|
July 26, 2010
Indian Takeover Regulations up for Overhaul!
Introduction
The Takeover Regulations Advisory
Committee (“TRAC”) constituted by Securities Exchange Board of India
(“SEBI”) to review the SEBI (Substantial Acquisition of Shares and
Takeovers) Regulations, 1997 (“Takeover Code”) submitted its report to
SEBI on July 19, 2010. Inspired by various decisions of Courts in India and
rulings of Securities Appellate Tribunal, international best practices and
motivated by the objective to provide equitable treatment to all the public
shareholders, TRAC has proposed a new set of regulations that seems to
balance the interests of all stakeholders. The recommendations of TRAC to
SEBI are open for suggestions till August 31, 2010.
We have provided below, in tabular
form, a comparison between some of the key provisions of the extant Takeover
Code and the recommendations of TRAC.
|
Sr. No.
|
Provisions of Extant Takeover
Code
|
Recommendations of TRAC
|
|
1.
|
Trigger of the Takeover Code
(i) 15% - Acquisition of shares or voting
rights exceeding 15% or more.
(ii) 15% to 55% - Creeping acquisition between 15% to
55% - Acquisition exceeding 5% (up to 55%) in a financial year will
trigger open offer.
(iii) 55% to 75% - Acquisition exceeding 5% (up to 55%) in the life time
of the company will trigger open offer only if such acquisition is through
open market purchases or buyback.
(iv) Acquisition of control - Irrespective
of acquisition of shares or voting rights in a company, any acquisition of
control over the target company will trigger open offer requirement.
Exemption: Acquisition of
control pursuant to a
special resolution through postal ballot passed by the shareholders in a
general meeting.
|
Trigger of the Takeover Code
(i) 25% - The threshold for triggering of the Takeover Code has been increased
from 15% to 25%
(ii) 25% to 75% - The creeping acquisition limit
of 5% in one financial year increased from 15% - 55% to 25% - 75%. Such acquisition
can be made in any manner (including through open market purchases,
negotiated deals, bulk or block deals, preferential allotment, etc)
(iii) Acquisition of control over a target company would
require the acquirer to make an open offer.
Exemption: Omitted
|
|
2.
|
Size of open offer
The open offer made by the
acquirer to the shareholders of the target company has to be for a minimum 20%
of the voting capital of the company.
|
Size of open offer
The size of open offer has been increased
from 20% to 100% of the shares of the company.
|
|
3.
|
Offer Price
(i)
For direct
acquisition
Highest of:
· highest negotiated price between
the parties;
· highest price paid by the acquirer
or persons acting in concert (“PAC”) for shares or voting rights
during 26 weeks prior to public announcement;
· average of the weekly high and low of
the closing prices of shares on the stock exchange during 26 weeks or the
average of the daily high and low of the prices quoted on the stock
exchange during the two weeks prior to date of public announcement.
(ii) For indirect acquisition
Highest price amongst the offer
prices calculated under the mechanism provided in (i)
above, using the date of public announcement of the direct target company
and the date of public announcement of the indirect target company.
|
Offer Price
(i) For direct acquisition
Volume-weighted average market
price (“VWAP”) for 60 trading days prior to the public announcement
to replace average of the weekly high and low of the closing prices of
shares for past 26 weeks or 2 weeks. Further, in addition to highest
negotiated price between parties and highest price paid by acquirer and PAC
during 26 weeks prior to public announcement, VWAP for shares acquired by
acquirer and PAC during past 52 weeks also to be considered for determining
open offer price.
(ii) For indirect
acquisition
New
price indicator introduced in the form of highest price paid by acquirer or
PAC between date of primary acquisition and date of public announcement for
indirectly acquired target company, in addition to the existing price
indicators. Further, offer price shall stand enhanced by additional 10%
p.a. for the period between date of primary acquisition and date of
detailed public statement.
|
|
4.
|
Definition of ‘control’
Control includes “the
right to appoint majority of the directors or to control the management or
policy decisions of the target company......”.
|
Definition of ‘control’
The definition of ‘control’ to include not only the right but also the ability
to appoint majority of the directors on the board of the target company.
|
|
5.
|
Deemed direct acquisition
No concept of deemed direct acquisition.
|
Deemed direct acquisition
Concept of deemed direct
acquisition introduced if the proportionate net
asset value / sales turnover / market capitalization of the indirectly
acquired target company as a percentage of the consolidated net asset value
/ sales turnover / market capitalization of the directly acquired entity
is in excess of 80%, on the basis of the most
recent audited annual financial statements.
|
|
6.
|
Voluntary open offer
An acquirer whose shareholding
in the target company (together with PAC) is between (55%) and (75%) can make
a voluntary open offer to increase shareholding up to minimum level of
public shareholding permitted by the Listing Agreement.
Size of voluntary open offer
Minimum -
No minimum limit.
Maximum - Up to the minimum level of public
shareholding permitted in the Target Company by the Listing Agreement.
|
Voluntary open offer
Specific framework proposed for
voluntary open offer. Shareholders holding 25% or
more in the target company may, without breaching minimum public shareholding
requirements under the Listing Agreement, voluntarily make an open offer.
Size of voluntary open offer
Minimum
- 10%.
Maximum - Up to the minimum level of
public shareholding permitted in the Target Company by the Listing
Agreement.
|
|
7.
|
Key Exemptions
(i) Inter se transfer of shares
amongst qualifying promoters exempt. Exemption for group companies as
defined under MRTP Act.
(ii) No explicit exemption for increase in voting rights
pursuant to buy-back of shares.
(iii) Acquisition pursuant to a scheme of arrangement or
reconstruction including amalgamation or merger or demerger under any law
or regulation, Indian or foreign, exempt.
|
Key Exemptions
(i) Inter se transfer of shares amongst qualifying
parties exempt. Exemption for group companies under the MRTP Act removed.
The exemption has now been restricted to transfers between co-subsidiaries
and their parents.
(ii) Increase in voting rights pursuant to buy-back of shares exempt
subject to certain conditions being fulfilled.
(iii)
Acquisition pursuant to a scheme of arrangement is exempt only if the
target company is a party to such scheme. If the target company is not a
party to a scheme of arrangement, any acquisition under the scheme is exempt
only if certain prescribed conditions are fulfilled.
|
|
8.
|
Delisting
·
If the
acquisition in the open offer reduces the public shareholding below the
minimum level under the Listing Agreement, the acquirer shall take necessary
steps to bring the shareholding below the prescribed threshold as per the
Listing Agreement within the prescribed time period.
·
If the
acquirer chooses to delist the target pursuant to acquisition in open offer,
it should be in accordance with provisions of SEBI (Delisting of Equity
Shares) Regulations, 2009.
|
Delisting
· An acquirer would be
required to state upfront in public announcement its intention to delist
the target company. If the shareholding of the acquirer is between 75% to
90% after the open offer, the acquirer would be required to either bring
his holding down to ensure compliance with the Listing Agreement, or
proportionately reduce both his acquisitions under the agreement that triggered
the open offer and the acquisitions under the open offer.
· No requirement to
make a separate delisting offer under Delisting Regulations if acquirer
crosses 90% delisting threshold through the open offer under the Takeover
Code.
|
|
9.
|
Competing offers
· Within 21 days of
public announcement of open offer by the acquirer, any other person can
make a competing offer for acquisition of shares from the public
shareholders of the target company.
|
Competing offers
· The period for
making competing offer changed to 15 business days from the date of
detailed public statement of open offer.
· Further, within 21
business days from expiry of the offer period, any competing acquirer would
be free to negotiate and acquire the shares tendered to the other competing
acquirer, at the same price that was offered by him to the public.
|
|
10.
|
Non-compete fees
Non-compete fees up to 25% of
the offer price permitted to be paid to the promoters of the target
company, in addition to the offer price.
|
Non-compete fees
Omitted. Promoters to be paid the same price per share
as the public shareholders.
|
|
11.
|
Open Offer Process
(i) Timing of public announcement
Public announcement to be made
within 4 working days of entering into an agreement or making a decision
for acquisition.
(ii) Timeline for
open offer: 95 calendar days
|
Open Offer Process
(i) Timing of public announcement
A summary public announcement on
the same day of agreeing to acquire shares or voting rights in, or control
over the target company.
A detailed public statement
within 5 business days from making of the summary public announcement.
(ii) Timeline for open
offer: 57 business days
|
|
12.
|
Governance Issues
· The acquirer
debarred from disposing of assets of the company other than in ordinary
course of business for a period of 2 years from the closure of open offer, if
such intention to dispose assets is not mentioned in public announcement
· The Board of the
target company may, if they desire, send their recommendations on the offer
to the shareholders.
|
Governance Issues
· The acquirer can
dispose assets inspite of not stating such
intention in public announcement if approval of shareholders of the target
company is obtained through a special resolution.
· A committee of independent
directors of the target company mandatorily required to give its reasoned
recommendations on the open offer to the shareholders.
|
|
13.
|
Obligations of the Manager
The manager is free to deal with
the shares of the target Company after 15 days from the closure of offer
period.
Regulation 25(7) states that the
merchant banker shall send a final report to the Board within 45 days from
the date of closure of the offer.
|
Obligations of the Manager
The manager is free to deal with the shares of the
target Company after the offer period.
The manager shall file a report
with the Board within 15 business days from the expiry of tendering period
|
|
14.
|
Timelines were based on ‘calendar days’.
|
Timelines are based on ‘business days’.
|
Recommendations to other Regulators
Apart from the recommendations as
mentioned above, TRAC has also indirectly given its recommendations to:
a.
Reserve Bank of India: for relaxing the norms for
lending to domestic acquirers for the purpose of acquisition of shares;
b.
SEBI: for
modifying ICDR Regulations to relax pricing norms for preferential allotment
of equity shares when the equity shares of the acquirer are proposed to be
used in the open offer as acquisition currency;
c.
Ministry of Company Affairs: for relaxing the squeeze out provisions; and
d.
Central Board of Direct Taxes: for exempting capital gains tax on the transfer of shares
tendered in open offer.
Implications
On basis of the recommendations
given by TRAC, we have analysed the impact of such
recommendations on each of the stakeholders:
Promoters of the Target Company
1.
Due to increase in initial trigger threshold from 15% to 25%, hostile
takeovers for some of the listed companies with lower promoter shareholding
could become easy.
2.
Increase in voting rights due to buyback of shares has been exempted
subject to certain conditions. This should offer some respite for the substantial
shareholders who, in spite of not participating in certain type of buy back
offers, end up crossing the threshold for open offer.
3.
Creeping acquisition has been permitted to the extent of 5% per annum
till 75% for any acquirer holding 25% or more voting rights in the target
company. This would be beneficial for the promoters to gradually consolidate
their shareholding upto 75% in the target company
without triggering open offer. The extant Takeover Code permits creeping
acquisition only up to 55%.
4.
Promoters may now not be able to charge a premium on their stake sale
as non-compete fees and will be eligible for only
such price as is paid to other public shareholders of the target company.
This could dissuade many promoters from selling their stakes in listed
companies.
Public Shareholders
1.
Increasing the offer size from 20% to 100% would give all the
shareholders an exit opportunity for all their shares.
2.
TRAC has recommended to CBDT to provide capital gains tax exemption on
the shares being tendered in an open offer. Currently, such transfers are
subject to capital gains tax under the Indian tax laws.
3.
The recommendations of TRAC attempt to ensure equitable treatment of
public shareholders which is clearly evidenced by the deletion of concept of noncCompete fees. The rationale for omitting non-compete
fees is to negate all sorts of differences between promoters and public
shareholders so that an price offered remains
uniform for all.
4.
The shortened timeline for open offer will reduce the market risk for
the public shareholders since the open offer price determined as per the
Takeover Code could at times be substantially lower than the market price at
the time of tendering of shares in the open offer.
5.
The public shareholders would benefit from the wisdom of committee of
independent directors who will have to mandatorily make reasoned
recommendations on open offer.
Strategic Acquirers
Considering the increase in
threshold for triggering open offer as well as the offer size, only serious
strategic investors would indulge in acquisitions.
1.
The cost of acquiring a listed company to substantially increase on
account of the increased open offer size.
2.
Domestic acquirers may have an issue in funding the acquisitions as
banks have limitations on financing for acquisition of shares of another
company. However, it would be beneficial for foreign acquirers to acquire an
Indian company as finance should be easily available outside India at a
cheaper cost.
3.
The acquirers have the option to directly delist the target company if
the stake of acquirer exceeds delisting threshold without complying with the
onerous requirements under the Delisting Regulations.
4.
The acquirers can use their own liquid shares or convertible
securities as an acquisition currency.
Private Equity Investors
1.
The Private Equity investors will get a higher
headroom to acquire stake in a listed company since they can now acquire a
stake upto 24.99% without triggering an open offer.
This could result in more PIPE transactions.
2.
No clarity on the definition of ‘control’ especially in situations
where PE investors get only minority rights without positive control over the
affairs of the target company. More emphasis has been laid on “defacto control” as compared to “dejure control”.
Target Company
1.
The Independent directors of the target company are required to play
an active role and give their reasoned recommendations to the shareholders of
the target company for or against the open offer. Such a provision would
clearly increase the accountability of independent directors who have already
become more cautious post Satyam scam. This could also have an impact on the
universe of independent directors available for listed companies.
2.
A special resolution shall be required to be passed by the
shareholders of the target company before alienating any assets of the target
company within a period of 2 years from the end of offer period. Currently,
Indian corporate laws require only an ordinary resolution of shareholders for
disposal of assets / undertaking.
Conclusion
TRAC has attempted to simplify the
Takeover Code and align it with the international best practices. The report
of TRAC sets a benchmark to emulate before any new legislation is introduced
since some of the important principles followed by TRAC such as sound
statistical analysis, relying on past Court and SAT rulings, analyzing
international takeover codes, plugging the loopholes based on some of the
recent cases, etc are extremely important for developing a robust legislation
which can stand the test of time.
If SEBI stamps the recommendations
of TRAC with force of law, replacing the extant Takeover Code, then the
Report of TRAC will be guiding light for takeover regime in India in the
next decade to come as was Bhagwati Committee
Report, 1997 in the previous decade.
-
Arun Scaria, Sahil Shah & Nishchal Joshipura
You may direct your comments to
Ramya Krishnan-AniL
+91 900465 0363
|
|
|
|
|
|
|
|
|
|
|
●
|
Chambers & Partners: Ranked no. 1 for Tax,
TMT and Real Estate-FDI practices
|
|
●
|
IFLR : Winner of Indian Law Firm of the Year
2010 for Technology-Media-Telecom (TMT)
|
|
●
|
Nishith Desai: Voted ‘External Counsel of the
Year 2009’ by Asian Counsel
|
|
●
|
Pacific Business Press: Winner of
'Asian-Counsel’s Social Responsible Deals of the Year 2009'
|
|
|
>>>
|
|
|
|
|
|
|
|
|
Welcome to connect with us at interesting
conferences, seminars and events.
|
|
|
>>>
|
|
|
|
|
|
|
|
>>>
|
|
|
|
|
|
|
|
>>>
|
|
|
|
|
|
|
|
|
Our email newsletters
– Hotlines are very popular for their insights and analysis. Sign-up to receive Hotlines on the following
– Tax, CorpSec, HR, Dispute Resolution and our
regular updates such as M&A Labs, IP, Pharma,
Media, Telecom Updates and Budget and Policy Analyses.
|
|
|
|
|
