Bhagwati Report On Takeover

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JUSTICE P.N.BHAGWATI COMMITTEE REPORT ON TAKEOVERS
CONTENTS
I PREFACE
II PART-I
1 The Approach of the Committee
2 Definitions
3 Applicability of the Regulations
4 Power to remove difficulties
5 Disclosure of shareholding and control in a listed company
6 Substantial Acquisition of shares and acquisition of control of the company
7 Bail out Takeovers
8 Penalties for non-compliance
PREFACE
i. Takeover of companies is a well accepted and established strategy for corporate growth. International
experience of takeovers and mergers and amalgamations has been varied. Nonetheless, one of its important
lessons is that, its appeal as an instrument of corporate growth has usually been the result of an admixture of
corporate ethos of a country, shareholding pattern of companies, existence of cross holdings in companies,
cultural conditions and the regulatory environment.
ii. In India, however, "the market" for takeovers has not yet become significantly active, though following
economic reforms, there is now a discernible trend among promoters and established corporate groups towards
consolidation of market share, and diversification into new areas, albeit in a limited way through acquisition of
companies, but in a more pronounced manner through mergers and amalgamations. The latter course is outside
the purview of SEBI and constitutes a subject matter of the Companies Act, 1956, and the courts of law, and
there are well laid down procedures for valuation of shares and protection of the rights of investors. This Report
and the SEBI Regulations for Substantial Acquisition of Shares and Takeovers do not deal with the subject of
mergers and amalgamations.
iii. In common parlance, a takeover bid is generally understood to imply the acquisition of shares carrying voting
rights in a company in a direct or indirect manner with a view to gaining control over the management of the
company. Generally speaking, there cannot be a change in the control of a company simpliciter, unaccompanied
by acquisition of shares, though there have been cases before SEBI where management control has changed
from one group of persons to another without any overt acquisition of substantial quantities of shares. It would
therefore be correct to state that, takeover or gaining control over a company, as opposed to pure investment,
is the most common leitmotif for substantial acquisition of shares. Such takeovers could take place through a
process of friendly negotiations or in a hostile manner in which, the existing management resists the change in
control. It is for this reason that substantial acquisition of shares in a listed company and change in control of a
listed company have both been addressed in this Report.
iv. In a market driven economy, where free competition should thrive without relying on the protective hand of
bureaucratic intervention, it is important that such critical processes as substantial acquisition of shares and
takeovers, which can significantly influence corporate growth and contribute to the wealth of the economy
through rational allocation and optimal utilisation of resources, take place within the orderly framework of
regulations and that such a framework should be one which comports with principles of fairness, transparency
and equity, and above all with the need to protect the rights of the shareholders.
v. The first attempts at regulating takeovers were made in a limited way by incorporating a clause, viz. Clause
40, in the listing agreement which provided for making a public offer to the shareholders of a company by any
person who sought to acquire 25% or more of the voting rights of the company. This allowed for the passive
participation of shareholders of the company that is being taken over, in the takeover process. But the clause
used to be easily circumvented and its basic purpose frustrated by the acquirers, simply by acquiring voting
rights a little below the threshold limit of 25% for making a public offer. Besides it was also noted that it was
possible to acquire control over a company in the Indian context with even holding 10% directly. There was
therefore a case for lowering of the threshold from 25%. In 1990, even before SEBI became a statutory body,
Government, in consultation with SEBI, amended Clause 40 by -
 lowering the threshold acquisition level for making a public offer by the acquirer, from 25% to 10% ;
 bringing within its fold the aspect of change in management control under certain circumstances (even without
acquisition of shares beyond the threshold limit), as a sufficient ground for making a public offer;
 introducing the requirement of acquiring a minimum of 20% from the shareholders;
 stipulating a minimum price at which an offer should be made;
 providing for disclosure requirements through a mandatory public announcement followed by mailing of an offer
document with adequate disclosures to the shareholders of the company; and
 requiring a shareholder to disclose his shareholding at level of 5% or above to serve as an advance notice to the
target company about the possible takeover threat.
vi. These changes helped in making the process of acquisition of shares and takeovers transparent, provided for protection of
investors’ interests in greater measure and introduced an element of equity between the various parties concerned by
increasing the disclosure requirement. But the clause suffered from several deficiencies - particularly in its limited
applicability and weak enforceability. Being a part of the listing agreement, it could be made binding only on listed
companies and could not be effectively enforced against an acquirer unless the acquirer itself was a listed company. The
penalty for non-compliance was one common to all violations of a listing agreement, namely, delisting of the company's
shares, which ran contrary to the interest of investors. The amended clause was unable to provide a comprehensive
regulatory framework governing takeovers; nonetheless, it made a positive beginning.
vii. The SEBI Act enacted in 1992, empowered SEBI to regulate substantial acquisition of shares and takeovers,
and made substantial acquisition of shares and takeovers a regulated activity for the first time. The SEBI
Regulations for Substantial Acquisition of Shares and Takeovers were notified by SEBI in November 1994. Clause
40(A & B) of the listing agreement also remained in force. The Regulations preserved the basic framework of
Clause 40 (A & B) by retaining the requirements of - initial disclosure at the level of 5%, threshold limit of 10%
for public offer to acquire minimum percentage of shares at a minimum offer price and making of a public
announcement by the acquirer followed by a letter of offer. But the Regulations did make a significant departure
from Clause 40(A & B) by dropping "change in management" simpliciter as a ground for making a public offer.
On the other hand, several new provisions were introduced enabling both negotiated and open market
acquisitions, competitive bids, revision of offer, withdrawal of offer under certain circumstances and restraining
a second offer in relation to the same company within 6 months by the same acquirer. These provisions were
used later by some acquirers to launch hostile and competitive bids. Additionally, the Regulations enhanced the
level of investor protection in several ways. Being statutory in nature, violation of its provisions attracted
several penalties. These inter alia included SEBI’s right to initiate criminal prosecution under section 24 of the
SEBI Act, issue directions to the person found guilty not to further deal in securities, prohibit him from disposing
of any securities acquired in violation of the regulations, or direct him to sell shares acquired in violation of the
Regulations and take action against the concerned intermediary who is registered with SEBI. The SEBI Act also
empowered SEBI to adjudicate fines as penalties for certain violations of the Regulations. Indeed, there have
already been a number of instances, where SEBI has initiated penal action against the acquirers under these
provisions for violation of the Regulations.
viii. The process of substantial acquisition of shares and takeovers is complex. SEBI has now gained
considerable experience and insight into the complexities in this area through the administration of the
Regulations and Clause 40 A & B of the listing agreement. It has also helped SEBI focus attention on certain
areas in the regulatory framework which not only required clarity but also needed to be addressed specifically.
For example, the provisions for open market acquisition of shares, competitive bid and revised offer in the
Regulations allowed hostile takeovers and competitive offers to be launched, and the consequent revision of
offers to take place for the first time in the Indian market; nonetheless, these offers demonstrated with certain
degree of acuity, the deficiencies in the existing provisions. These needed to be specifically addressed in the
extant Regulations to make the regulatory framework more comprehensive and equitable.
ix. A Committee was therefore set up by SEBI in November 1995, under the Chairmanship of Justice P.N.
Bhagwati, former Chief Justice of India, to review the Securities and Exchange Board of India (Substantial
Acquisition of Shares and Takeovers) Regulations, 1994. The terms of reference of the Committee were :
 to examine the areas of deficiencies in the existing Regulations; and
 to suggest amendments in the Regulations with a view to strengthening the Regulations and making them more fair,
transparent and unambiguous and also protecting the interest of investors and of all parties concerned in the
acquisition process.
x. The Committee was constituted with wide representation from the Chambers of Commerce and Industry, Investors
Associations, Stock Exchanges, Merchant Bankers, Institute of Chartered Accountants and Legal Experts.
The members of the Committee were as follows:
Justice P.N. Bhagwati - Chairman
Chambers of Commerce & Industry were represented by
Sh. Adi Godrej, representing Confederation of Indian Industry (CII)

Sh. Bipin Jhaveri, representing Associated Chambers of Commerce and Industry (Assocham)
Sh. Rajendra S. Lodha, representing Federation of Indian Chambers of Commerce and Industry
(FICCI)
Investors Associations were represented by
Prof. M. D. Limaye, representing Lokmanya Seva Sangh

Prof. Manubhai Shah, representing Consumer Education and Research Centre (CERC).
Merchant Bankers were represented by
Sh. Udayan Bose, Chairman, Lazard Creditcapital Ltd.
Sh. Shitin Desai, Vice Chairman & Managing Director, DSP Merrill Lynch Ltd.
Sh. Nimesh Kampani, Chairman, J.M. Financial & Investment Consultancy Services Ltd.
Stock Exchanges were represented by
Sh. Kamal Kabra / Sh. M.G. Damani (President, The Stock Exchange, Mumbai)
Legal Experts were represented by
Sh. J.R. Gagrat of Gagrat & Co.
Sh. R.A. Shah of Crawford Bayley & Co.
Sh. Shardul Suresh Shroff of Amarchand Mangaldas & Suresh A. Shroff & Co.
Institute Chartered Accountants of India was represented by
Sh. Y.M. Kale / Sh. T. S. Vishwanath (President, Institute of Chartered Accountants of India (ICAI))
SEBI was represented by
Kum. D.N. Raval, Executive Director
Sh. Pratip Kar, Executive Director and Member Secretary.
xi. The Committee was to submit the report within 3 months; however, considering the preparatory work
required to be done including the need to have interaction with various market participants and industrialists
etc. before framing the regulations which is of vital importance to the market place and the economy, the
Chairman, SEBI had extended the period from time to time and the last such extension requires the report to be
finalised and submitted before January 31, 1997.
xii. The Committee held a number of meetings and deliberated extensively on all the provisions of existing
Regulations, and on the issues which came up before SEBI in the course of administration of the Regulations
over the past two years or so, keeping in view the imminent scenario in the corporate sector following the
economic reforms. In order to gather the views of all the members of the Committee and to look at the process
of substantial acquisition of shares and takeovers closely from all angles, some members of the Committee
prepared papers on specific topics in the Regulations for Substantial Acquisition of Shares and Takeovers namely
definitions, applicability of the Regulations, disclosures, the procedural details of an offer and penal provisions.
The Committee also had the benefit of views of important market participants, industrialists who have made
acquisitions of companies, intermediaries professionally involved in corporate takeovers, and financial and
investment institutions who also have crucial role to play in the area of takeovers as they, as a group, hold more
than 30% of the voting rights in a large number of listed companies. The Committee also invited several
eminent financial journalists who have been writing on the subject of takeovers, for their views. The names of
all those persons who gave their views in writing to the Committee and those who made submissions before the
Committee are given in the annexure to this Report.
xiii. The Committee examined the principles and practices and the regulatory framework governing takeovers in
as many as 14 countries. The Committee noted that the regulatory framework in these countries had evolved
over a period of time drawing extensively upon the corporate culture and practice in these countries. Without
an appreciation of these factors, a mere comparison of the procedures, regulatory requirements and various
quantitative limits in these countries would be meaningless and would only be an exercise in pedantry. It was
important to go behind these regulatory requirements and quantitative limits to discover their raison de etre
and understand the fundamental principles on which these regulations are predicated. While the practices and
procedures vary from country to country, the principles and the concerns - cardinal among which are equality of
opportunity to all shareholders, protection of minority interests, transparency and fairness - have remained
more or less common. It would therefore be far more rewarding to devote attention to these principles and
concerns rather than to attempt a simplistic adaptation of the practices and procedures prevailing in other
countries where the corporate culture is different. The latter exercise may prove to be neither useful nor
appropriate; the former would be more satisfactory.
xiv. The Committee had decided to submit a draft Report to SEBI and requested SEBI to circulate it widely with a
view to eliciting public reaction and response. The Committee noted with satisfaction that the Report had
become a subject matter of intense debate among companies, industrialists, chambers of commerce,
professional bodies, academic circles, market participants, investor associations and the media. This was only a
measure of the significance attached to the area of takeovers especially in the wake of economic reforms. As
was proposed in the draft Report, the Committee met again to deliberate on the feedback received by SEBI. The
Report has also been informally discussed with Government and clarifications on various issues were provided
to Government and their views considered and taken into account. This final Report incorporates the changes
considered and accepted by the Committee.
xv. The Report of the Committee is presented in two parts. The first part contains the recommendations of the
Committee based on which the new Regulations have been framed. The newly framed Regulations are given in
the second part.
PART I
1 The Approach of the Committee
1.1 The Committee was of the view that the Regulations for substantial acquisition of shares and takeovers
should operate principally to ensure fair and equal treatment of all shareholders in relation to substantial
acquisition of shares and takeovers. While on the one hand the Regulations should not impose conditions which
are too onerous to fulfill and hence make substantial acquisitions and takeovers difficult, at the same time, they
should ensure that such processes do not take place in a clandestine manner without protecting the interests of
the shareholders. A balance must necessarily be struck between the two considerations. The objective of the
Regulations should therefore be to provide an orderly framework within which such processes could be
conducted. The Regulations should also help in evolving good business standards as to how fairness to
shareholders can be achieved, as maintenance of such standards is of importance to the integrity of the
financial markets, and they should not concern themselves with issues of competition, or financial or
commercial advantages or disadvantages of a takeover. The committee also noted that the process of
substantial acquisition of shares and takeovers is so intertwined with the warp and weft of the industry,
especially in the wake of economic reforms, that it would be unrealistic to make Regulations in this area without
taking into account the ground realities of the Indian industry.
1.2 The Committee also recognised that the process of takeovers is complex and is interrelated to the dynamics
of the market place. It would therefore be impracticable to devise regulations in such detail as to cover the
entire range of situations which could arise in the process of substantial acquisition of shares and takeovers.
Instead there should be a set of General Principles which should guide the interpretation and operation of the
Regulations, especially in circumstances which are not explicitly covered by the Regulations. These principles
are -
i. Equality of treatment and opportunity to all shareholders.
ii. Protection of interests of shareholders.
iii. Fair and truthful disclosure of all material information by the acquirer in all public announcements and offer
documents.
iv. No information to be furnished by the acquirer and other parties to an offer exclusively to any one group of
shareholders.
v. Availability of sufficient time to shareholders for making informed decisions.
vi. An offer to be announced only after most careful and responsible consideration.
vii. The acquirer and all other intermediaries professionally involved in the offer, to exercise highest standards of care
and accuracy in preparing offer documents.
viii. Recognition by all persons connected with the process of substantial acquisition of shares that there are bound to
be limitations on their freedom of action and on the manner in which the pursuit of their interests can be carried
out during the offer period.
ix. All parties to an offer to refrain from creating a false market in securities of the target company.
x. No action to be taken by the target company to frustrate an offer without the approval of the shareholders.
In the event of any ambiguity or doubt as to the interpretation of the regulations, the concerned authority shall pay
adequate attention to and be guided by any one or more of the aforesaid general principles having a bearing on the matter.
2. Definitions
(Reference: Part II of the Report-Chapter I-Regulation 2)
2.1 The "definitions" section should by and large set the tone for interpretation of its substantive provisions.
Very often, imprecision in the definition of the terms results in difficulties in interpretation of regulations. To the
extent possible, definitions should be clear, precise and unambiguous and definitions of key terms and concepts
which form the basis of the regulations should be laid down.
2.2 The Committee noted that some of the difficulties encountered by SEBI in the interpretation and
implementation of the existing Regulations arose either on account of lack of clarity in the existing definitions of
certain terms or for want of definitions in the text of the existing Regulations. For example, the existing
definition of "acquirer" did not cover the concept of indirect acquisition of a company, through acquisition of
unlisted investment companies which is a possible route of acquisition of a listed company under certain
circumstances. Besides, the way the existing definition of acquirer is worded, it covers only acquisition of
shares, but not of control of the company. Both these concepts should be covered. The definition of "persons
acting in concert" should be expanded, in the present day context, to cover a wider group of persons to which
the presumption of acting in concert could be extended. The terms "offer period", "promoter", "public
shareholding" and "target company" which were not defined in the present Regulations, needed to be defined to
give greater clarity to the provisions of the Regulations. Common sense dictates that takeover of a company
should result in change in control of the company. It thus became a matter of debate for the Committee whether
the terms "takeover" and "control", which are the very quintessence of the Regulations, need to be precisely
defined. For reasons explained in para 6.3 of the Report, the Committee had initially taken the view not to
define "control" and decided to leave it to SEBI to determine whether there was a takeover or not in a given
situation. Upon publication of the draft report, there was an overwhelming body of public opinion stressing the
need to define or at least evolve the contours of what constitutes "control", though there was no concrete
suggestion on how to define the term . In response, the Committee, even while recognising the difficulties in
precisely defining ‘control’, agreed to adopt an inclusive definition. The issue is further discussed in para 6.3 of
the Report.
2.21 Definition of ‘Acquirer'
The Committee noted that the very scope of SEBI’s jurisdiction under section 11 of SEBI Act extends not only to
substantial acquisition of shares but also to takeovers. It was the view of the Committee that the Regulations
should not only cover the process of acquisition of shares but also cases where there is change in control over a
company. There could be different ways for exercising control over a company - some overt and some covert
and it would not be possible to list all. But ultimately such control would get reflected in the manner in which
the voting rights on the board of directors of a company are being exercised.
The Committee also noted that in any case, SEBI has been taking notice of situations involving change in
control and has been directing acquirers to make public offer in the interest of investors, by relying on Clause 40
A & B, which continued to be in force. There have also been other cases before SEBI in which indirect acquisition
of a listed company has taken place by acquiring unlisted holding or investment companies, which in turn held a
majority stake in the listed company, or by acquiring voting rights in a listed company from the present
promoters through power of attorney or by entering into covert voting arrangements. It is beyond doubt that as
shareholder interest is involved in such cases too, these must be covered by the Regulations by incorporating
them in the definition of acquirer.
The Committee recommends that
 not only acquisition of shares but also voting rights in a company or control over a company, howsoever such
control be exercised -directly or indirectly- must be covered under the Regulations and the present definition
of "acquirer " expanded to include these situations; (Reference : Part II of the Report - clause (b) of sub-
regulation (1) of Regulation 2)
 The term ‘control’ be defined to include " the right to appoint majority of the directors or to control the
management or policy decisions, exercisable by 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.
 ( Reference : Part II of the Report - clause (c) of sub regulation (1) of Regulation 2)
 as the expansion of the definition of "acquirer" in the Regulations would render Clause (40 A & B) of the listing
agreement redundant, it may now be replaced by a clause requiring compliance of the SEBI Regulations as a
condition of listing.
2.22 Definition of ‘Persons acting in concert'

"Persons acting in concert" have particular relevance to public offers, for often an acquirer can acquire shares or
voting rights in a company "in concert" with any other person in a manner that the acquisitions made by him
remain below the threshold limit, though taken together with the voting rights of persons in concert, the
threshold may well be exceeded. It is therefore, important to define "persons acting in concert".
To be acting in concert with an acquirer, persons must fulfill certain "bright line" tests. They must have
commonality of objectives and a community of interests which could be acquisition of shares or voting rights
beyond the threshold limit, or gaining control over the company and their act of acquiring the shares or voting
rights in a company must serve this common objective. Implicit in the concerted action of these persons must
be an element of cooperation. And as has been observed, this cooperation could be extended in several ways,
directly or indirectly, or through an agreement - formal or informal .
The Committee was of the view that the present definition of "persons acting in concert" in sub-clause (d) of
regulation 2 needed to be strengthened by incorporating all the ingredients discussed in the foregoing
paragraph to bring out clearly the import of acting in concert.
Any person fulfilling the "bright line" tests would be acting in concert. But there could also be certain persons
who, by their position in relation to an acquirer or by the very nature of their business, could be generally
presumed to be acting in concert, unless proved to the contrary. In other words, a rebuttable presumption of
being persons in concert with burden of proof cast on them will be raised against these persons. The Committee
was of the view that while the net of presumption should be cast to include all such persons, it should not be
cast too widely so as to impinge on the freedom of any person to carry on his normal business activities. In
other words, there should be well defined bounds of presumption.
 the present definition of "persons acting in concert" be expanded to include mutual funds, their sponsors,
asset management companies and trustees, venture capital funds, their sponsors, foreign institutional
investors, banks, financial advisers and stock brokers with a provision to exclude banks which provide normal
commercial banking services to an acquirer;
 sub-clause (iv) of clause (d) of regulation 2 of the existing Regulations be re-worded to bring out the role of
investment companies in cases where such companies are used as vehicles to make substantial acquisition of
shares or voting rights in a company;
 the term "associate" which has been used in the Regulations in the context of "person acting in concert" be
defined;
 public financial institutions which are at present included in the list of persons deemed to be acting in concert
be excluded. (Reference: Part II of the Report - clause (e) of sub regulation (1) of regulation 2)
The inclusion of "venture capital funds and sponsors" in the definition of "persons acting in concert" and the definition of the
term ‘associate’ were in response to the feedback received by the Committee on the draft Report.
2.23 Burden of proof on ‘persons acting in concert’
The Committee further noted that in the existing Regulations, there is no burden of proof on the ‘persons acting
in concert'. Once the burden of proof is cast on the persons presumed to be acting in concert, it would be
important to ensure that the persons are grouped in categories such that the persons may be presumed to be
acting in concert only with another person belonging to the same category. A general reading of the existing
provisions implies that a person belonging to any one of the categories mentioned in sub-clauses (i) to (iv) of
clause (d) of regulation 2 could be presumed to be acting in concert with a person belonging to any other
category. Thus, a company could be presumed to be acting in concert with a merchant banker, mutual fund, or
any other body even though they may all be distinctly independent entities without any connection whatsoever.
Such irrebuttable presumption of a common motive amongst unrelated parties would be illogical and not legally
tenable. A distinction must be made between persons who could be presumed to be acting in concert unless
proved to the contrary and others who may be acting in concert even though such a presumption cannot be
raised against them. In this context, it may be noted that the UK City Code of Takeovers and Mergers, for this
very reason, has divided the persons acting in concert into groups in such a manner that these persons would in
the natural course of affairs be presumed to be acting in concert only with another person in the same group.
This served to set the pattern for raising rebuttable presumptions.
 in the definition of persons acting in concert, the persons be grouped in such a manner in the same group or
category that they bear such relationship amongst themselves as could justify raising of a presumption in the
normal course of affairs that they are acting in concert. For example, a sponsor of a mutual fund could be
presumed to be acting in concert with the trustee company or asset management company of the same mutual
fund; similarly a merchant banker may be presumed to be acting in concert with his client as acquirer. But no
presumption may be made that persons in one group are acting in concert with persons in another group. It has to
be proved by evidence that they are acting in concert. (Reference : Part II of the Report- sub-clause (e) of sub-
regulation (1) of regulation 2).
The definition of the persons acting in concert as defined above would imply a rebuttable presumption. The question which
arises is who would rule whether the presumption has been rebutted. The responsibility of ruling will lie with SEBI and over a
period of time, jurisprudence on the subject will develop.
2.24 Definition of ‘Offer Period’
Offer period has not been defined in the existing Regulations. The Committee noted that the Regulations require
certain activities to be carried out within the offer period and also cast restrictions on the acquirer and the
target company not to carry out certain activities during that period. Besides, offers, competitive offers and
revised offers will have to be made during the offer period. The Committee therefore decided that it would be
best to define the term.
 the offer period be defined as the period from the date of the first public announcement of the first offer till
the date of the closure of that offer. (Reference: Part II of the Report- clause (f) of sub-regulation (1) of
Regulation 2).
2.25 Definition of ‘Promoter’

The term promoter is not defined, although the word "promoter" has been used in regulation 4 of the present
Regulations and there have been applications made to SEBI seeking exemption from the applicability of the
Regulations on the ground of inter se transfer of shareholdings among the promoters. There is, therefore, a
need to define the term.
 the definition of the term ‘promoter' may be based substantially on the recommendations from the Malegam
Committee Report as accepted by SEBI , which has already been widely accepted for the purpose of disclosure.
(Reference: Part II of the Report- clause (h) of sub-regulation (1) of Regulation 2).
2.26 Definition of ‘Public Shareholding’

The term "public shareholding" is not defined in the existing Regulations although the term has been
extensively used, particularly in sub-regulation (4) of regulation 21. There is no definition of public shareholding
also in the listing agreement of the stock exchanges, which could be adopted by the Committee. The
percentage of shares to be acquired in a public offer as well as the public holding after the offer has to bear a
relation to the "public shareholding" in a company. Queries have often been raised as to whether the
shareholding in the hands of financial institutions or mutual funds, or residual holding in the hands of outgoing
management would qualify for the purposes of reckoning public shareholding after the offer. It is, therefore,
important to define the term.
 the term may be defined to mean shareholding in the hands of any person other than the acquirer and persons
acting in concert with him. (Reference : Part II of the Report - clause (j) of sub-regulation (1) of Regulation 2).
2.27 Definition of ‘Shares’

The draft report retained the definition of shares as per the existing Regulations which included any security
which entitles the holder to receive shares with voting rights at a future date. The Committee decided to retain
the same definition. The Committee, however, noted that mere acquisition of securities which would confer
voting rights at a later date should not trigger the code at the point of acquisition of the securities before voting
rights are acquired and that the Regulations would be attracted only at the point of time when the securities are
converted into shares with voting rights and this should be clearly brought out in the Regulations. (Reference :
Part II of the Report - sub-regulation (2 ) of Regulation 14 ).
2.28 Definition of ‘Target company’
As the acquirer could also be a corporate body, it is necessary to define the "target company" so as to
distinguish between the offeror company (i.e. the acquirer company) and the offeree company (i.e. the target
company) and to indicate that the Regulations apply only to target companies which are listed.
 the listed company which is the subject matter of acquisition or takeover may be defined as the target
company (Reference: Part II of the Report - clause (o) of sub-regulation (1) of Regulation 2).
2.29 Definition of the remaining terms

 the definitions of the remaining terms in the existing Regulations be retained.
3 Applicability of the Regulations

(Reference: Part II of the Report, Chapter I, Regulation 3)
3.1 In the course of administering the Regulations, SEBI had been granting exemptions from the applicability of
the Regulations in a number of cases in exercise of the powers granted to it under regulation 4 of the existing
Regulations. Exemptions were also granted by SEBI under Clause 40 (A & B) of the listing agreement. Very often
acquisition of shares or voting rights may become necessary in commercial and business interests as described
later, and all such cases of transfer of shares among two set of persons may not result in a takeover and the
interest of shareholders may not be jeopardised. It stands to good reason that such cases merit exemption from
the requirement of making mandatory public offers. With the experience gained by SEBI in dealing with
applications for exemption, it should be possible to enlist the types of transactions for which exemptions could
be granted under the Regulations. The Regulations may be made inapplicable in the first place for such cases,
so that the need to approach SEBI for seeking exemptions would not arise in such cases.
3.2 The Committee felt that delineating the circumstances in which Regulations will not be applicable would
mean greater transparency besides minimising the exercise of discretionary power. At the same time, the
Committee also recognised that in a dynamic and developing securities market, there would always be
situations, all of which cannot be covered even by delineating circumstances in the widest possible terms. The
use of discretionary power in residual cases cannot be totally avoided but may be guided by the
recommendations to be made by a Panel to which reference has been made in para 3.3.5 of the Report.
SEBI should appoint a Panel comprised of experts and officers of SEBI and the recommendations of
the Panel may be taken into account by SEBI while considering exemptions in cases which would
not be covered by the circumstances specifically enumerated in the Regulations. (Reference : Part II
of the Report - Regulation 4)
While laying down the situations where the provisions of the Regulations regarding public offers will not be
applicable, the Committee restricted itself to only those situations in which SEBI has granted exemptions in the
past.
3.3 It was brought to the notice of the Committee that the cases in which exemptions have been granted
broadly fell into one of the following two categories :
 acquisition through preferential issue for consolidation of holdings by foreign collaborators, Indian
promoters and also, consequent upon induction of foreign collaborators for technology transfer etc.
 acquisition by way of transfer of shares inter se among group companies, promoters, state level
financial institutions and promoters in joint and assisted sector projects, foreign collaborators and Indian
promoters, split in family and consequential regrouping of shareholding among branches of the family and
corporate restructuring plans.
It was also brought to the notice of the Committee that while firm allotment in public issues and preferential offers should
continue to be permitted, it should be ensured that these routes are not used to bring about change in control without
appropriate disclosures and proper consent of the shareholders. Similarly, in the case of rights issues the exemption from the
applicability of the requirement to make a public offer should normally be restricted to the extent of the entitlement of a
shareholder. At the same time, if a shareholder passively crosses the threshold limit of a public offer under the Regulations,
or were allotted additional shares within the limit of the acquisitions permitted in any period of twelve months, he should
not be required to make a public offer. Further, if the persons presently in control of the company have disclosed in the
rights letter of offer that they intend to acquire additional shares beyond their entitlement if the issue is undersubscribed,
they should be permitted to do so as long as there is no change in control.
The Committee therefore recommends that
 the requirement to make a public offer be exempted for acquisitions made under firm allotment in
public issues and preferential offers, with full disclosure as to who the allottees are and the
consequences, if any, on the control of the company; acquisitions by the shareholder pursuant to
rights issue to the extent of his entitlement and additional entitlement subject to certain conditions;
inter se transfers among group companies within the definition of group in the MRTP Act; inter se
transfer among promoters and foreign collaborators, among relatives, among government companies,
among state level financial institutions and private co-promoters in joint sector projects; acquisitions
pursuant to schemes of arrangement or reconstruction including amalgamation or merger or
demerger under any law or Regulation, Indian or foreign; acquisition of shares by market makers
during the course of market making, acquisition of shares by financial institutions in the ordinary
course of their business in view of the special role in the Indian context or as pledgees. (Reference :
Part II of the Report - sub-regulation 1 of Regulation 3)
3.31 Rights Issues

The Committee reconsidered the need to exempt fully all acquisitions made through a rights issue and noted
that while there was a case for exempting acquisitions made through rights issues, this could also be prone to
misuse and it may be possible for persons presently in control of the company to hand over control through a
combination of unattractive pricing and rights renunciation in favour of the acquirer.
 instead of fully exempting rights issue as was proposed in the draft Report, apart from acquisitions
made by a shareholder pursuant to an application made to the extent of his entitlement, additional
allotments within the limit of the acquisitions permitted in any period of 12 months and additional
allotments to the persons currently in control of the company, provided he had disclosed in the letter
of offer that he intends to take up additional shares if the issue is undersubscribed, be excluded.
(Reference : Part II of the Report - clause (b) of sub-regulation (1) of Regulation 3)
3.32 Preferential Offers
Companies adopt the preferential offer route in varied situations for the purpose of consolidation of stake by the
existing Indian or foreign promoters, induction of foreign collaborators with foreign technology, gaining
management control of the company, injection of fresh funds for turning around sick companies. At present,
SEBI has been granting exemption on case to case basis under the powers granted to it under regulation 4 of
the existing Regulations.
The Committee debated on whether preferential issues, which are approved by the shareholders under Section
81 (1A) by passing special resolution, should at all attract the regulations, as it is the very body of shareholders
whose interest the takeover regulations seek to protect which has given consent to the preferential issue.
Besides, as preferential issue helps infusion of fresh capital into the company, it is largely in the general interest
of all shareholders and also SEBI Guidelines for Preferential Issues have neutralised any economic advantage to
any person acquiring shares through preferential allotment on terms more favourable than the market. There is
also a need to differentiate between the acquisition of shares through the primary market and the secondary
market. The Committee also noted that market participants with whom the Committee discussed this issue,
overwhelmingly favoured exclusion of preferential issue from the ambit of the Regulations, provided it does not
lead to change in control.
Following suggestions received on the draft Report and also on its own, the Committee deliberated on the
possibilities of misuse of this exemption route to circumvent the regulatory provisions for public offer. The
Committee ultimately decided to exempt preferential issue of capital made with express consent of the
shareholders to whom full disclosures about the proposal including the likely changes in the control of the
company, if any, has been made by way of explanatory statement to the notice to the general meeting in which
the proposal is being put up for shareholders approval.
The Committee also examined whether the exemption of preferential offer discourages competitive offers. The
Committee, however, noted that the company is required to notify the stock exchange upon passing of the
board resolution approving the public offer and thus, the proposal of preferential offer becomes publicly
available information and that preferential offer, per se, does not debar a serious acquirer from making a bid on
the company.
 the acquisition of shares covered under section 81 (1A) of the Companies Act be exempt from the
applicability of the regulations subject to full disclosure in the notice for the extraordinary general
meeting called for consideration of preferential issue, including identity of the acquirer and
consequent changes in shareholding pattern and control of the company etc. (Reference : Part II of the
Report - clause (c) of sub-regulation (1) of regulation 3).
3.33 Market Makers

 Acquisition of shares in the ordinary course of business by a registered market maker of a Stock
Exchange in respect of shares for which he is the market maker during the course of market making
be exempt. (Reference : Part II of the Report - sub-clause (ii) of clause (f) of sub-regulation (1) of
regulation 3).
3.34 Indirect acquisition

The Committee had noted that there exists a lacuna in the existing regulations which would allow persons to
acquire indirect control of a listed company by acquiring the holding company or a set of investment companies
which has block holding and which may be unlisted, because the scope of the Regulations apply only to
acquisitions of shares in listed companies. The Committee thought it fit to clarify by way of an explanation that
acquisition of an unlisted company would not be exempted if by virtue of such acquisition, or change in control
of the unlisted company whether in India or abroad, there is brought about a change in control of the listed
company or acquisition of control over the voting rights of the listed company.
 concept of indirect acquisitions be brought in. This has been done in the definition of acquirer in
clause (b) of sub regulation (1) of regulation (2); in the definition of persons acting in concert in sub
clause (1) of clause (e) of sub regulation (1) of regulation (2); further while excluding unlisted
companies from the purview of the Regulations in clause (k) of subregulation(1) of regulation 3.
3.35 Chain principle

Occasionally, a person or group of persons acquiring statutory control of a company (which need not be a
company to which the Regulations apply) will thereby acquire control of a second company because the first
company itself holds a controlling block of shares in the second company, or holds shares which, when
aggregated with those already held by the person or group, secure or consolidate control of the second
company. The Committee felt that an offer should be made in these circumstances if -
 the shareholding in the second company constitutes a substantial part of the assets of the first
company; or
 one of the main purposes of acquiring control of the first company was to secure control of the second
company.
 indirect acquisition of control of a company should require compliance to the Regulations and this
needs to be clarified by way of suitable explanation. (Reference : Part II of the Report - Explanation
to clause (k) of sub-regulation (1) of regulation 3 and Explanation to Regulations 10 and 11).
3.36 Residual Cases and Takeover Panel

While the Committee has attempted to enlist as many circumstances as possible where a public offer should not
be required to be made, there might still be residual cases where SEBI may be required to exercise its discretion
whether to grant exemption or not. To help SEBI in this task, the Committee thought it desirable to set up a
Panel.
 SEBI may be vested with power to grant exemption in residuary cases and for this purpose SEBI
shall set up a Panel. The Panel would be recommendatory in nature. Any order granting or refusing
exemption passed by the Board shall be a reasoned order and shall be published. This, procedure,
while bringing transparency, would also serve to create precedents and help develop jurisprudence
on the subject through case law. (Reference : Part II of the Report - clause (l) of sub-regulation (1) of
regulation 3 and Regulation 4)
3.37 Reporting of Exemptions to Stock Exchange and SEBI

 in order to ensure transparency in the transaction and assist in the monitoring, all the exempted
transactions should be subject to reporting requirements to the concerned stock exchanges in
advance of the proposed acquisition and to SEBI. (Reference : Part II of the Report - sub-regulation (3)
and (4) of Regulation 3)
4 Power to remove difficulties

(Reference: Part II of the Report - Chapter I, Regulation 5)
During the implementation of the revised Regulations, there are likely to be difficulties in interpreting the
Regulations. The Committee considered it desirable to provide a clause in the Regulations empowering SEBI to
issue clarifications and guidance notes from time to time.
 the Board be vested with power to remove difficulties in the interpretation or application of the
Regulations. (Reference : Part II of the Report - Regulation 5)
5Disclosure of shareholding and control in a listed company

(Reference: Part II of the Report - Chapter II)
5.1 Compliance with the Regulations and monitoring of compliance require adequate disclosures at periodical
intervals. Such disclosures would include a transitional provision to take care of disclosures immediately
following notification of the revised Regulations, disclosures pursuant to new acquisitions by persons holding
less than the threshold limit but more than 5%, disclosures of persons identified as promoters or in the control
of the company and continual disclosures by any person holding more than ten per cent.
5.2 It may be mentioned that the existing provisions required disclosure by any person to the stock exchanges
and the company. For operational ease, and to reduce the duplication of paper work, he would now be required
to disclose his holding only to the company and the company in turn would be required to annually report the
holdings of the persons to the stock exchanges. Additionally, the promoters or any person having control over
the company will be required to disclose his holding to the company. The company will also be required to
disclose the details of persons in control of the management and their shareholdings to all the stock exchanges
immediately after the notification of the revised Regulations. Such information should be maintained in a
separate register in the presribed format and should be available for inspection. Now that change in control
would also trigger of a public offer, the latter requirement will provide supplemental evidence of change of
control.
 apart from disclosures about individual holdings, disclosures about persons in control of
management of the company and their shareholding interest in the company should also be called for.
(Reference : Part II of the Report- Regulations 6, 7 & 8)
6 Substantial Acquisition of shares and acquisition of control of the company (Reference : Part II of the Report - Chapter III)
6.1 Acquisition of shares or voting rights (Reference : Part II of the Report- Regulation 10)
6.11 Negotiated vs. open market acquisition
The provisions in Regulations 9 & 10 of the existing Regulations differentiate between the manner of acquisition
of shares - i.e. either by way of negotiations or through open market transactions. This distinction is however
without much significance as it exists only in the manner of the initial acquisition. There is hardly any distinction
between the procedure to be followed for making public offers and compliance with the remaining provisions of
the Regulations in both these cases. The Committee considered this matter and felt that keeping separate
regulatory provisions for the two modes of acquisition served no purpose.
 as the manner of initial acquisition which would trigger public offer has no relevance as far as
performance of obligations under the Regulations are concerned, the two provisions should be
combined into a single provision. (Reference : Part II of the Report- Regulation 10)
6.12 Threshold Limit for Mandatory Public Offer

The Committee examined the question of raising of the threshold limit for public offer from the current level of
10%. It was noted that the threshold limit varied from country to country, and depended on the corporate
shareholding pattern prevailing in the country and minimum holding which would traditionally be likely to give
control of a company in the country. For example, in UK the threshold limit was set at 30%, in Hongkong at 35%
and in Singapore at 25%. In the USA, acquisitions beyond 5% may be made by way of tender offers under the
Williams Act.
In the draft Report, the Committee had decided to retain the present threshold of 10%. The rationale which has
been explained in the Preface to the Report was accepted by the Committee and it was decided to retain this
threshold. A large number of public comments received supported retention of this threshold, though there were
a few who suggested the raising of the threshold to at least 26%. It was felt that under Indian conditions hardly
any person as investor would invest in more than 10% in any company unless he has an intention of taking over
the company at some point of time and the Committee therefore decided to retain the existing threshold limit of
10%.
 having regard to the Indian situation in which it is possible to acquire control of a company with a
lower percentage of holding, the present threshold of 10% for public offer be retained;
 the present ambiguity about the applicability of the Regulations to persons who acquire shares
beyond the threshold limit of 10% without initially holding any share be removed by adding the words
"together with shares or voting rights held, if any". (Reference : Part II of the Report - Regulation 10)
6.2 Consolidation of holdings (Reference: Part II of the Report -Regulation 11)

The Committee noted that the existing Regulations do not give any scope for consolidation of holdings by
person(s) who already hold more than 10% of the shares or voting rights of the company without attracting the
mandatory public offer. The Committee appreciated the fact that in a competitive environment, it may become
necessary for person(s) in control of the company to consolidate their holdings either suo moto or to build their
defences against takeover threats.
The Committee also recognised the need to harmonise consolidation of holdings by persons already holding
substantial shares with the need to protect the interest of shareholders in a competitive, free market
environment. Indeed, for the same reason, Regulations of other countries do not trigger mandatory public offers
for all acquisitions and provide for consolidation of shareholdings within a band in a specified period. This only
allows for consolidation in a regulated manner without unduly affecting the interest of the shareholders.
The draft Report had proposed a graduated limit of acquisition - depending upon whether the acquirers existing
holding was between 10% and 25% or between 25% and 50%. The Committee felt that introducing such
differential limits would not be in the interest of the shareholders and moreover would not be justifiable on any
rational basis. It was therefore decided to remove this differentiation and permit acquisitions upto 2% in any 12
month period, to all persons who hold shares above the threshold limit of 10%.
The draft report had also contained a proposal for clarification to the effect that the provisions of the
Regulations will not be applicable to any person who holds 50% or more. But reservations were expressed from
some quarters about this exclusion clause on the ground that if the Regulations are intended to safeguard
shareholders interest even in the event of substantial acquisition of shares not involving a takeover, there is no
justification for excluding substantial acquisition by acquirers holding more than 50%. The question which arose
in this regard is upto what point of time substantial acquisitions not involving takeovers need to be regulated.
The Committee decided that substantial acquisition till an acquirer gains absolute control level of 75% may be
brought within the scope of the Regulations.
 person(s) holding not less than 10% but not more than 75% may acquire upto 2% shares in any
period of twelve months, without attracting the mandatory public offer requirement. (Reference :
Part II of the Report - Regulation 11).
The percentage of acquisition referred to above is on absolute basis i.e. there should be no netting of acquisition and
disinvestment during the said period. In other words if a person acquired x% during a period of 12 months, sold y% and
acquired z% his aggregate acquisitions of (x% + z%) would be reckoned for the purpose of the Regulation and not (x% - y% + z
%).
 The Committee also felt that it would be desirable to clarify that the provisions of these
Regulations will not be applicable to any person who holds 75% or more at the time of notification of
these Regulations and also to any acquirer who has reached the level of 75% without any breach of
the provisions of the Regulations in force from time to time.
6.3 Takeovers
(Reference : Part II of the Report - Regulation 12)
The question of defining takeovers was discussed. It was noted that though the concept of takeovers was easily
comprehensible, it eluded precise definition. It is perhaps for this reason why regulations in most countries have
not defined it. While takeover is taken to be synonymous with acquisition of control over the company, opinions
vary on what constitutes change of control. According to industrialists and professionals who have involved
themselves in takeovers, management control ultimately manifests itself through control over the board of
directors of the company, whatever be the manner in which such change of control may be achieved.
The Committee agreed that attempting a precise definition of takeover would not only be counter productive
but also limit the scope of the Regulations, and it should be left to SEBI to decide whether there has been a
violation of regulations in a given situation of a takeover, through investigation if necessary, and enforce the
Regulations. The Committee was of the view that the Regulations should nonetheless contain an inclusive
definition of the term ‘control’ which would serve to indicate the circumstances when compliance with the
provisions of the Regulations would be necessitated, even where there has been no acquisition of shares, so
that SEBI would not be on an uncharted sea in investigating whether there has been change in control.
On the issue of change in control of a company attracting the provisions for public offer, the Committee felt that
control of a company is interlinked with its fortunes and any change in control could not be without impact on
company's policies and business prospects and is thus linked to investors interest. And given that investor
protection is a mandate of SEBI, takeover which entails change in control should necessarily be the concern of
SEBI. This is all the more necessary because under clause (h) of sub section (2) of Section 11 of SEBI Act, SEBI is
empowered to regulate not only substantial acquisition of shares but also takeovers. This was also the
overwhelming view of all professionals, intermediaries and financial journalists who made submissions before
the Committee. The Committee also noted that though the existing Regulations did not include change in
control as triggering of a public offer, SEBI has placed continued reliance on Clause 40 A and B of the Listing
Agreement in such cases where the acquisition of shares has been less than the threshold limit of 10%. The
Committee recognised that the Regulations should, as far as possible, be comprehensive and self contained and
SEBI should not have to rely on outside rules and regulations to implement its objective.
On the above considerations and given on the one hand that it would be difficult, if not impossible, to attempt
at a precise and comprehensive definition of takeover, and on the other hand that takeover does ultimately
result in change in control of the company, howsoever such control may be exercised, the Committee felt that
change in control of a company, as opposed to change in management of a company, should be made a
condition requiring a public offer to be made. When there is change in control, the shareholders must be
afforded an opportunity to exit from the company if they do not want to continue under the new acquirers. This
will also obviate the need for SEBI to fall back upon Clause 40 A & B of the Listing Agreement, which could now
be repealed. The Committee originally thought that it would be advisable to refrain from defining "control of a
company" and allow time and practice to craft a well accepted definition of control. The above decision of the
Committee was incorporated in the draft report of the Committee. But, as already discussed in para 2.2 of this
Report, the Committee received numerous comments advocating the need to define at least the parameters of
control. Having regard to the feed back received, the Committee felt that a term of such critical relevance to the
Regulations should not be left undefined.
The Committee, therefore, agreed to define control. The Committee also felt that concept of joint control which
is often seen in practice should also be recognised. The Regulations should make it explicit that cessor of any
one person from joint control, thus giving the remaining person or persons sole control or taking of any person
or persons in joint control by a person having sole control shall not be construed as ‘change in control over the
company’ attracting the Regulations.
 the term ‘control, may be defined by giving an inclusive definition and also, the consequences of
change in control be included in the substantive portion of the Regulations, through provision for
disclosure of person(s) in control of the company at periodical intervals which could indicate change
in control over the company, when it occurs; (Reference : Part II of the Report- Regulations 2 (1) (c), 6
& 8)
 mandatory public offer consequent upon change in control over the company be also provided
(Reference : Part II of the Report - Regulation 12).
6.4 Relevance of Clause 40 A & B of the Listing Agreement

The Committee noted that SEBI has enforced public offer relying on Clause 40 A and B of the Listing Agreement
where takeover has been evidenced through changes in management control, though the acquisition of shares
has been less than the threshold limit of 10%. The Committee recognised that the Regulations should, as far as
possible, be comprehensive and self contained and SEBI should not have to rely on outside rules and
regulations to implement its objective. As discussed in Para 6.3 above, the Committee decided to strengthen
the regulations by defining ‘control’ and requiring mandatory public offer upon change in control over the
company. The Committee noted that the changes in the Regulations would render clause 40A & B of the listing
agreement redundant.
 clause 40 A & B of the listing agreement may be replaced by a clause requiring compliance with the
SEBI Regulations on Takeovers.
6.5 Appointment of Merchant Banker

The Committee envisaged a far more crucial role for the Merchant Banker with additional responsibilities under
the revised Regulations, which would require the merchant banker to be an independent and responsible
person, so that he can exercise due diligence independently of the acquirer in the discharge of his
responsibilities and at the same time be accountable to SEBI. It was, therefore, decided to allow only Category I
merchant banker to act as merchant banker to a takeover offer. The Committee received comments for allowing
other categories of merchant bankers to play a role in takeovers, but the Committee felt that the provision be
retained in view of the added responsibilities and obligations cast on merchant bankers under the revised
Regulations. It was also felt necessary to prohibit a firm which is an associate of or belongs to the group of the
acquirer or the target company from acting as a merchant banker.
 only a Category I Merchant Banker, not being a group company or associate of the acquirer or the
target company, be appointed for the purpose. (Reference : Part II of the Report - Regulation 13)
6.6 Timing of public announcement of offer

(Reference: Part II of the Report- regulation 14)
It proved difficult to make the public announcement of offer within four days of agreement if there are
intervening holidays. Besides, the existing Regulations did not specify when the public announcement of offer is
to be made in case of acquisition of shares through securities like convertible debentures, global/ American
depository receipts etc., which would entitle the holder to receive shares with voting rights at a later date. This
needed to be clarified.
 the public announcement of offer be made not later than four working days of the agreement.
 in case of acquisition of securities (including GDRs / ADRs) which would entitle the acquirer to
voting rights at a later date, the public announcement be made not later than four working days
before conversion, or exercise of option, as the case may be leading to acquisition of shares with
voting rights exceeding the threshold limit. (Reference : Part II of the Report - sub- regulation (2) of
Regulation 14)
6.7 Public announcement of offer

Under the existing provisions, an acquirer is required to make public announcement in atleast one national
English daily and in regional language newspaper of the place where the shares of the company are listed and
most frequently traded. It has been the experience of SEBI that acquirers pay lip service to compliance with
these provisions by releasing the public announcements in obscure dailies with very limited circulation. This
defeats the very purpose of releasing public announcement as it hardly comes to the notice of any shareholder.
Fairness and equity also demand that the Board of Directors of the target company should know about the
impending takeover from the acquirer. It should be an obligation for the acquirer to inform the Board of the
target company about his intention. Another important point is that the announcement of substantial
acquisition of shares or takeover of a company by an acquirer is a market sensitive information and should
become publicly available through communication to the stock exchanges as well.
An issue which often came up before SEBI in the course of administering the existing Regulations was when an
offer could be said to have been made. Related to this was the issue whether the public announcement of an
offer would constitute an offer or could be considered merely as a declaration of intention to make an offer.
There have been several cases before SEBI in which the acquirers have sought to withdraw their offers after
making the public announcement on the basis of a contention that public announcement by itself does not
constitute an offer. These issues need to be clarified.
The Committee was of the view that, as the release of a public announcement has its impact on the market, it
would stand to reason that it should necessarily be followed by the mailing of a letter of offer and hence, the
acquirer should make a public announcement only after satisfying himself that he would be able to implement
the offer. It is for this reason that the offer period has been defined to commence from the date of public
announcement.
In view of the above, the Committee recommends that
 Public announcement be released in all editions of an English national daily with wide circulation,
one Hindi national daily with wide circulation and a regional language daily having circulation at the
place where the registered office of the target company is situated and at the place of the stock
exchange where the shares of the target company are most frequently traded. (Reference : Part II of
the Report - sub regulation (1) of Regulation 15).
 Public announcement be submitted to SEBI two working days in advance of its release. (Reference :
Part II of the Report - sub regulation (2) of Regulation 15).
 Public announcement be sent to all the stock exchanges on which the shares of the company are
listed and to the target company at its registered office. (Reference : Part II of the Report - sub-
regulation (3) of Regulation 15).
 Once the public announcement is made, the public offer shall be deemed to have been made.
(Reference : Part II of the Report - sub regulation (4) of Regulation 15)
6.8 Contents of public announcement of offer

(Reference: Part II of the Report - Regulation 16)
The Committee noted that the existing regulations spell out in detail the contents of public announcement.
Nevertheless, going by the experience of SEBI, there was room for bringing about further clarity in the contents
of the public announcement to make them more comprehensive.
To give a few examples: the Committee observed that if the acquirer had acquired shares in the open market
prior to the date of public announcement, information on price at which such acquisition was made would be
material for the shareholder and the market and should be provided. The public announcement should also
contain disclosure in regard to availability of financial resources required to implement the offer and future
plans of the acquirer, if any, for the target company, including, inter alia, whether the acquirer proposes to strip
or dispose of or otherwise encumber any assets of the target company. Disclosure of future plans of the acquirer
in relation to the target company is important information with which shareholders of the target company would
be seriously concerned and hence there is need to make such information available to them. The Committee
also felt that if the disclosure regarding future plans is to be meaningful, responsibility must be cast on the
acquirer and he should be debarred from engaging in disposing of or otherwise encumbering the assets of the
target company unless he has made such disclosure.
The question of allowing conditional offer was debated; namely, whether an offer could be subject to minimum
level of acceptances. While conceding that in a hostile takeover situation, the bidder might like to reserve the
right to retract from the offer if acceptances as would give him absolute control over the target company are
not forthcoming, the Committee felt that without proper checks and balances, such a provision could lead to
frivolous offers and might be misused to prejudicially affect the target company’s operations. It would also
inconvenience the shareholders and destabilise the market, as they have to part with the shares and forego the
right to deal with the shares for a period of at least two to three months. The Committee therefore was of the
opinion that if at all conditional offers which are subject to minimum level of acceptances are to be permitted,
it should be subject to checks and balances.
In this context, the Committee felt that in addition to the requirement of escrow deposit, an acquirer should be
allowed to make conditional offer only subject to minimum acceptance of 20% and whatever be the extent of
the conditional offer, the acquirer, having made such an offer, must be required to accept at least upto 20%.
This would imply that if an acquirer has made an offer to acquire (20 + x)% and the acceptances received by
him are more than 20% but less than his desired level, then he would be required to accept at least 20% and
would have the option to return the rest. At the same time, the Committee also recognized that it may not be
fair to a genuine acquirer to saddle him with a shareholding less than his desired level, because the object for
which the offer was made by him would be frustrated. Moreover, such shareholding arising out of failure of the
acquirer to acquire desired shareholding, may also result in the existing company being subject to "green mail"
by the acquirer. The Committee, therefore, thought that to be fair to an acquirer making conditional offer, he
should be permitted to have dual pricing for his offer i.e. a higher price for acquisition of desired level may be
offered vis a vis the price for minimum mandatory acceptances. Thus, this provision, while being fair to the
acquirer, would also not be contrary to the interest of shareholders.
The Committee also observed that at times, the takeover offer could be challenged on the ground that various
requisite statutory approvals have not been obtained. It is for the acquirer to ascertain which are the approvals
required to be obtained for giving effect to the takeover offer and state them clearly in the public
announcement. While the Regulations specify certain illustrative approvals that may be necessary, there could
be other approvals too, all of which may not be known to SEBI. The Committee, therefore, felt that the acquirer
should be required to make a distinct statement that no other approvals other than those mentioned in the
public announcement are required for giving effect to the offer.
The Committee also felt that persons holding unregistered shares, though may not get a copy of letter of offer,
should be enabled to participate in the offer.
 The highest and average price paid by the acquirer or persons acting in concert with him for
acquisition, if any, of shares of target company during the twelve month period prior to the date of
the public announcement be disclosed in public announcement (Reference : Part II of the Report -
Regulation 16 (viii)).
 The future plans of the acquirer, if any, for the target company, including whether the acquirer
proposes to strip or dispose of or otherwise encumber any of the assets of the target company during
the next succeeding 2 years be disclosed in the public announcement and in the absence of such
disclosure, the acquirer shall be debarred from doing so. Where the public announcement sets out
future plans, the acquirer shall also state how he proposes to implement such future plans.
(Reference : Part II of the Report - Regulation 16 (ix) and 22 (18)).
 Public announcement should contain disclosure on financial arrangements for implementing the
offer. (Reference : Part II of the Report - Regulation 16 (xiv)).
 Persons holding unregistered shares should be enabled to participate in the offer (Reference : Part
II of the Report -Regulation 16 (xv)).
 The statutory approvals required to give effect to the offer be spelt out, with a declaration that no
other approvals other than those mentioned in the public announcement are required for giving
effect to the offer. (Reference : Part II of the Report- Regulation 16(xvi)).
 Offer conditional as to minimum level of acceptances may be allowed, subject to checks and
balances. (Reference : Part II of the Report - Regulation 16(xviii)).
 The acquirer should be required to accept minimum of 20% irrespective of whether the conditional
offer has elicited response to the level of acceptances desired by the offeror, but a lower price,
which shall not be less than the minimum offer price as per the Regulations, can be offered for the
minimum mandatory acceptances. (Reference : Part II of the Report - Regulation 16 (xviii) and
Explanation 4 to Regulation 20 and sub-regulation (8) of Regulation 22).
6.9 Approval of Board for Letter of Offer

Hitherto all offer documents were to be submitted to SEBI within fourteen days of the public announcement for
approval. The Committee discussed the merits of this requirement and noted that for primary issues, SEBI
gradually moved away from a system of vetting prospectuses to a system of filing. This trend was also noted in
the offer documents for mutual funds, where SEBI proposed to give up vetting.
The Committee desired that the merchant banker should assume greater responsibility for ensuring proper
disclosures and SEBI should give up the requirement of prior approval of offer documents and move into a filing
oriented system. Once an offer document is filed with SEBI, it would be up to SEBI to offer comments, if any,
within a specified time period of say twenty one days. If comments are offered by SEBI, those comments are to
be taken note of and in cases requiring a refiling, the twenty one days period will commence once again from
the date of refiling. This will bring discipline among the acquirers and merchant bankers to do the necessary
due diligence with utmost care without SEBI undertaking any responsibility in that behalf.
 disclosure requirements be clearly and elaborately specified by the Board (Reference : Part II of the
Report - sub-regulation (1) of Regulation 18)
 offer document be filed with SEBI within fourteen days of public announcement and if no comments
are communicated within twenty one days, the offer document may be circulated to the
shareholders. (Reference : Part II of the Report - sub-regulations (1) and (2) of Regulation 18)
6.10 Specified Date

The existing Regulations require a "Record Date" to be specified for the purposes of determining the
shareholders to whom the Letter of Offer is to be sent. As this record date was not defined in the Regulations, it
took on the meaning it already had in the stock exchange parlance, i.e. the date as fixed by the stock exchange
for the purposes of entitlement of bonus, rights etc. This posed several practical problems, especially when a
book closure or a date for rights issue for example were near to the date of the public offer. The Committee
observed that the stock exchange rules for fixation of record date namely request from the board of directors of
the listed company, a minimum notice period, minimum ninety days gap between two record dates etc. have
not only contributed to delaying the whole process but were also found to be impracticable, especially in a
hostile takeover situation, where the co-operation of the present management may not be forthcoming.
As speed and secrecy are essential in takeovers, the acquirer should have the freedom to fix the cut off date for
the purposes of mailing the letters of offer; besides, a detailed procedure for fixation of record date in which
more than one party is involved would apart from engendering delay, result in leakage of information and
speculation on the target company's shares. While the shareholders whose names appear in the books of the
company on the specified date would receive the offer, there should be no bar on a person holding unregistered
shares from participating in the open offer.
The Committee also observed that the present sixty day period for fixation of record date is too long and leads
to delay in completion of formalities and could be reduced, especially when the concept of ‘record date' is being
done away with.
 concept of ‘record date' may be replaced with ‘specified date', which can be any date as may be
decided by the acquirer and indicated in the public announcement subject to the condition that such
date shall not be later than the thirtieth day from the date of public announcement. (Reference : Part
II of the Report - Regulation 19)
6.11 Minimum offer price and payment of consideration other than in cash
The existing Regulations have three stipulations about pricing of an offer. First, it specifies the minimum offer
price to be paid by an acquirer to those to whom the offer is being made. This price is the higher of the weekly
highs and lows of the twenty six weeks immediately prior to the date of public announcement and the price
paid by the acquirer in the negotiated transactions. Second, this price could be paid in cash or by way of
exchange of shares. In other words, share swap is permitted with the stipulation that if the negotiated price paid
by the acquirer is in cash, the offer must also be a cash offer. Third, if the shares of the target company are
infrequently traded, the price would have to be approved by SEBI. Infrequent trading has not been defined in
the Regulations.
The Committee agreed that there should be a principle setting down the minimum level of offer price as in the
existing Regulations. Laying down this minimum level of offer price was, in the opinion of the Committee,
necessary to protect the interest of investors and not discordant with the free pricing regime.
The Committee felt that while cash offers and exchange offers are already permitted under the present
Regulations, there was need to extend the manner of payment of consideration to include other securities
including debt instruments. This need to encourage payment of consideration other than by way of cash must
be balanced with the need to protect the interest of shareholders. The Committee, therefore, agreed to modify
the earlier recommendations in the draft Report and recommend that even where payment in cash has been
made to any class of shareholders for acquisition of their shares under any agreement or through open market
purchases or otherwise, the acquirer might be allowed to make payment in cash or by way of exchange of
securities. However, in such cases, an option should be given to the investor. This would imply that if a
shareholder desires the payment of consideration in cash only, the acquirer would have to make the payment in
cash. In the case of exchange offers, the merchant banker should be responsible for ensuring that the swap
ratio fixed for the exchange is in conformity with the principles for determining the minimum offer price laid
down in the Regulations. The Committee also felt that subject to compliance with minimum offer price
requirements, in the case of exchange offer or conditional offer, the acquirer may be permitted to have dual
pricing for his offer i.e. the cash offer can be at a price lower than that for securities exchange offer. Similarly,
the price for minimum mandatory acceptances may be lower than the price for targeted full acceptances. The
Committee was of the view that such provisions, while being fair to the investors, would also balance the need
of the acquirers. Adjustments in price would also have to be made for market quotations on cum/ex-rights or
cum/ex-bonus basis.
Additionally, the Committee recommended that the highest price paid by an acquirer for any acquisition of
shares of the target company in the last twelve months prior to the date of public announcement be also taken
as a parameter for deciding the minimum offer price. In regard to infrequently or thinly traded shares for which
quotations were not available, the Committee felt that SEBI
should not be involved in approving the offer price in infrequently traded shares and should leave it to the
acquirer and merchant bankers to determine the offer price and disclose the basis on which it is determined.
 the acquirer be permitted to pay consideration by way of cash or by exchange of securities,

(Reference : Part II of the Report - sub-regulation (1) of Regulation 20)
 The existing formula for minimum offer price be retained with the additional parameter namely the
highest price paid by the acquirer for any acquisition of shares of the target company during the
twelve months prior to the date of public announcement. (Reference : Part II of the Report sub-
regulation (2) of Regulation (20).
 Where a preferential offer is made to an acquirer during the twelve month period ending with the
date of closure of the offer , the price at which the preferential allotment has been made will also be
taken into account in determining the offer price. (Reference : Part II of the Report - sub-regulation (2)
of Regulation 20)
 The minimum offer price shall be fixed in consultation with the merchant banker in case of
infrequently traded shares, to be justified on parameters specified in the regulations. (Reference :
Part II of the Report - sub-regulation (3) of Regulation 20)
 Infrequent trading be defined. (Reference : Part II of the Report -sub-regulation (3) of Regulation (20)
 In case of acquisitions made by the acquirer during the offer period in any manner either from the
market or from any particular investor(s), the highest price paid for such acquisition be paid to the
shareholders under the public offer, unless it is less than the minimum offer price. (Reference : Part II
of the Report - sub-regulation (4) of Regulation 20)
6.12 Minimum Offer and Minimum Holding after the Offer

In the existing Regulations, there are provisions which require that if a person were to cross the threshold of
10%, he must make a public offer to acquire a minimum of 20% of the share capital of the company, and
consequent upon such offer, the public share holding must not fall below 20%. In addition, if a person holding
more than 10% shares in a company, and who has not made any public offer before, were to acquire any further
shares, the public offer will have to be made to the extent of the difference between his present holding and
30%.
The above provisions raised some issues. First, in companies in which public holding was less than 20%, or
might fall below that level to comply with the minimum public offer requirement, it was not possible to comply
with second requirement of maintaining a minimum level of post offer public holding. There are likely to be
more such cases in the future. The two provisions could thus conflict with each other. Further, a harmonious
construction of all the three provisions implied that if a person was holding more than 30%, no public offer was
required to be made by him, for further acquisition of shares in the company, even though he has not made any
public offer earlier to reach his present holding. Thirdly, it was not clear from the three provisions whether full
offer for a company could be made, i.e. a bid for 100% shares of the company could be made.
The Committee considered various points such as - revision of the percentage of public offer; mandatory
requirement of making a full offer as prevails in some countries instead of a minimum offer of only 20%;
increasing the minimum post offer public holding requirement to 25% level so as to be harmonious with the
condition for initial listing; whether, an acquirer be forced to buy out the entire holding if, by virtue of public
offer, the public shareholding does indeed fall below 20%; and whether he should be required to make an offer
for sale to the public within a specified timeframe, so as to bring the public shareholding level upto a minimum
level of 25%.
Some of the comments received by the Committee have argued strongly against partial offers, as they do not
effectively protect the interest of the shareholders and are not in consonance with established international
practice. The UK City code was often cited in which 100% public offer was mandatory. While taking note of the
suggestions and the provisions of regulations in some other countries, the Committee felt that it was necessary
to be alive to the ground realities in our country. In all developed markets, public offers are financed very often
by banks. Financing of takeovers is not a critical issue in developed markets because there multiple sources of
finance are available to an acquirer. In India, however, this is a critical issue as bank finance to fund securities
business, let alone takeovers, is now hard to come by and there is no other organised source of funding for such
operations. Under these conditions, to prescribe a requirement of a full offer would not only be too onerous and
virtually stop takeover activities or make it possible only for a handful of cash rich Indian companies or foreign
companies with unlimited resources to takeover other companies and consequently there would be no level
playing ground between Indian companies and foreign companies who would always be at an advantage if the
requirement of a full offer is introduced.. The Committee was, therefore, of the opinion that there is merit in
prescribing a minimum level of offer, as it would ensure a minimum level of participation by the shareholders
consistent with the existing economic ground reality. Besides, prescribing a minimum would not debar an
acquirer from making an offer for higher percentage of shares.
The Committee also considered the suggestions received from certain quarters that persons presently in control
of the Company should be permitted to make an open offer for such percentage of shares as may be decided by
them for consolidation of their holding either suo moto or in defence of a hostile bid. In other words, the
minimum public offer requirement of 20% should not be made applicable to consolidation of holdings through
public offer by existing management. The Committee, while taking the view that there is merit in the argument,
agreed that the minimum offer requirement, even in such cases, cannot be totally done away with but could be
lowered to 10%.
As regards minimum public holding after the public offer, the Committee recognised that it would be desirable
to stipulate a minimum percentage of public holding at all times, if a company were to retain the character of a
listed public company, but such a stipulation should be a part of the listing requirement, rather than of takeover
regulations.
In the case of substantial acquisition of shares and takeovers, the Committee’s concerns were as follows :
 The takeover should not lead to a situation of minority oppression and therefore, the Regulations must
have a provision requiring the acquirer to buy out the remaining shares if the public shareholding were to
fall below 10% consequent upon a public offer;
 Impossibility of performance on the basis that the public holding left would be low cannot be a ground
for not making mandatory minimum offer to the shareholders, in a takeover situation.
The Committee also observed that with respect to the paid up capital on the basis of which the specified percentages are to
be worked out, the existing regulations do not take into account conversion of securities into shares. This raises doubts
whether conversions due after the date of public announcement should also be reckoned. The Committee felt that paid up
equity capital as would emerge at the closure of offer should be reckoned for the purpose.
 The minimum offer as stipulated in the present regulations may continue but with a proviso
allowing minimum offer of only 10% for consolidation of holdings by persons presently in control of
the company. (Reference : Part II of the Report- sub-regulation (1) of Regulation 21).
 An offer may be made for 100% of the shares of the target company (Reference : Part II of the
Report - sub-regulation (2) of Regulation 21).
 The acquirer may be given an option to buy out the remaining shares if the public shareholding
were to fall below 10% consequent upon a public offer which would have the effect of deemed
delisting; or
 Alternatively, the acquirer may undertake to bring the public shareholding to a level as would
satisfy the listing requirements through an offer for sale, with suitable disclosure in the offer
document. (Reference : Part II of the Report- sub-regulation (2) of Regulation 21).
6.13 General Obligations of the Acquirers

(Reference: Part II of the Report- Regulation 22)
The existing Regulations do not clearly specify obligations on the part of the acquirer, the board of directors of
the target company and the merchant banker. The Committee was of the view that these obligations should be
specified clearly in the Regulations.
6.131 Participation in the open offer by outgoing management
The Committee noted that questions were raised whether the persons who had entered into MOU for selling
part of their equity may participate in the open offer for offloading their remaining holdings (not forming part of
the negotiated sale).
 persons other than parties to the agreement, in the case of negotiated takeovers, may participate
in the open offer. (Reference : Part II of the Report - sub-regulation (3) of Regulation 22)
6.132 Offer to GDR / ADR holders and holders of convertibles or warrants

In response to the comments received on the draft report , the Committee agreed that the rights of holders of
Global Depository Receipt/ American Depository Receipt and other convertibles need to be clarified in the
Regulations.
 the letter of offer should be sent to the custodians of GDR / ADR holders;
 the letter of offer should also be sent to the holders of warrants or convertibles issued pursuant to a domestic
issue, where the period for exercise of option or conversion falls within the offer period. (Reference : Part II of
the Report - Explanation to sub-regulation (3) of Regulation 22)
6.133 Offer to be completed within specified time

The Committee observed that there are certain inadequacies in the existing regulations, which could be taken
advantage of to delay or prolong the open offer. For example, the Regulations do not specify the date when the
offer has to open for acceptance. Similarly, the outer time limit for which the offer can be kept open is left to the
discretion of the acquirer.
The Committee also felt that there might be genuine reasons for delay in receipt of some of the statutory
approvals by the acquirer. SEBI could, under these circumstances, after examining the bonafides, extend the
time period for completion of the offer, provided the acquirer agrees to pay interest to the shareholders for the
delayed period. If there is willful default on the part of the acquirer in obtaining statutory approvals, the amount
lying in the escrow account shall be liable to be forfeited.
 the time limit for each activity should be spelt out, as an obligation of the acquirer, so that the
takeover process is completed promptly. These are -
 Filing of offer document with SEBI within fourteen days of the date of public announcement
 Mailing of letter of offer so as to reach the shareholders, within forty five days of the date of public
announcement (Reference : Part II of the Report - sub-regulation (3) of Regulation 22)
 Offer to open within sixty days of the date of public announcement (Reference : Part II of the Report
- sub-regulation (4) of Regulation 22)
 Offer to close within a maximum of 105 days of the date of public announcement (Reference : Part
II of the Report - sub-regulation (5) of Regulation 22)
 Consideration to be mailed within thirty days of the date of closure (Reference : Part II of the Report
- sub-regulation (12) of Regulation 22 )
 SEBI may permit extension of time limit under certain circumstances, subject to acquirer agreeing
to pay interest for delayed period ((Reference : Part II of the Report - sub-regulation (12) of Regulation
22 )
6.134 Acquisitions during offer period

The wording of the existing provisions of the Regulations would lend to an interpretation that further
acquisitions outside of public offer, from the market or otherwise, may be permitted, once the public
announcement of offer has been made. The Committee recalled that this point had come up before SEBI in
some of the cases dealt with by SEBI. The Committee noted that the views of the market participants on the
issue varied from ‘yes but with prior approval of the Board and best price to all shareholders who have tendered
shares in the public offer', to a complete ‘no'.
The Committee observed that allowing purchases by the acquirer during the offer period is likely to have a
positive impact on the price which would be in the interest of investors, besides allowing the acquirer to defend
himself in competitive offers. So long as the acquirer is required to pay to the shareholders of the target
company the highest price paid by him for his acquisitions during the offer period, there should be no objection
to allowing such acquisitions. In case there is an attempt to create a false market, SEBI can always check
through its other Regulations.
 except where an offer is made conditional as to minimum level of acceptances, the acquirer may
be allowed to make acquisitions during offer period subject to the condition that highest price paid
for such acquisition be paid to the shareholders under the public offer, unless it is less than the
minimum offer price (Reference : Part II of the Report - sub regulation (4) of Regulation 20 and sub-
regulations (8) and (17) of Regulation 22).
6.135 Escrow Account

The Committee noted that the extant Regulations do not have any stringent monetary penalties which could
discipline delinquent acquirers to fulfill their obligations on time. The Committee felt that the prospect of
monetary loss in the event of non fulfillment of obligation is likely to spur him into timely completion of all
activities connected with the offer. It would also act as a check against frivolous offers. The Committee was of
the opinion that requiring cash deposit in an escrow account before the public announcement and forfeiture
thereof if the acquirer fails to discharge his obligations under the offer may be a step forward in the interest of
investors. While ideally such escrow should be for full value of the offer, the Committee noted that such a stiff
stipulation would act as a disincentive for takeover activities. Moreover, the Committee observed that for
financing the takeover, the Indian bidder has to essentially rely on his own resources, as line of credit from
banks or other reliable financial sources would not be easily forthcoming for such purposes. The Committee
therefore felt that it would be desirable to allow the acquirer to provide the escrow in a form other than cash at
the option of the acquirer.
In its draft Report, the Committee had proposed a uniform deposit of 10% of the value of the public offer
towards the escrow account. Based on the comments received and upon further deliberations, the Committee
veered round to the view that while escrow account was certainly desirable to prevent frivolous offers and to
test the seriousness of the acquirer, at the same time prescribing an uniform rate for all takeovers may not be
desirable and might militate against takeover activity itself. For example, if the target is a large company, the
takeover consideration will also be high, and 10% of the offer would also be proportionately higher. This will not
be so for takeover of smaller companies in which case, 10% may be a very small amount for the acquirer. The
Committee, therefore, decided to have a graded escrow account for offers of value equal to or less than Rs.100
crore. and more than Rs.100 crore. The Committee also felt that in case of forfeiture of the escrow account, the
amount should be equally distributed between the shareholders of the target company, the target company and
investor protection fund or any other similar fund for investor education, research, grievance redressal and
similar such purposes as may be specified by the Board from time to time.
 an escrow deposit as under shall be made for the value of the public offer
 For consideration payable under the public offer upto and including Rs.100 crore - 25%; and for
consideration exceeding Rs.100 crore - 25% upto Rs.100 crore and 10% thereafter.
 amount to be adjusted whenever there is a revision in offer price;
 the amount will be used for payment of consideration to shareholders or refunded upon timely
fulfillment of the obligations and forfeited, if not.
 to ensure that this escrow account which is in the interest of investors does not become too
onerous a burden on the acquirer especially where the acquisition could involve large sums, the
acquirer should also be allowed the option of depositing the escrow amount otherwise than in cash
i.e. by way of bank guarantee or approved securities with appropriate margin as determined by the
merchant banker. (Reference : Part II of the Report - sub-regulation (10) of Regulation 22 and Regulation
28.)
6.136 Financial arrangements for fulfillment of obligations

The Committee noticed that often arrangements for finance required to fulfill the obligations under the offer are
not put in place while making the offer leading to delay in payment of consideration to the shareholders.
 the acquirer shall make firm arrangements for finance required and disclose full details of the
arrangements both in the public announcement and in the letter of offer. (Reference : Part II of the
Report - Regulation 16 (xiv) and sub- regulation (11) of Regulation 22)
6.137 Procedure for payment of consideration to shareholders

The Committee noted that the existing Regulations merely state that payment of consideration is to be effected
within thirty days of closure of the offer. The Committee was of the opinion that in the interest of investors, it
would be worthwhile to standardise mode of payment of consideration in the same manner as the refund
account procedure for primary issues, so that the full amount of consideration payable to the shareholders may
be deposited in a separate bank account within a period of twenty one days from the date of closure of the offer
and which should lie there for a minimum period of three years, after which unclaimed balance, if any, in such
account may be transferred to investor protection fund.
 an obligation to open a separate bank account may be cast on the acquirer and the procedure for
payment of consideration may be laid down in the Regulations (Reference : Part II of the Report - sub-
regulation (12) of Regulation 22 and Regulation 29)
6.138 Cooling Period

 if an offer made by an acquirer has been withdrawn, the acquirer should not be allowed to make a bid for the
same company within a period of 6 months from the date of the public announcement or withdrawal or closure
of the offer. (Reference : Part II of the Report - sub-regulation (14) of Regulation 22).
 In the event of non-fulfillment of obligations under Chapter III or IV of the Regulations, the acquirer shall not
make an offer for acquisition of shares of any company or a period of twelve months from the date of closure
of the offer. (Reference : Part II of the Report - sub-regulation (15) of Regulation 22).
6.14 Obligations of the target company

The Regulations, as currently worded, would enable an acquirer to acquire the shares, have them transferred in
his name and enter the management too, once the public announcement is made, especially in a negotiated
takeover. The Committee noted that once the acquirer is firmly saddled in the target company, he would have
very little incentive to complete the offer formalities. Delays in fulfillment of the obligations under the offer are
therefore very common. Besides, once the seller has sold his shares and acquirer has entered the company, it
would be difficult to roll back the transaction as a penalty for non fulfillment of his obligations by the acquirer.
Allowing a negotiated bidder to enter the management before completion of formalities can also discourage
competitive bids, because the negotiated bidder would be privy to information about the target company which
is not available to the competitive bidder and moreover the competitive bidder, if successful, would have
considerable difficulty in dislodging the negotiated bidder and during the period that he is in the saddle, the
negotiated bidder might enter into irreversible transactions. It is therefore necessary to prevent this situation by
introducing appropriate provisions in the regulations. It may be pointed out that such provisions are there even
in other international codes.
At the same time, the Committee also recognised that the management of the target company could also resort
to methods for stalling the takeover bid by not allowing transfer of shares and/ or not ceding representation on
the board of directors or control over the company, even after the acquirers have fulfilled the obligations cast
on them under the regulations. The Committee therefore desired that the regulations should have definite
provisions making it obligatory for the target company to transfer the shares and /or allow changes in the board
of directors once the acquirers have fulfilled their obligations under the Regulations.
The draft Report had proposed that the Board of Directors of the target company may if they so wish, send their
unbiased comments on any bid to their shareholders, as obtaining in developed markets. A few had opined that
this provision should be made mandatory and not at the option of the directors of the target company. The
Committee while agreeing that while agreeing that such a mandatory provision should be our ultimate goal, a
beginning is being made now by providing for a voluntary requirement., which can be reviewed later and made
mandatory if found necessary.
 till the offer formalities are completed, the target company shall be precluded from inducting any
person or persons nominated by the acquirer or belonging to his group into the board of the target
company or in management of the target company during the offer period (Reference : Part II of the
Report - sub regulation (7) of Regulation 22 and sub-regulation (3) of Regulation 23).
 the target company shall exclude any person or persons connected with the acquirer from
participating in any matter(s) relating to or arising from the offer(Reference : Part II of the Report -
sub-regulation (9) of Regulation 22 and sub-regulation (3) of Regulation 23)
 management changes can be made after closure of the offer and deposit of full amount in a special
account with the bank. (Reference : Part II of the Report - proviso to clause (a) of sub-regulation (3) of
Regulation 23).
 to begin a healthy trend as obtaining in developed markets, the board of directors of the target
company, if they so wish, may send their unbiased comments on any bid to their shareholders
keeping in view the fiduciary responsibility of the directors and for that purpose, seek the opinion of
an independent merchant banker or a committee of independent directors. The directors of the
target company shall be liable for any mis-statement or concealment of material information in the
discharge of this function. (Reference : Part II of the Report - sub-regulation (4) of Regulation 23 and
sub-regulation (6) of Regulation 45)
 the board of directors of the target company shall facilitate the acquirer in verification of
securities tendered for acceptances. (Reference : Part II of the Report - sub-regulation (5) of Regulation
23).
 once the acquirer fulfills his obligations under the regulations as certified by the merchant banker,
the target company shall -
 transfer the shares in the name of the acquirer;
 allow proportional representation on the board to the acquirer or give control over the company,
as the case may be . (Reference : Part II of the Report - sub-regulation (6) of Regulation 23)
6.15 Obligations of merchant bankers

The Committee noted that while the extant Regulations required appointment of a merchant banker, no specific
responsibilities were cast on him nor is there any provision to take action against him for non-compliance. The
Committee felt that merchant bankers have a crucial role to ensure that the takeover process is smoothly
completed with least inconvenience to shareholders. The Committee also envisaged a greater role to the
merchant bankers under the revised Regulations in matters such as fixation of offer price, acceptance of
securities in lieu of cash escrow, verification of financial resources of the acquirer, certification of completion of
formalities etc. The Committee also desired that in order to ensure that the merchant bankers exercise caution
and discretion and provide adequate margin while accepting securities as escrow, liability must be cast upon
the merchant banker to make good the shortfall in escrow amount, if, upon realisation of securities, the escrow
amount fall short of requirement.
 obligations of the merchant bankers be specifically laid down in the Regulations and penalties for
non-compliance by the merchant bankers be provided. (Reference : Part II of the Report, Regulation 24
and sub-regulation (5) of Regulation 45).
 Merchant banker shall be liable to make good the shortfall, if any, in the escrow account.
(Reference : Part II of the Report, sub-regulation (7) of Regulation 28).
6.16 Competitive bid

The Committee noted that the position of the existing Regulations on the competitive bids was not very clear.
First, there was the question of definition of a competitive bid. Second was the position of the first bid if the
acquirer did not want to compete in the offer.
The Committee believed that the word competition is widely and commonly understood; ordinarily, any bid for
the shares of the same target company and addressed to the same body of shareholders would be construed as
a competitive bid; and merely because there is variation in the number of shares to be acquired or the price is
different, the bid cannot lose its competitive nature. A precise definition of what constitutes a competitive bid
may not, therefore, be necessary and the import of what constitutes a competitive bid can be brought forth in
the substantive part of the regulations itself. While making the recommendations, the Committee took into
account the recommendations of the market participants that the time limit of 14 days is too short to evaluate
the target and make a competitive bid and there should be provision for upping the offers by bidder(s).
The draft report envisaged that all competing bids shall close on the date of closure of the first offer. However,
many had commented that such a requirement would squeeze the time available to the subsequent
competitive bidder(s), as also to the shareholders to evaluate and participate in the competing bids. There was,
however, unanimity of opinion that all competitive offers should close on the same date to facilitate exercise of
option by the shareholders. The Committee therefore decided that in case there are more than one subsisting
offer, the date of closure of the earlier offer(s) may stand extended to the date of closure of the last subsisting
offer. This provision, while ensuring that all offers close on the same date, also allow sufficient time to all the
offerors as well as the shareholders as envisaged in the Regulations.
 A competitive bid can be for some or all of the shares of the target company the outer time limit
within which a competitive can be made may be increased to 21 days . (Reference : Part II of the
 No bid for the target company can be made during the offer period, after twenty one days from the
date of public announcement of the first offer. (Reference : Part II of the Regulation - sub-regulation (2)
of Regulation 25)
 Subject to minimum offer requirement, any competitive offer by an acquirer shall be for such
number of shares which, when taken together with shares held by him shall be at least equal to the
number of shares for which the first public announcement has been made.(Reference : Part II of the
 Consequent upon a competing bid or bid(s), the acquirer(s) under the earlier offer should have the
freedom either to revise their terms of offer or withdraw from the offer with the prior approval of
the Board, within fourteen days of the announcement of the competing bid and if no such
announcement is made, the offer on original terms shall subsist and be binding the acquirer.
 The competing bidders shall have the freedom to revise their offer price upwards anytime upto
seven working days prior to the date of closure of the offer. (Reference : Part II of the Report - sub-
regulation (6) of Regulation 25)
 If more than one bid subsist at the end of thirty five days from the date of public announcement of
the first offer, it would be the shareholders' prerogative to choose one over another and to facilitate
shareholders exercise of option in such an event, the competing offers shall close on the same date
(Reference- Part II of the Report : sub-regulation (7) of Regulation 25)
6.17 Revision of offer
The Committee noted that the Regulations do not specify the circumstances and the time limit within which a
revised offer can be made; nor do the Regulations specify whether revision of all the terms of offer, upward or
downward, is permissible. The regulations also require approval of SEBI for revision in the terms of offer.
But it might be plausible that even in the absence of a competing bid, the acquirer may like to or may have
genuine reason to revise his offer, if he finds that acceptances to the offer on original terms are poor. The
Committee, therefore, desired that flexibility should be built into the Regulations to allow an acquirer to revise
his price, if he so desires any time before the closure of the offer period. The Committee, however,
acknowledged that in the interests of the investors, such revision should only be in terms of number of shares to
be acquired and the price offered and that too only upwards.
 upward revision in price and number of shares sought to be acquired may be permitted,
irrespective of whether or not there is a competitive bid, upto seven working days prior to the date
of closure of the offer, subject to public announcement in respect of such changes and consequent
changes in the escrow. (Reference : Part II of the Report - Regulation 26)
6.18 Withdrawal of Offer

 the circumstances under which withdrawal of offer can be made could be clearly spelt out.
(Reference : Part II of the Report - Regulation 27).
7 Bail out Takeovers

The Committee went into the rationale for the existing provisions for bail out takeovers. It appreciated the
context in which these provisions were made i.e. to help financially weak companies which do not fall under the
purview of BIFR. The financially weak companies were defined in a manner as to distinguish them from the
companies which can be classified as sick under the SICA. In these financially weak companies, a large amount
of funds of public financial institutions and banks and also of investors are locked up. There is a need to
encourage the turn around of these companies - a process which is often undertaken at the insistence of the
financial institutions and in which essentially a new promoter steps in place of the earlier promoter and also
infuses cash into the company. There is, therefore, a need to have simplified procedures for such bail out
takeovers and make life simpler for the new incumbent without removing the obligations for making a public
offer. The public offer for bail out takeovers differs from the public offer requirement in Chapter III only in that
there is no minimum offer price and minimum amount for public offer.
The Committee recommends
 retention of the existing provisions with marginal changes for enhanced clarity and operational
simplicity. Additionally, competitive bid would not be allowed for bail out takeovers as the selection
of the incumbent in the management has been made through a process of competitive bidding.
(Reference : Part II of the Report -Chapter IV).
8Penalties for non-compliance

The Committee was of the opinion that stringent penalties which are meaningful and which could be speedily
imposed, would alone be effective deterrents against the acquirer and ensure that these Regulations are able to
serve the desired objectives. The Committee noted that the present Regulations do provide for certain
penalties, such as giving directions to the acquirer not to deal in the securities, sell back the shares acquired in
violation of the Regulations. Besides, SEBI also has the power under the Act to adjudicate for levying of
monetary penalties or criminally prosecute the acquirers.
The Committee recognised that being a subordinate legislation, the penalties imposed cannot go beyond those
provided by the parent legislation.
The Committee therefore recommends that SEBI Act be amended to
 expand the scope of adjudication and levy of monetary penalties;
 increase the amount of monetary penalties to make the penalties meaningful;
 provide for forfeiture and auction of shares acquired in violation of Regulations;
 provide for award of interest, cost and damages, if any, to the aggrieved party(ies) in case of violation of any
of the provisions of these Regulations
 render null and void acquisition of shares made in violations of the Companies Act, 1956, regulation 3, 10, 11
and 12 of the Regulations or of any conditions imposed by SEBI while granting exemption under Regulation 4.
 strengthen the criminal sanctions for violations of any of the regulations.
Additionally the Committee also recommends that provisions should be made in Company Law for personal
disqualification of directors of the acquirer who violates the provisions of the Regulations.
The above penalties would be in addition to the penalties already existing in the SEBI Act and
Regulations.
The Committee thanks the Secretariat and the officers of SEBI who helped the Committee in its deliberations
and in the preparation of the Report. The Committee records its deep appreciation of the valuable inputs and
insights provided by Smt. Usha Narayanan, Division Chief, IIMARP Department of SEBI and the assistance
provided by her in the preparation of the Report. We would particularly like to place on record the utter sincerity
and dedication and the unremitting enthusiasm and zeal with which the staff of SEBI and particularly Shri Pratip
Kar, Kum Dharmishta Raval and Smt. Usha Narayanan placed themselves at the disposal of the Committee and
worked even on Saturdays and Sundays and it would be no exaggeration to state that had it not been for the
very considerable input of a high order provided by them, both in the course of the discussion and in the
preparation of the Report, it would not have been possible for the Committee to produce the Report within the
period of a few months, balancing diverse considerations. We would be doing injustice to Smt. Usha Narayanan
if we do not mention in particular the invaluable role played by her. We found in her exemplary sense of
dedication and loyalty and great concern for the interest of the investors and there were occasions when she
resolutely stood her ground where the interest of the investors was involved.
The Committee thanks the large number of individuals and institutions, including the financial journalists who
readily responded to the Committee’s request for presentation of their views and comments and also for giving
in writing their views on specific issues. The Committee thanks the media in particular, the financial and
economic newspapers and magazines for widely publicizing the deliberations, the draft report and for writing
articles and editorials, publishing letters from the readers, thus generating larger public debate and interest in
the subject.
The Committee also wishes to express their grateful thanks to Shri D.R. Mehta, Chairman, SEBI for constituting
the Committee and giving the members full freedom in drafting the Report and the Regulations.
We would end the Report by pointing out that no Rule, no Regulation, indeed no law, which deals with
dynamically evolving economic situations and circumstances and seeks to resolve constantly varying economic
interests and problems in a fast growing economy, can possibly hope to have a permanent - not even a long
ending life. With new ideas and new experiences, the law must move forward. It cannot be allowed to stagnate,
for stagnation is death. Law undoubtedly must have its roots in the past, but it must look out into the future.
The World, at any rate the Indian economy, is in a state of flux and law and in particular, Regulations of the kind
the Committee has framed, have to keep pace with the changing social and economic matrix and the emerging
global scenario, for otherwise they will tend to strangulate the growth of the country. It is with a sense of
humility born out of this conviction that the Committee has framed the Regulations which form Part II of this
Report.
MUMBAI
January 18, 1997

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JUSTICE P.N.BHAGWATI COMMITTEE REPORT ON TAKEOVERS

 introducing the requirement of acquiring a minimum of 20% from the shareholders;

 stipulating a minimum price at which an offer should be made;

Sh. Adi Godrej, representing Confederation of Indian Industry (CII)

Prof. M. D. Limaye, representing Lokmanya Seva Sangh

2.22 Definition of ‘Persons acting in concert'

2.25 Definition of ‘Promoter’

2.26 Definition of ‘Public Shareholding’

2.27 Definition of ‘Shares’

2.29 Definition of the remaining terms

3 Applicability of the Regulations

3.31 Rights Issues

3.33 Market Makers

3.34 Indirect acquisition

3.35 Chain principle

The Committee recommends that

3.36 Residual Cases and Takeover Panel

3.37 Reporting of Exemptions to Stock Exchange and SEBI

4 Power to remove difficulties

5Disclosure of shareholding and control in a listed company

6.12 Threshold Limit for Mandatory Public Offer

6.2 Consolidation of holdings (Reference: Part II of the Report -Regulation 11)

6.4 Relevance of Clause 40 A & B of the Listing Agreement

6.5 Appointment of Merchant Banker

6.6 Timing of public announcement of offer

6.7 Public announcement of offer

6.8 Contents of public announcement of offer

6.9 Approval of Board for Letter of Offer

6.10 Specified Date

 the acquirer be permitted to pay consideration by way of cash or by exchange of securities,

6.12 Minimum Offer and Minimum Holding after the Offer

6.13 General Obligations of the Acquirers

6.132 Offer to GDR / ADR holders and holders of convertibles or warrants

6.133 Offer to be completed within specified time

6.134 Acquisitions during offer period

6.135 Escrow Account

 amount to be adjusted whenever there is a revision in offer price;

6.136 Financial arrangements for fulfillment of obligations

6.137 Procedure for payment of consideration to shareholders

6.138 Cooling Period

6.14 Obligations of the target company

 transfer the shares in the name of the acquirer;

6.15 Obligations of merchant bankers

6.16 Competitive bid

6.18 Withdrawal of Offer

7 Bail out Takeovers

8Penalties for non-compliance

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