Course Code: MS 222

Course: Mergers, Acquisitions and Corporate Restructuring

Unit 2

Regulation by SEBI and Takeover

Code

Dr. Anil Kumar Goyal

 Outline
• Regulation By SEBI
• Takeover Code

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 The 21st century is, for a reason, called the “Decade
of the Dragon and the Elephant”.

• Following the economic reforms in India in the post – 1991 period,

there is a discernible trends among promoters and established
corporate groups towards consolidation of market share and
diversification into new areas through acquisition / takeover of
companies but in a more pronounced manner through mergers /
amalgamations. Although the economic considerations in terms of
motive and effect of these are similar, the legal procedures involved
are different. The merger and amalgamation of corporate
constitutes a subject matter of the Companies Act, the courts and
law and there are well-laid down procedures for valuation of shares
and rights of investors.

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• The acquisition/ takeover bids fall under the purview of SEBI. The
terms mergers and amalgamations on the one hand and
acquisitions and takeovers on the other are treated here
synonymously/ interchangeably. Section one of the chapter covers
the framework of mergers/ amalgamations including financial
evaluation. The regulatory framework governing acquisition/
takeovers is described in Section two. The main points are
summarized in Section three

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 Mergers/Amalgamations
• The terms merger and amalgamation are used interchangeably as a
form of business organization to seek external growth of business.
A merger is a combination of two or more firms in which only one
firm would survive and the other would cease to exist, its assets /
liabilities being taken over by the surviving firm. An amalgamation is
an arrangement in which the assets / liabilities being taken over by
the surviving firm. An amalgamation is an arrangement in which the
assets / liabilities of two or more firms become vested in another
firm.

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• As a legal process, it involves joining of two or more firms to form a
new entity or absorption of one/ more firms with another. The
outcome of this arrangement is that the amalgamating firm is
dissolved / wound-up and loses its indenting and its shareholders
become shareholders of the amalgamated firm.

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• The Income Tax Act, 1961, stipulates two pre-requisites for an
amalgamation through which the amalgamated company seeks to
avail the benefits of set-off / carry forward of losses and
unabsorbed depreciation of the amalgamating company against its
future profits under Section 72-A, namely,
• i. all the property and liabilities of the amalgamated company
/ companies immediately before amalgamation should vest
with / become the liabilities of the amalgamated company
and

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• ii. the shareholders other than the amalgamated company / its
subsidiary(ies) holding at least 90 percent value of shares / voting
power in the amalgamating company should become shareholders
of the amalgamated company by virtue of amalgamation. The
scheme of merger, income tax implications of amalgamation and
financial evaluation are discussed in this section.

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Regulation by SEBI
• Regulation by SEBI
Securities Exchange Board of India (SEBI) has provided guidelines for takeover
only. The prominent features of the guidelines are:

 When an individual or a company acquires five per cent or more of the

voting capital of a

 company then Target Company and the concern stock exchange shall be
notified immediately.

 There is a limit in acquiring shares of another company without making any

offer to other shareholders that is ten per cent of the voting capital.

 If the holding of the acquiring company exceeds ten per cent, a public offer
to purchase a minimum of twenty per cent of the shares shall be made to
the remaining shareholders by a public announcement.
 If offer is made to the shareholders the minimum offer price shall not be
less than the average of the weekly high and low of the closing prices
during the last six months before the date of announcement of such offer.
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(ii)The offer should disclose the detailed terms of the offer, identity of the
offerer, details of the offerer’s existing holdings in the offer company etc. and
this information should be made available to all the shareholders at the same
time and in the same mode.

The main objective of the Companies Act and the SEBI guidelines for takeovers
are to ensure full disclosure about the mergers and takeovers and to protect the
interests of the shareholder especially the small shareholders.

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•

Issues related with SEBI Regulation

•Sections 108A to 108I of CA56, which place restrictions on the transfer and acquisition of
shares where the shareholdings of the bidder or transformer would either:
Result in a dominant undertaking; or
•In case of a pre-existing dominant undertaking, result in an increase in the production,
supply, distribution or control of goods and services by it.

•Section 390 to 394 of CA56, which govern the schemes of arrangement between companies
and their respective shareholders and creditors, under the supervision of the relevant High
Court.

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 •The Takeover Code, which sets out procedures governing any attempted takeover
of a company that has its shares listed on one or more recognized stock
exchange(s) in India. Regulation 10, 11, and 12 of the Takeover Code, which
•deal with public offers, do not apply to a scheme framed under the Sick Industrial
Companies (Special Provisions) Act, 1985 (“ SICA ”), or to an arrangement or
reconstruction under any Indian or foreign law (Regulation 3 (1) (j), Takeover
Code).

•The Takeover Code, however, does not apply to the following acquisitions:
1.Allotment of shares made in public issue or in right issue;
2.Allotment of shares to underwriters in pursuance of underwriting agreement;
3.Inter-se transfer between group, relative, foreign collaborators and Indian
promoters who are shareholders, acquirer and persons acting in concert with him;

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SEBi Takeover Codes
 Takeover – An Analysis

Globalisation opened the doors of Indian Economy for the overseas Investors.
Mergers and Takeovers were a good medium to seize opportunities made
available by globalization.

1) 40A and 40B – contractual agreement/listing agreement

2) November 1994 – SEBI notified Substantial acquisition of shares and
takeovers
3)P.N Bhagwati Committee – 1995
4) 1997 – SEBI notified Substantial acquisition of shares and takeovers – “
SEBI Takeover Regulations”

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In its report, the committee stated the necessity of a Takeover
Code on the following grounds:
• Retail investors interest needs to be protected,
• Exit opportunity shall be given to the investors if they do not
want to continue with the new management.,
• Full and truthful disclosure shall be made of all material
information relating to the open offer,
• The acquirer shall ensure the sufficiency of financial
resources for the payment of acquisition price to the investors

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 Concept of takeovers
Takeover implies acquisition of control of a company which is
already registered through the purchase or exchange of
shares. Takeover takes place usually by acquisition or
purchase from the shareholders of a company their shares at
a specified price to the extent of at least controlling interest in
order to gain control of the company .

Friendly Bail-out Hostile Takeover

Takeover Takeover

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 Procedure for Takeover
Takeover takes place through :
• Acquiring unlisted companies under section 395 of the
Companies Act,
• Acquiring substantial shares or voting rights of listed target
company as the process set out in the SEBI (Substantial
Acquisition of Shares and Takeovers) Regulations, 1997, as
amended in 2002, 2004 and 2006 ,2011& 2013.

The term ‘Takeover’ has not been defined under SEBI (Substantial
Acquisition of Shares and Takeovers) Regulations, 1997 , the term
basically envisages the concept of an acquirer taking over the control or
management of the target company

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 Let’s understand the actual
meaning of terms
Acquirer- An Acquirer means any individual/company/any other legal entity
which intends to acquire substantial quantity of shares or voting rights of
target company or acquires or agrees to acquire control over the target
company
Target Company - A Target company is a listed company i.e. whose shares
are listed on any stock exchange and whose shares or voting rights are
acquired/ being acquired or whose control is taken over/being taken over
by an acquirer
Control - Control includes the right to appoint directly or indirectly or by
virtue of agreements or in any other manner majority of directors on the
Board of the target company or to control management or policy
decisions affecting the target company
Promoter - any person who named as promoter in an offer document or
shareholding pattern filed by the target company with the stock
exchanges.
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 The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997
has defined substantial quantity of shares or voting rights distinctly for two
different purposes:

A) Threshold of disclosure to be made by acquirer(s):

1) 5% and more shares or voting rights: A person acquires shares or
voting rights (which when taken together with his existing holding)
would entitle him to more than 5% or 10%, 14%, 54% or 74% shares or
voting rights of target company, is required to disclose at every stage
the aggregate of his shareholding to the target company and the Stock
Exchanges within 2 days of acquisition
2) Any person who holds more than 15% but less than 55% shares or
voting rights of target company, and who purchases or sells shares
aggregating to 2% or more shall within 2 days disclose such purchase/
sale along with the aggregate of his shareholding to the target
company and the Stock Exchanges.
3) Any person who holds more than 15% shares or voting rights of target
company and a promoter and person having control over the target company,
shall within 21 days from the financial year ending March 31 disclose every
year his aggregate shareholding to the target company
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 B)Trigger point for making Public Announcement

Public Announcement

A Public announcement is generally an

announcement given in the newspapers by
the acquirer, primarily to disclose his intention
to acquire a minimum of 20% of the shares or
voting capital of the target company from the
existing shareholders by means of an open
offer

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 B) Trigger point for making an open offer by an acquirer

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 B) Trigger point for making an open offer by an acquirer
1) 15% shares or voting rights:
An acquirer who intends to acquire shares which along with his existing shareholding
would entitle him to exercise 15% or more voting rights, can acquire such
additional shares only after making a public announcement (PA) to acquire at least
additional 20% of the voting capital of target company from the shareholders
through an open offer.

2) Creeping acquisition limit:

An acquirer who holds 15% or more but less than 55% of shares or voting rights of a
target company, can acquire such additional shares as would entitle him to exercise
more than 5% of the voting rights in any financial year ending March 31 only after
making a public announcement to acquire at least additional 20% shares of target
company from the shareholders through an open offer . However in the case
where only 5% or less shares or voting rights could be acquired in aggregate ,
whether the person acquired it individually or together with persons acting in
concert Public announcement is not required to be made. This is called creeping
acquisition .
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3) Consolidation of Holding
An acquirer who holds 55% or more but less than 75% shares or voting rights
of a target company, can acquire further shares or voting rights only after
making a public announcement to acquire at least additional 20% shares
of target company from the shareholders through an open offer.

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 Takeover Code - 2011
Achuthan committee was set up in 2009 to review the Takeover
code, 1997 and give suggestions. After taking into account the
suggestions of the Achuthan Committee and feedback from the
interest groups and general public on such suggestions, the SEBI
finally notified the SEBI (Substantial Acquisition of Shares and
Takeovers) Regulations, 2011 ("Takeover Code, 2011") on 23
September 2011. The Takeover Code, 2011 got effective from 22
October 2011.

The Takeover Code, 2011 adheres to the framework and principles

of the Takeover Code, 1997 but the changes that it brings about
are significant.

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 Thank You

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