SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2 !!

" so#e ke$ features

Souvik Bhadra The Securities and Exchange Board of India ( SEBI) had been mulling over reviewing and amending the existing SEBI (Substantial Ac uisition of Shares and Ta!eovers) "egulations# $%%& (Takeover %ode of !&&') for uite some time now' A Ta!eover "egulations Advisor( )ommittee was constituted under the chairmanshi* of +r' )' Achuthan (Achuthan %o##ittee) in Se*tember ,--% to review the Ta!eover )ode of $%%& and give its suggestions' The Achuthan )ommittee *rovided its suggestions in its re*ort which was submitted to SEBI in .ul( ,-$-' After ta!ing into account the suggestions of the Achuthan )ommittee and feedbac! from the interest grou*s and general *ublic on such suggestions# the SEBI finall( notified the SEBI (Substantial Ac uisition of Shares and Ta!eovers) "egulations# ,-$$ ( Takeover %ode of 2 !!) on ,/ Se*tember ,-$$' The Ta!eover )ode of ,-$$ will be effective from ,, 0ctober ,-$$' The Ta!eover )ode of ,-$$ adheres to the framewor! and *rinci*les of the Ta!eover )ode of $%%& but the changes it brings about are significant' Some of the most im*ortant amendments are discussed below1 !(Initial threshold li#it for triggering of an o)en offer 2nder the Ta!eover )ode of $%%&# an ac uirer was mandated to ma!e an o*en offer if he# alone or through *ersons acting in concert# were ac uiring $34 or more of voting right in the target com*an(' This threshold of $34 has been increased to ,34 under the Ta!eover )ode of ,-$$' Therefore# now the strategic investors# including *rivate e uit( funds and minorit( foreign investors# will be able to increase their shareholding in listed com*anies u* to ,5'%%4 and will have greater sa( in the management of the com*an(' An ac uirer holding ,5'%%4 shares will have a better chance to bloc! an( decision of the com*an( which re uires a s*ecial resolution to be *assed' The *romoters of listed com*anies with low shareholding will undoubtedl( be concerned about an( ac uirer misutilising it'

6owever# at the same time# this will hel* the listed com*anies to get more investments without triggering the o*en offer re uirement as earl( as $34# therefore ma!ing the *rocess more attractive and cost effective' 2( %ree)ing acquisition

The Ta!eover )ode of $%%& recognised cree*ing ac uisition at two levels 7 from $34 to 334 and from 334 to the maximum *ermissible limit of &34' Ac uirers holding from $34 to 334 shares were allowed to *urchase additional shares or voting rights of u* to 34 *er financial (ear without ma!ing a *ublic announcement of an o*en offer' Ac uirers holding from 334 to &34 shares were re uired to ma!e such *ublic announcement for an( additional *urchase of shares' 6owever# in the latter case# u* to 34 additional shares could be *urchased without ma!ing a *ublic announcement if the ac uisition was made through o*en mar!et *urchase on stoc! exchanges or due to bu(bac! of shares b( the listed com*an(' The Ta!eover )ode of ,-$$ ma!es the *osition sim*ler' 8ow# an( ac uirer# holding more ,34 or more but less than the maximum *ermissible limit# can *urchase additional shares or voting rights of u* to 34 ever( financial (ear# without re uiring to ma!e a *ublic announcement for o*en offer' The Ta!eover )ode of ,-$$ also la(s down the manner of determination of the uantum of ac uisition of such additional voting rights' This would be beneficial for the investors as well as the *romoters# and more so for the latter# who can increase their shareholding in the com*an( without necessaril( *urchasing shares from the stoc! mar!et' *( Indirect acquisition

The Ta!eover )ode of ,-$$ clearl( la(s down a structure to deal with indirect ac uisition# an issue which was not ade uatel( dealt with in the earlier version of the Ta!eover )ode' Sim*listicall( *ut# it states that an( ac uisition of share or control over a com*an( that would enable a *erson and *ersons acting in concert with him to exercise such *ercentage of voting rights or control over the com*an( which would have otherwise necessitated a *ublic announcement for o*en offer# shall be considered an indirect ac uisition of voting rights or control of the com*an('

It also states that wherever# a) the *ro*ortionate net asset value of the target com*an( as a *ercentage of the consolidated net asset value of the entit( or business being ac uired9 b) the *ro*ortionate sales turnover of the target com*an( as a *ercentage of the consolidated sales turnover of the entit( or business being ac uired9 or c) the *ro*ortionate mar!et ca*italisation of the target com*an( as a *ercentage of the enter*rise value for the entit( or business being ac uired9 is more than :-4 on the basis of the latest audited annual financial statements# such indirect ac uisition shall be regarded as a direct ac uisition of the target com*an( and all the obligations relating to timing# *ricing and other com*liance re uirements for the o*en offer would be same as that of a direct ac uisition' +( ,oluntar$ offer

A conce*t of voluntar( offer has been introduced in the Ta!eover )ode of ,-$$# b( which an ac uirer who holds more than ,34 but less than the maximum *ermissible limit# shall be entitled to voluntaril( ma!e a *ublic announcement of an o*en offer for ac uiring additional shares sub;ect to their aggregate shareholding after com*letion of the o*en offer not exceeding the maximum *ermissible non<*ublic shareholding' Such voluntar( offer would be for ac uisition of at least such number of shares as would entitle the ac uirer to exercise an additional $-4 of the total shares of the target com*an(' This would facilitate the substantial shareholders and *romoters to consolidate their shareholding in a com*an(' -( Si.e of the o)en offer

The Ta!eover )ode of $%%& re uired an ac uirer# obligated to ma!e an o*en offer# to offer for a minimum of ,-4 of the = voting capital of the target company> as on =expiration of 15 days after the closure of the public offer >' The Ta!eover )ode of ,-$$ now mandates an ac uirer to *lace an offer for at least ,?4 of the =total shares of the target company># as on the =10th working day from the closure of the tendering period >'

The increase in the si@e of the o*en offer from ,-4 to ,?4# along with increase in the initial threshold from $34 to ,34# creates a uni ue situation under the Ta!eover )ode of ,-$$' An ac uirer with $34 shareholding and increasing it b( another ,-4 through an o*en offer would have onl( got a /34 shareholding in the target com*an( under the Ta!eover )ode of $%%&' 6owever# now an ac uirer with a ,34 shareholding and increasing it b( another ,?4 through the o*en offer under the Ta!eover )ode of ,-$$# can accrue 3$4 shareholding and thereb( attain sim*le ma;orit( in the target com*an(' These well thought out figures clearl( shows the intention of the regulator to incentivi@e investors ac uiring sta!es in a com*an( b( giving them an o**ortunit( of attaining sim*le ma;orit( in a com*an(' /( I#)ortant e0e#)tions fro# the require#ent of o)en offer

Inter-se transfer 7 The Ta!eover )ode of $%%& used to recogni@e inter<se transfer of shares amongst the following grou*s 7 a) grou* coming within the definition of grou* as defined in the +ono*olies and "estrictive Trade Aractices Act# $%?% b) relatives within the meaning of section ? of the )om*anies Act# $%3?

c) Bualif(ing Indian *romoters and foreign collaborators who are shareholders# etc' The catagorisation of such grou*s have been amended in the Ta!eover )ode of ,-$$ and transfer between the following ualif(ing *ersons has been termed as inter<se transfer1 a) Immediate relatives

b) Aromoters# as evidenced b( the shareholding *attern filed b( the target com*an( not less than / (ears *rior to the *ro*osed ac uisition9 c) a com*an(# its subsidiaries# its holding com*an(# other subsidiaries of such holding com*an(# *ersons holding not less than 3-4 of the e uit( shares of such com*an(# etc'

d) *ersons acting in concert for not less than / (ears *rior to the *ro*osed ac uisition# and disclosed as such *ursuant to filings under the listing agreement' To avail exem*tion from the re uirements of o*en offer under the Ta!eover )ode of ,-$$# the following conditions will have to be fulfilled with res*ect to an inter<se transfer1 < If the shares of the target com*an( are fre uentl( traded 7 the ac uisition *rice *er share shall not be higher b( more than ,34 of the volume<weighted average mar!et *rice for a *eriod of ?- trading da(s *receding the date of issuance of notice for such inter<se transfer < If the shares of the target com*an( are infre uentl( traded# the ac uisition *rice shall not be higher b( more than ,34 of the *rice determined b( ta!ing into account valuation *arameters including# boo! value# com*arable trading multi*les# etc' ights issue 7 The Ta!eover )ode of ,-$$ continues to *rovide exem*tion from the re uirement of o*en offer to increase in shareholding due to rights issue# but sub;ect to fulfillment of two conditions1 (a) The ac uirer cannot renounce its entitlements under such rights issue9 and (b) The *rice at which rights issue is made cannot be higher than the *rice of the target com*an( *rior to such rights issue' Scheme of arrangement 7 The Ta!eover )ode of $%%& had a blan!et exem*tion on the re uirement of ma!ing an o*en offer during ac uisition of shares or control through a scheme of arrangement or reconstruction' 6owever# the Ta!eover )ode of ,-$$ ma!es a distinction between where the target com*an( itself is a transferor or a transferee com*an( in such a scheme and where the target com*an( itself is not a *art( to the scheme but is getting affected nevertheless due to involvement of the *arent shareholders of the target com*an(' In the latter case# exem*tion from the re uirement of ma!ing an o*en offer would onl( be *rovided if (a) the cash com*onent is ,34 or less of the total consideration *aid under the scheme# and

(b) *ost restructuring# the *ersons holding the entire voting rights before the scheme will have to continue to hold //4 or more voting rights of the combined entit(' Buyback of shares 7 The Ta!eover )ode of $%%& did not *rovide for an( exem*tion for increase in voting rights of a shareholder due to bu(bac!s' The Ta!eover )ode of ,-$$ however *rovides for exem*tion for such increase' In a situation where the ac uirer>s initial shareholding was less than ,34 and exceeded the ,34 threshold# thereb( necessitating an o*en offer# as a conse uence of the bu(bac!# The Ta!eover )ode of ,-$$ *rovides a *eriod of %- da(s during which the ac uirer ma( dilute his sta!e below ,34 without re uiring an o*en offer' Chereas# an ac uirer>s initial shareholding was more than ,34 and the increase in shareholding due to bu(bac! is be(ond the *ermissible cree*ing ac uisition limit of 34 *er financial (ear# the ac uirer can still get an exem*tion from ma!ing an o*en offer# sub;ect to the following1 (a) such ac uirer had not voted in favour of the resolution authorising the bu(<bac! of securities under section &&A of the )om*anies Act# $%3?9 (b) in the case of a shareholder resolution# voting was b( wa( of *ostal ballot9 (c) the increase in voting rights did not result in an ac uisition of control b( such ac uirer over the target com*an( In case the above conditions are not fulfilled# the ac uirer ma(# within %- da(s from the date of increase# dilute his sta!e so that his voting rights fall below the threshold which would re uire an o*en offer' '( 1ther i#)ortant changes

Dollowing are few other im*ortant amendments that have been brought about in the Ta!eover )ode of ,-$$1 !efinition of "share# 7 The Ta!eover )ode of $%%& excluded =*reference shares> from the definition of =shares> vide an amendment of ,--,' 6owever# this exclusion has been removed in the Ta!eover )ode of ,-$$ and therefore

now =shares> would include# without an( restriction# an( securit( which entitles the holder to voting rights' $on-compete fees 7 As *er the Ta!eover )ode of $%%&# an( *a(ment made to the *romoters of a target com*an( u* to a maximum limit of ,34 of the offer *rice was exem*ted from being ta!en into account while calculating the offer *rice' 6owever# as *er the Ta!eover )ode of ,-$$# *rice *aid for shares of a com*an( shall include an( *rice for the shares E voting rights E control over the com*an(# whether stated in the agreement or an( incidental agreement# and includes =control *remium># =non<com*ete fees># etc' esponsibility of the board of directors and independent directors 7 The general obligations of the board of directors of a target com*an( under the Ta!eover )ode of $%%& had given a discretionar( o*tion to the board to send their recommendations on the o*en offer to the shareholders and for the *ur*ose the board could see! the o*inion of an inde*endent merchant ban!er or a committee of inde*endent directors' The Ta!eover )ode of ,-$$# however# ma!es it mandator( for the board of directors of the target com*an( to constitute a committee of inde*endent directors (who are entitled to see! external *rofessional advice on the same) to *rovide written reasoned recommendations on such o*en offer# which the target com*an( is re uired to *ublish' %onclusion The Ta!eover )ode of ,-$$ is a timel( and *rogressive regulation that would facilitate investments and attract investors' Even though SEBI has not im*lemented all the suggestions of the Achuthan )ommittee# it has still ta!en into consideration some of the ma;or issues that had been *laguing the industr( till now' It has tried to maintain a balance between the concerns of the investors as well as that of the *romoters'