FACULTY GUIDE.

JOY MUKHERJEE

PROF. BHARAT SHAH MIB-35

Acquisition under SEBI Takeover Code 1997

Introduction

This Project gives a brief explanation of the concept of Takeover and a summary of the
procedure for takeovers as enshrined in the Securities Exchange Board of India (Substantial
Acquisition of Shares and Takeovers) Regulations, 1997 (“Regulations”) as amended in
2002.

The twentieth century began with the process of transformation of entire business scenario. The
economy of India which was hitherto controlled and regulated by the Government was set free to
seize new opportunities available in the world. With the announcement of the policy of
globalization, the doors of Indian economy were opened for the overseas investors. But to
compete at the world platform, the scale of business was needed to be increased. In this changed
scenario, mergers and acquisitions were the best option available for the corporates considering
the time factor involved in capturing the opportunities made available by the globalization.

This new weapon in the armory of corporates though proved to be beneficial but soon the
predators with huge disposable wealth started exploiting this opportunity to the prejudice of
retail investor. This created a need for some regulation to protect the interest of investors so that
the process of takeover and mergers is used to develop the securities market and not to sabotage
it.

The Development of Takeover code

In the year 1992, with the enactment of SEBI Act, SEBI was established as regulatory body to
promote the development of securities market and protect the interest of investors in securities
market. Thus SEBI appointed a committee headed by P.N. Bhagwati to study the effect of
takeovers and mergers on securities market and suggest the provisions to regulate takeovers and
mergers.

In its report, the committee stated the necessity of a Takeover Code on the following
grounds:
The confidence of retail investors in the capital market is a crucial factor for its development.
Therefore, their interest needs to be protected, an 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 so as to take an informed decision, the
acquirer shall ensure the sufficiency of financial resources for the payment of acquisition price to
the investors., the process of acquisition and mergers shall be completed in a time bound manner.
Disclosures shall be made of all material transactions at earliest opportunity

Meaning and Concept of takeovers

TAKEOVER- It’s Meaning

Broadly speaking Takeover refers to the acquisition of one company by another company. In the
words of M.A. Weinberg one of the pioneers in the formation of law and practice relating to
takeovers, it has been defined as

“A Transaction or a series of transactions whereby a person acquires control over the assets of a
company, either directly by becoming the owner of those assets or indirectly by obtaining control
of the management of the company. Where shares are closely held (i.e. by small number of
persons), a takeover will generally be effected by agreement with the holders of the majority of
the share capital of the company being acquired. Where the shares are held by the public
generally the takeover may be effected” :

1) By agreement between the acquirers and the controllers of the acquired company.

2) By purchase of shares on the stock exchange.

3) By means of a takeover bid.

Takeovers are quite often taken as a prelude to the mergers. Corporate generally embark on
acquisition of another company and then take steps to merge or amalgamate the acquired
company or merge or amalgamate with the acquired companies and in the process also demerge
certain undertakings. Takeover can be either friendly which is done by a mutual agreement
between two companies or it can be hostile.

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.
From legal perspective, takeover is of three types:

[i] Friendly takeover,

[ii] Bail out takeover,

[iii] Hostile takeover

[i] Friendly or Negotiated Takeover: Friendly takeover means takeover of one company by
change in its management & control through negotiations between the existing promoters and
prospective investor in a friendly manner. Thus it is also called Negotiated Takeover. This kind
of takeover is resorted to further some common objectives of both the parties. Generally, friendly
takeover takes place as per the provisions of Section 395 of the Companies Act, 1956.

[ii] Bail out Takeover - Takeover of a financially sick company by a financially rich company
as per the provisions of Sick Industrial Companies (Special Provisions) Act, 1985 to bail out the
former from losses.

[iii] Hostile takeover- Hostile takeover is a takeover where one company unilaterally pursues
the acquisition of shares of another company without being into the knowledge of that other
company. The most dominant purpose which has forced most of the companies to resort to this
kind of takeover is increase in market share. The hostile takeover takes place as per the
provisions of SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997

In the context of business, takeover is of three types

[i] Horizontal Takeover,

[ii] Vertical takeover,

[iii] Conglomerate takeover.

[i] Horizontal Takeover- Takeover of one company by another company in the same industry.
The main purpose behind this kind of takeover is achieving the economies of scale or increasing
the market share. E.g. takeover of Hutch by Vodafone.

[ii] Vertical Takeover - Takeover by one company with its suppliers or customers. The former
is known as backward integration and latter is known as Forward integration. E.g. takeover of
Sona Steerings Ltd. By Maruti Udyog Ltd. is backward takeover. The main purpose behind this
kind of takeover is reduction in costs.
[iii] Conglomerate takeover- Takeover of one company by another company operating in
totally different industries. The main purpose of this kind of takeover is diversification.

Procedure for Takeover

The takeover could take place through different methods. A company may acquire the shares of a
unlisted company through what is called acquisition under Section 395 of the Companies Act,
1956. However where the shares of the company are widely held by the general public, it
involves the process as set out in the SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 1997, as amended in 2002, 2004 and 2006 . In this paper the researcher shall limit
his analysis to listed companies.

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. When an acquirer, acquires substantial
quantity of shares or voting rights of the target company, it results in the Substantial acquisition
of Shares

For the purposes of understanding the implications arising from the aforementioned paragraph, it
is necessary for us to dwell into what is the actual meaning of [I] Acquirer, [ii] Target Company,
[iii] Control, [iv] Promoter, [v] Persons acting in concert and [vi] substantial quantity of shares
or voting rights.

[I] Acquirer- An Acquirer means (includes persons acting in concert (PAC) with him) any
individual/company/any other legal entity which intends to acquire or acquires substantial
quantity of shares or voting rights of target company or acquires or agrees to acquire control over
the target company

[ii] 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

[iii] 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. However, in case there are
two or more persons in control over the target company the cesser of any one of such persons
from such control shall not be deemed to be a change in control of management nor shall any
change in the nature and quantum of control amongst them constitute change in control of
management provided this transfer is done in terms of Reg. 3(1)(e). Also if consequent upon
change in control of the target company in accordance with regulation 3, the control acquired is
equal to or less than the control exercised by person (s) prior to such acquisition of control, such
control shall not be deemed to be a change in control

[iv] Promoter- The definition of promoter after amendment in 2006 now includes “any person
who is in control of the target company” or “named as promoter in an offer document or
shareholding pattern filed by the target company with the stock exchanges according to the
listing agreement, whichever is later.”
The clauses that formed part of the earlier definition but now stand deleted are, “any persons
who is directly or indirectly in control of the company” and “any person named as person acting
in concert with the promoter in any disclosure made in terms of the listing agreement with the
stock exchange or any other regulations or guidelines made or issued by the board under the Act.

The takeover code has also modified the definition of individual. The new definition of
individual includes:

1. Spouse, parents, sisters, brothers and children of the promoter.

2. A company in which 10% or more of the share capital is held by the promoter or his
immediate relative or a firm/HUF in which the promoter or his immediate relative is a member
holding an aggregate share capital of 10% or more.

3. Any company in which the company specified in sub-clause above holds 10% or more of the
share capital. (The earlier threshold was 26%)

1.The concept of Takeover

Although, the term ‘Takeover’ has not been defined under the said Regulations, the term
basically envisages the concept of an acquirer taking over the control or management of the
target company When an acquirer, acquires substantial quantity of shares or voting rights of the
target company, it results in the Substantial acquisition of Shares.

For the purposes of understanding the implications arising from the aforementioned paragraph,
it is necessary for us to dwell into what is the actual meaning of substantial quantity of shares or
voting rights .

2. Meaning of substantial quantity of shares or voting rights

The said Regulations have discussed this aspect of ‘substantial quantity of shares or voting
rights’ separately for two different purposes:

(I) For the purpose of disclosures to be made by acquirer(s):

(1) 5% or more shares or voting rights:

A person who, along with ‘persons acting in concert’ (“PAC”), if any, acquires shares or voting
rights (which when taken together with his existing holding) would entitle him to more than 5%
or 10% or 14% shares or voting rights of target company, is required to disclose the aggregate of
his shareholding or voting rights to the target company and the Stock Exchanges where the
shares of the target company are traded within 2 days of receipt of intimation of allotment of
shares or acquisition of shares.

2) More than 15% shares or voting rights:

An acquirer who holds more than 15% shares or voting rights of the target company, shall within
21 days from the financial year ending March 31 make yearly disclosures to the company in
respect of his holdings as on the mentioned date.
The target company is, in turn, required to pass on such information to all stock exchanges where
the shares of Target Company are listed, within 30 days from the financial year ending March 31
as well as the record date fixed for the purpose of dividend declaration.

(II) For the purpose of making an open offer by the acquirer

(1) 15% shares or voting rights:

An acquirer who intends to acquire shares which along with his existing shareholding would
entitle him to more than 15% 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 the
target company from the shareholders through an open offer.

(2) Creeping limit of 5%:

An acquirer who is having 15% or more but less than 75% of shares or voting rights of a target
company, can consolidate his holding up to 5% of the voting rights in any financial year ending
31st March. However, any additional acquisition over and above 5% can be made only after
making a public announcement. However in pursuance of Reg. 7(1A) any purchase or sale
aggregating to 2% or more of the share capital of the target company are to be disclosed to the
Target Company and the Stock Exchange where the shares of the Target company are listed
within 2 days of such purchase or sale along with the aggregate shareholding after such
acquisition /sale. An acquirer who has made a public offer and seeks to acquire further shares
under Reg. 11(1) shall not acquire such shares during the period of 6 months from the date of
closure of the public offer at a price higher than the offer price.

(3) Consolidation of holding:

An acquirer who is having 75% shares or voting rights of target company, can acquire further
shares or voting rights only after making a public announcement specifying the number of shares
to be acquired through open offer from the shareholders of a target company.

In order to appreciate the implications arising here from, it is pertinent for us to consider the
meaning of the term ‘public announcement’.

3. 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 voting capital of the
target company from the existing shareholders by means of an open offer.

However, an Acquirer may also make an offer for less than 20% of shares of Target Company in
case the acquirer is already holding 75% or more of voting rights/ shareholding in the target
company and has deposited in the escrow account in cash a sum of 50% of the consideration
payable under the public offer.

The Acquirer is required to appoint a Merchant Banker registered with SEBI before making a PA
and is also required to make the PA within four working days of the entering into an agreement
to acquire shares, which has led to the triggering of the takeover, through such Merchant Banker.
The other disclosures in this announcement would inter alia include

1. The offer price,

2. The number of shares to be acquired from the public.

3. The identity of the acquirer,

4. The purposes of acquisition,

5. The future plans of the acquirer, if any, regarding the target company,

6. The change in control over the target company, if any

7. The procedure to be followed by acquirer in accepting the shares tendered by the

shareholders and the period within which all the formalities pertaining to the offer would be
completed.

The basic objective behind the PA being made is to ensure that the shareholders of the target
company are aware of the exit opportunity available to them in case of a takeover / substantial
acquisition of shares of the target company. They may, on the basis of the disclosures contained
therein and in the letter of offer, either continue with the target company or decide to exit from it.

4. Procedure to be followed after the Public Announcement

In pursuance of the provisions of Reg. 18 of the said Regulations, the Acquirer is required to file
a draft Offer Document with SEBI within 14 days of the PA through its Merchant Banker, along
with filing fees of Rs.50, 000/- per offer Document (payable by Banker’s Cheque / Demand
Draft). Along with the draft offer document, the Merchant Banker also has to submit a due
diligence certificate as well as certain registration details.

The filing of the draft offer document is a joint responsibility of both the Acquirer as well as the
Merchant Banker.

Thereafter, the acquirer through its Merchant Banker sends the offer document as well as the
blank acceptance form within 45 days from the date of PA, to all the shareholders whose names
appear in the register of the company on a particular date.

The offer remains open for 30 days. The shareholders are required to send their Share
certificate(s) / related documents to the Registrar or Merchant Banker as specified in the PA and
offer document.

The acquirer is obligated to offer a minimum offer price as is required to be paid by him to all
those shareholders whose shares are accepted under the offer, within 30 days from the closure of
offer.
 5. Exemptions

The following transactions are however exempted from making an offer and are not required to
be reported to SEBI

• Allotment to underwriter pursuant to any underwriting agreement.

Acquisition of shares in ordinary course of business by:
- Regd. Stock brokers on behalf of clients.
- Regd. Market makers.
- Public financial institutions on their own account.
- Banks & FIs as pledges.
Acquisition of shares by way of transmission on succession or by inheritance.
Acquisition of shares by Govt. companies.
Acquisition pursuant to a scheme framed under section 18 of SICA 1985
of arrangement/ restructuring including amalgamation or merger or de - merger under any
Indian law.

Acquisition of shares in companies whose shares are not listed.

However, if by virtue of acquisition of shares of unlisted company, the acquirer acquires shares
or voting rights (over the limits specified) in the listed company, acquirer is required to make an
open offer in accordance with the Regulations.

6. Minimum Offer Price and Payments made

It is not the duty of SEBI to approve the offer price, however it ensures that all the relevant
parameters are taken in to consideration for fixing the offer price and that the justification for the
same is disclosed in the offer document. The offer price shall be the highest of.

- Negotiated price under the agreement, which triggered the open offer.

- Price paid by the acquirer or PAC with him for acquisition if any, including by way of public
rights/ preferential issue during the 26-week period prior to the date of the PA

- Average of weekly high & low of the closing prices of shares as quoted on the Stock
exchanges, where shares of Target Company are most frequently traded during 26 weeks prior to
the date of the Public Announcement

In case the shares of target company are not frequently traded, then the offer price shall be
determined by reliance on the following parameters, viz: the negotiated price under the
agreement, highest price paid by the acquirer or PAC with him for acquisition if any, including
by way of public rights/ preferential issue during the 26-week period prior to the date of the PA
and other parameters including return on net worth, book value of the shares of the target
company, earning per share, price earning multiple vis a vis the industry average.
Acquirers are required to complete the payment of consideration to shareholders who have
accepted the offer within 30 days from the date of closure of the offer. In case the delay in
payment is on account of non-receipt of statutory approvals and if the same is not due to willful
default or neglect on part of the acquirer, the acquirers would be liable to pay interest to the
shareholders for the delayed period in accordance with Regulations. Acquirer(s) are however not
to be made accountable for postal delays.

If the delay in payment of consideration is not due to the above reasons, it would be treated as a
violation of the Regulations.

7. Safeguards incorporated so as to ensure that the Shareholders get their payments

Before making the Public Announcement the acquirer has to create an escrow account having
25% of total consideration payable under the offer of size Rs. 100 crores (Additional 10% if
offer size more than 100 crores).. The Escrow could be in the form of cash deposited with a
scheduled commercial bank, bank guarantee in favor of the Merchant Banker or deposit of
acceptable securities with appropriate margin with the Merchant Banker. The Merchant Banker
is also required to confirm that firm financial arrangements are in place for fulfilling the offer
obligations. In case, the acquirer fails to make payment, Merchant Banker has a right to forfeit
the escrow account and distribute the proceeds in the following way.

1. 1/3 of amount to target company.

2. 1/3 to regional Stock Exchanges, for credit to investor protection fund etc.

3. 1/3 to be distributed on pro rata basis among the shareholders who have accepted the offer.

The Merchant Banker advised by SEBI is required to ensure that the rejected documents which
are kept in the custody of the Registrar / Merchant Banker are sent back to the shareholder
through Registered Post.

Besides forfeiture of escrow account, SEBI can take separate action against the acquirer which
may include prosecution / barring the acquirer from entering the capital market for a period etc.

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