SEBI takeover Code

1. SEBI TAKEOVER CODE
AN OVERVIEW & RECENT CHANGES
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2. BACKGROUND
 The SEBI Takeover Code aims to regulate
acquisition of shares of a listed Company /
acquiring control over a listed Company
 Effective October 22, 2011
 Earlier Takeover Code revamped post
recommendations of advisory committee
 Constantly evolving code in line with
international practices.
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3. APPLICABILITY OF THE CODE
 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.
 Applies to direct and indirect acquisitions
(global acquisitions also covered)
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4. IMPORTANT DEFINITIONS
• Acquirer
• Any Person acquiring , directly or indirectly
• Shares or Voting Rights or Control
• In the Target Company
• By himself or Persons Acting in Concert
• Control
• Right to appoint majority of Directors or control
the policy decisions of the company
• By means of their share holding, or management
rights or share holders agreements or any other
manner
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5. IMPORTANT DEFINITIONS
• Person Acting in Concert
• Persons who for a common objective
• Directly or indirectly cooperate
• To acquire shares or voting rights or control over the Target Company
• By means of an agreement or understanding
• Certain cases of deemed PAC
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6. EARLIER PROVISION
• Upto 5% - no disclosures
• 5% to 14.9% - disclosures
• 15% & above – Open Offer for 20%
• Above 15% holders – permitted upto 5% p.a upto
54.9%
• To hold 55% - Open Offer (subject to min pub shldg)
• Above 55% holders – Open offer (subject to min pub
shldg)
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7. NEW PROVISIONS
• Upto 5% - no disclosures
• 5% upto 25% - disclosure to S.Exch
• To cross 25% - open offer of min 26%
• Above 25% - upto 5% p.a upto 75%
• Shareholding is Acq + PAC in aggregate
• Increase in threshold & offer size
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8. TRIGGER OF OPEN OFFER
• Reg 3 (1) – If holding >= 25%
• Reg 3 (2) – for a person already holding above 25%, - if
acq is more than 5% p.a
• Between 25% to 75% - upto 5% p.a allowed.
• Cannot acq more than permitted holding
• Only Gross Acqn considered
• Diff between post & pre allot – computation
• Individual plus aggregate holding considered now.
• Promoter treated on par with any other acquirer
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9. ACQN OF CONTROL
• Reg 4 – separate regulation for acqn of control
• Applicable irrespective of whether there is acqn of
shares or not
• Earlier exemption of postal ballot resolution, is now
removed.
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10. INDIRECT ACQUISITION
• Reg 5 (1) – defining indirect acqn
• Acq of shares, voting rts, control
• Over any company or other entity
• That would enable the person + PAC to
• Exercise voting right or control over target co
• Such that it would attract open offer
• Direct (vs) percentage rule
• Reg 5 (2) - Indirect is construed as Direct if
proportionate value of target is - > 80% of acquired
entity’s value
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11. VOLUNTARY OFFERS
• Min eligibility – 25%
• Offer size – minimum of 10%
• Last 52 week voluntary acqn by self & PAC – -
cannot make a volunt offer
• Cannot acq shares from open market during offer
period
• Cannot acquire for 6 months post offer period
except thro another volun offer
• Volun acq by Promoters – whether hit by the bar
on earlier acqn rule ?
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12. OFFER SIZE
• Reg 7 - Offer Size –
• At least 26% of total shares as of 10th day of PA (including
shares to be acq through PA)
• If shareholding would exceed the max limit, undertaking to
bring it down within time given under SCR Act.
• Such person who has exceeded the max limit, cannot make a
voluntary delisting offer for a period of 12 months post offer
period
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13. OFFER PRICE
• In case of direct acqns – as per Reg 8(2)
• In case of indirect acqns – as per Reg 8 (3)
• If acq has any outstanding convertible instrument, conversion price of
those also to be computed
• Non-compete fee to be added
• Higher price paid during offer period – offer price will stand revised
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14. PRICING
• Indirect acq – if delay in PA more than 5 days, int
@ 10% p.a
• Payment of diff in price if acq / PAC acquire post
offer for a period of 26 weeks at a price higher
than the offer price except for another open
offer, delisting, market purchases other than thro
negotiated deal. If Promoter subsc to Pref Offer
@ higher price – impact ?
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15. EXEMPTIONS
• Under Reg 10 (1) – for exemption u/ 3 & 4
• Interse transfer of shs amongst qualifying persons
– between relatives, PAC, Promoters etc
• Acqn in the ord course of business by broker,
Merch Banker, Bank / FI as pledgee
• Pursuant to scheme of merger / BIFR etc
• SARFAESI
• Delisting
• Transmission
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16. EXEMPTIONS
• Under Reg 10 (2) – acqn of shares without change in
control pursuant to CDR Scheme
• Under Reg 10 (3) - Increase in voting right beyond
25% pursuant to a buyback if the shareholding is not
reduced < 90 days of buyback.
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17. EXEMPTIONS
• Reg 10 (4) – Exemption under Creeping Acqn of 3(2)
• Rights issue
• Buy back – as long as not participated
• Acqn by promoter from State Fin Corp pursuant to agmt
• Acqn by promoter from VC Fund / FVCI pursuant to agmt
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18. RECENT CHANGES – PROCESS &
PROCEDURE
• Public Announcement – on the date of acqn /
agreeing to acquire. In case of market purchases –
prior to order placing.
• In case of Indirect acqn – within 4 days.
• within 4 days of intent / acqn – notify to S.Exch
• Detailed Public Statement – within 5 days of PA
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19. PROCESS & PROCEDURE
• Reg.12(1) Manager to the open offer: acq- MB- who is not
associcated of the acquirer, as the manager to open offer.
• Detailed PA to be sent to all S.Exch, SEBI & to Company plus
publication in papers.
• File Draft Letter of Offer to SEBI within 5 days of Detailed PS.
• Create escrow a/c within 2 days of Detailed PA
• First 500 crs – 25%
• Excess – 10% of the balance
• Send LOO to shareholders < 7 days of SEBI observations
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20. PROCESS
• Acq + PAC to disclose their acq during the offer period
< 24 hrs of acqn
• Acq + PAC cannot acquire during the period 3 days
prior to open of offer & till close of offer
• Offer period – 10 days open
• Once tendered cannot withdraw
• Acq to complete formalities < 10 days of closure of
offer
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21. OTHER ISSUES
• Completion of acquisition
• Can be made only after completion of offer process
• Exemption for pref allotment
• In case of 100% Escrow, can be completed after 21 days of Detailed PA
• What happens to Open Offers triggered by Market purchases ?
• Board appt – only after offer closes or 100% escrow after 15 days of
Det PA
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22. OBLIGATIONS OF TARGET
COMPANY
• No matl changes during offer period unless spl resln
thro postal ballot
• Constitute committee of Indp Dirs to recommend on
open offer & publish in papers + send to SEBI / S.Exch
• Make available all info to acquirer
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23. DISCLOSURES
• Disclosure to S.Exch & Company < 2 days of
• Acqn exceeding 5% aggregate
• Once above 5%, every acqn or disposal > 2%
aggregate
• Acqn includes pledge. Except for Bk/FI
• Persons holdg > 25% and Promoters shd disclose
their aggregate holdg to S.Ex & Co within 7 days
of 31 Mar
Promoter to disclose creation / invocation /
disposal of pledge < 7 days by Promoter / PAC
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24. IMPACT OF THE NEW CODE
• Cost of open offers increases
• Hostile takeover – quite remote
• Exemptions – rationalised & clarified
• Process & procedures – rationalised
• Foreign acquirer – require FIPB clearances
• Role of SEBI in processing offer docs – needs
rationalisation & clarity
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25. WITHDRAWAL OF OPEN OFFER
• Reg.23. An offer shall not be withdrawn- once made
• i. Refusal of Statutory approvals
• Ii. The acquirer, being a natural person, has died
• Iii. Agreement rescinded
• Iv. Through manager with in two days
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26. • Regulations 27 of takeover code, 1997 are replaced with Regulation 23, in takeover
code 2011. The regulations deal with withdrawal of an open offer after making
public announcement. In the following cases, Supreme Court laid down the law with
regard to withdrawal of open offer after public announcement.
• Securities and Exchange Board of India v. Akshya Infrastructure Pvt. Ltd.
• Facts
• Akshya Infrastructure was the acquiring company and MARG Limited was the target
company. The appeal was under Section 15Z of the SEBI Act from the judgment and
final order of the Securities Appellate Tribunal (SAT), Mumbai. Akshya Infrastructure
had sought to withdraw their open offer because it had become uneconomical to be
performed. In the open offer, the public shareholders of the target company were
given an option to exit the target company at a pre-determined price. The offer had
become uneconomical because of the unjustified delay by SEBI in approving the
draft letter of offer.
• AIR2014SC1963
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27. • Issue
• The Supreme Court framed the following issue:
• Whether an open offer voluntarily made through a
public announcement for purchase of shares of the
target company can be permitted to be withdrawn at a
time when the voluntary open offer has become
uneconomical to be performed?
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28. • Analysis of the Court and judgment
• The Counsel for Akshya Infrastructure sought to distinguish between
a mandatory public offer and a voluntary public offer. He submitted
that in a mandatory open offer there exists an underlying transaction
which triggers the Takeover Code. However, in a voluntary open
offer no such right accrues to the shareholders to exit the company,
since the offer is not the result of a triggered acquisition. Therefore,
in his opinion Regulation 27 would not be applicable to voluntary
open offer. However, the Court rejected this submission. Under
Regulation 27, no public offer whether it is voluntary or triggered
can be withdrawn unless it satisfies the conditions set forth in
Regulation 27. Therefore, for the purpose of Regulation 27,
mandatory public offer and triggered public offer stand on an equal
footing.
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29. • Akshya Infrastructure had in the years 2006-07, 2007-08 and 2010-11 acquired
shares in excess of 5% which breached the 5% creeping acquisition limit.
Further, they did not comply with Regulation 11 during the aforesaid creeping
acquisition. Therefore, SEBI was justified in taking the above non-compliance
into consideration while considering the feasibility of the present public offer.
• The delay by SEBI will not nullify its actions and will not assist Akshya
Infrastructure in withdrawal of the offer. Ultimately, SEBI is charged with the
duty of ensuring that every public offer made is bona fide for the benefit of
the shareholders as well as acquirers. In the present case, SEBI has found that
permitting Akshya Infrastructure to withdraw the public offer would be
detrimental to the overall interest of the shareholders. Public announcement
of the public offering affects the securities market and the shares of the Target
Company. The impact is immediate.
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30. • The Court relied on Nirma Industries case and said that under Regulation 27(1)(b)(c)
and (d), a public offer once made can only be permitted to be withdrawn in
circumstances which make it virtually impossible to perform the public offer. The
very purpose of deleting Regulation 27(1)(a) [which provided for withdrawal upon a
competitive bid] was to remove any misapprehensions that an offer once made can
be withdrawn if it becomes economically unviable. Delay in performance of its duties
by SEBI cannot be equated to refusal of the statutory approval requires from other
independent bodies, such as under the RBI, Taxation Laws and other regulatory
statutes including Foreign Exchange Regulations. Delay by SEBI in taking a final
decision in making its comments on the letter of offer would not fall under
Regulation 27(1)(b).
• The ejusdem generis principle is fully applicable for the interpretation of Regulation
27(1)(b)(c) and (d) as there is a common genus of impossibility. This impossibility
envisioned under the aforesaid Regulation would not include a contingency where
voluntary open offer once made can be permitted to be withdrawn on the ground
that it has now become economically unviable to be performed.
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31. NIRMA INDUSTRIES LTD. AND ANR. V.SECURITIES AND
EXCHANGE BOARD OF INDIA
• The appeal is under Section 15Z of the SEBI Act from an order of the Securities
Appellate Tribunal which rejected the application from the Appellants to withdraw
their public offer. By the impugned order of SAT, the request of the Appellants for
withdrawal of an offer to acquire the equity shares of Shree Ram Multi Tech Limited
(SRMTL) under the SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 1997 (Takeover Code) has been rejected.
• Promoters of SRMTL had borrowed money from the Appellants and pledged their
equity shares in SRMTL as security for the said borrowing. However, the borrowed
money was not redeemed and this compelled the Appellants to invoke the pledge.
The invocation of the pledge triggered Regulation 10 of the Takeover Code. After
making the open offer, the Appellant came to know of the various financial
irregularities and embezzlement carried on the promoters of SRMTL. Thus, they
sought to withdraw the open offer as it had become commercially unviable to buy
the shares at the pre-determined price set out in the open offer. This plea was
rejected by SEBI and SAT.
• AIR 2013 SC 2360
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32. CONCLUSION
• Objective of SEBI regulations - increasing transparency and
protecting interest of the investors in the Capital Markets
• Need to distinguish between large / small companies & role of
intermediaries
• Flexibility to be given to Promoters to increase holding
• International practices to be adapted to Indian context.
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