintentional confusions and non-clarities and make the takeover law less complicated in understanding and compliance. The India Inc. will look forward to an early implementation of these new Regulations with some further modifications as per the comments and suggestions of industry chambers, professional bodies and public at large. <br />For any query feel free to refer www.takeovercode.com or write to pkvijay@indiacp.com <br />
![AN INSIGHT OF THE TRAC RECOMMENDATIONS AND DRAFT TAKEOVER REGULATIONS, 2010<br />- by Pavan Kumar Vijay, Past President, ICSI<br />Managing Director, Corporate Professionals Capital Private Limited & Founder TakeoverCode.com<br />Introduction<br />The trend of Mergers and Acquisitions (M&As) as an itinerary for the growth of corporate world can be traced back from twentieth century. However, with the liberalization and globalization of Indian economy, the importance of M&A for inorganic growth has become more relevant for systematic growth of the capital market. This new weapon in the armory of corporate though proved to be beneficial but soon the predators with huge disposable wealth started exploiting this opportunity to the prejudice of retail investor. This created a need for some regulation to protect the interest of investors so that the process of takeover and mergers, of widely held companies, is used to develop the capital market and not to sabotage it. In the year 1992, with the enactment of Securities and Exchange Board of India Act, 1992, the SEBI was established as regulatory body to promote and develop securities market and to protect the interest of investors in securities market. Thereafter, in the year 1994, SEBI formulated the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1994 so that process of takeover is carried out in a fair and transparent manner. After a time gap, a need was felt to review the Regulations to make the regulatory framework more comprehensive and equitable. Thus, SEBI appointed a committee headed by Justice P. N. Bhagwati to analyze the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1994 and to suggest the appropriate changes. <br />In the year 1997, SEBI Takeover Code has been rechristened by enacting SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 substituting SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1994. These regulations also have been amended a number of times to address the changing circumstances and needs of corporate sector and various clarifications, orders and judgments have been given to simplify the complexities involved in these regulations. Thus, a need was felt to review the SEBI Takeover Regulations to remove the ambiguities involved in the Regulations which have been one of the major causes of defiance with the Regulations and to bring it at par with the global practices so as to create a level playing field.<br />Accordingly, in September 2009, market watchdog SEBI constituted a multi-disciplinary expert committee, Takeover Regulations Advisory Committee (TRAC) under the chairmanship of Sh. C. Achuthan, the former Chairman of Securities Appellate Tribunal, with a terms of reference to examine the existing Takeover Regulations and to suggest suitable amendments, as deemed fit. It also invited the suggestions from the Indian corporate, professional bodies and public at large. After a detailed analysis and considering the views of regulators, corporate bodies and public comments for about 9 months, the Committee on July 19, 2010 has released its much awaited report suggesting changes in the rules of game of takeover with a draft of new Takeover Regulations for the public comments. The Report is comprehensive enough detailing the Key Recommendations; Deliberations and Rationale along with Draft text of the proposed Takeover Regulations. The Committee felt it is appropriate to rewrite the entire Regulations to incorporate all clarifications given in various orders and judgements and to remove all possible ambiguity and issues in the Existing Regulations which are already amended a number of times since 1997.<br />The Committee has framed the Regulations keeping in view the interest of public shareholders on one side and that of the Strategic Investors, Private Equity Players, Target Company and Promoters on the other side. While some of the recommendations which are in favour of the general shareholders have become the concern for the Corporate and Strategic Investors, a few of them may be seen as not in the interest of small shareholders. In this Article, the recommendations of the Committee have been analyzed on the basis of major heads dealing with the Definitions, Triggering Limit for Open Offer and Open Offer Process, Exemptions and Disclosures Requirements.<br />Overview of the Recommendations<br />More clarity in the language of various definition;<br />Inclusion of various judicial decisions in the Regulations itself to remove the ambiguity and reduce future litigation;<br />Insertion of SEBI’s administrative views in the Regulations;<br />Effective protection for the small shareholders;<br />More Opportunities for Institutional Investors;<br />At par with Global Practices prevalent for M&As;<br />Simplification in the provisions relating to consolidation of holding;<br />Scrub out of Non Compete Fee.<br />An analysis of Key Recommendations in comparison with the Existing SEBI Takeover Regulations<br />IMPORTANT DEFINITIONS<br />Acquirer<br />“Acquirer” means any person 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 a target company; <br />The definition of the acquirer as given in the Draft Regulations is more or less same with the one in the existing SEBI Takeover Regulations with an addition of the word through. In the Existing Regulations, a person is termed as acquirer when he acquires or agrees to acquire the shares or voting rights or control over a target company whether by himself or with person acting in concert with him. Thus, to include a person within the ambit of the definition of Acquirer, the acquisition should be made by him alone or in an association with the person acting in concert i.e. he should be a party to the transaction of acquisition. On the other hand, the Proposed Regulations do also 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.<br />Control<br /> “Control” includes the right or the ability to appoint majority of the directors or to control the management or policy decisions of the target company, 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<br />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;<br />The Proposed Regulations have widened the scope of term Control 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. The existing definition of Control covers within its ambit only the right to appoint majority of the directors or to exercise control in any other manner. Thus, by inserting the word ability in the definition, the scope of term Control has been expanded to mean not only the de jure control but de facto control also. However, the question whether the power to say “No” or to exercise negative control would constitute the Control within the meaning of the SEBI Takeover Regulations have not been addressed in the report.<br />Shares<br /> “Shares” means shares in the equity share capital of a target company carrying voting rights, and includes any security which entitles the holder thereof to exercise voting rights; <br /> Provided that all depository receipts entitling the holder thereof to exercise voting rights in the target company shall be regarded as shares. <br />The definition of the “Shares” has been broadened to include within its ambit even the depository receipts. Thus, in terms of the Proposed Regulations, the holder of the depository receipts is treated at par with the one who acquired the Equity Shares carrying voting rights.<br />Frequently Traded Shares<br />The term “Infrequently Traded Shares” has been replaced with the term “Frequently Traded Shares”. The Existing Regulations state that for the purpose of checking the status of trading, the trading turnover in that share during the 6 months preceding the month in which PA is made has to be annualized. Whereas in the report, the Committee has recommended that trading turnover during the 12 months preceding the month in which the Public Announcement is made is to be considered. Further, the existing definition provides a trading turnover of 5% to consider the shares as frequently traded whereas the committee has raised the level to 10% to have a more realistic picture.<br />Identified Date<br />Further, the term “Specified Date” has been replaced with the term “Identified Date”. As the purpose of Specified Date is to determine the names of the shareholders to whom the Letter of Offer would be sent and an exit opportunity would be provided, therefore, it is argued by the Committee that the same should not be much before the approval of Letter of Offer and initiation of offer period for tendering the shares. Accordingly, it is recommended that the shareholders list should be finalized on a date falling on 10th business day prior to the commencement of the tendering period. “Tendering Period” is defined under Regulation 2(1)(ab) of the New Draft Takeover Regulations which means the period within which shareholders may tender their shares in acceptance of an open offer to acquire shares made under these Regulations.<br />Delisting Threshold <br />A definition of Delisting Threshold has been inserted in the New Draft Takeover Regulations which means a shareholding entitling exercise of 90% of the voting rights in a target company, excluding voting rights on shares held by a custodian and against which depository receipts have been issued overseas, with reference to the share capital of the target company as of the last day of the tendering period.<br />Open Offer and related concepts<br />,[object Object],The existing SEBI Takeover Regulations necessitate the acquirer to give an open offer to the shareholders of Target Company on the acquisition of shares/ voting rights entitling to exercise 15% or more voting rights in the Target Company. Prior to October 28, 1998, the threshold for Open Offer was at 10%. In the Report, the Committee has recommended to increase the threshold limit for Open Offer to 25%. The recommendation has been made considering the average promoters shareholding prevalent in the Listed Companies and the international practices.<br />The recommendation seems to be beneficial from the point of Private Equity and Institutional investors who had to restrict themselves to 14.99% stake in every listed company in terms of Existing Regulations as otherwise it would necessitates the open offer to the shareholders of the Target Company for which they are in no way interested to do as their objective is not to acquire the control over the company. However, it is apprehended that the increase in threshold would reduce the number of open offers and hence might be viewed negatively from the point of view of small shareholders. <br />Further, in the Proposed Regulations, two most debatable issues with respect to the calculation of threshold for the purpose of open offer have been clarified:<br />,[object Object],The Proposed Regulations specifically provide that for the purpose of determining the quantum of acquisition of additional voting rights, the gross acquisitions without considering the disposal of shares or dilution of voting rights owing to fresh issue of shares by the target company shall be taken into account.<br />,[object Object],In the case of acquisition of shares by way of issue of new shares by the target company, the difference between the pre-allotment and the post-allotment percentage voting rights shall be regarded as the quantum of additional acquisition.<br />For instance:<br /> Pre Allotment Post AllotmentParticularsNo. of Shares%Preferential Allotment (No. of Shares)No. of Shares%Promoters2525255025Non promoters75757515075Total100100 200100<br />As can be observed from the above Table, although the allotment made to the Promoters is 25 (in absolute terms), constituting 25% of the Preferential Allotment of 100 shares, but in overall terms, the Promoters’ voting rights percentage has remained intact (earlier, it was 25% of the Paid up capital of 100 shares and after the allotment, it is 25% of the expanded capital of 200 shares). Thus, there is no incremental increase in the voting rights of the Promoters. <br />,[object Object],In accordance with the existing SEBI Takeover Regulations, an acquirer of shares or voting rights beyond the limit as prescribed under the Regulations is required to make a statutory open offer to the shareholders of the Target Company for acquisition of a minimum 20% of the voting capital of that Company. The Proposed Regulations have increased the open offer size to as high to 100% of remaining shareholders. The recommendation has been made taking into consideration the interest of the shareholders so that an opportunity to exit from the Target Company can be provided to all the shareholders who desire to exit from the company in the event of substantial acquisition of shares/ change in control. Present provisions allow an offer of only 20% of the total paid-up capital. Thus, all the shareholders do not get the opportunity of selling their shares in the offer, whereas the controlling shareholders can get 100% secured exit by entering into the share purchase agreement. In this way there is no equity for controlling shareholders and the public shareholders. However, the proposal will make the offer a costly affair for the acquirer as it will involve a larger cash outflow and can be a deterrent for takeover offers and might cause negative impact on M&A activities. Further, on account of lacking of proper bank funding in India, the recommendation seems to be impracticable and will put the foreign acquirers at an advantage in comparison to the Indian acquirers as the foreign acquirers have easy access to the funding opportunities globally. To address this to some extent, the Committee has proposed lower size of offer, only 10%, in case of Voluntary Offers.<br />,[object Object]](https://image.slidesharecdn.com/articlecharteredsecretaryfinal-110203052413-phpapp02/85/Article-chartered-secretary-final-1-320.jpg)
