a critical analysis of proposed changes to takeover reg

2011] SECURITIES LAWS 71

[2011] 105 SCL 71 (MAG)

SECURITIES LAWSA CRITICAL ANALYSIS OF PROPOSED CHANGES TO

SEBI TAKEOVER REGULATIONSVIVEK SADHALE*

VIKAS AGARWAL**

ndia has witnessed intense activities in corporate restructuring in pastfew years. The number of takeovers of listed companies has increasedfrom an average of 69 a year during the period between 1997 and 2005to an average of 99 a year during the period between 2006 and 2010.With the growing level of takeover activity, the SEBI felt it necessary toreview the Takeover Regulations, 1997 and bring it in line with thecurrent understanding of the international market. A comparative study ofkey provisions of the Takeover Regulations, 1997 and ProposedTakeover Regulations with critical comments is given in this write-up.

A Brief History on Takeover Regulations1. India has seen a steady but robust evolution ofregulations relating to substantial acquisitions of sharesand takeovers. With the statutory recognition given in theform of the SEBI Act, 1992, wherein the SEBI was mandatedto regulate substantial acquisition of shares andtakeovers, the SEBI promulgated SEBI SubstantialAcquisition of Shares and Takeover Regulations in 1994("Takeover Regulations, 1994"), which came into force onNovember 4, 1994.

To review the Takeover Regulations, 1994, the SEBI had setup a committee under the chairmanship of Justice P.N.Bhagwati. Taking into consideration the recommendations ofthe committee given in its report submitted in January1997, the SEBI notified the SEBI Substantial Acquisitionof Shares and Takeover Regulations, 1997 (‘TakeoverRegulations, 1997’) on February 20, 1997, repealing theTakeover Regulations, 1994. The Takeover Regulations, 1997were periodically amended in response to events anddevelopments in the market place, regulatory and judicialrulings as well as evolving global practices. In 2001, areview of the Takeover Regulations, 1997 was carried outby a reconstituted committee chaired by Justice P.N.Bhagwati. The reconstituted Bhagwati committee submitted

* The author is a Company Secretary.**The author is a Manager-Corporate Secretariat, Persistent Systems Lt

d.

72 SCL - MAGAZINE [Vol. 105

its report in May 2002. Based on the same, furtheramendments were made to the Takeover Regulations, 1997.


Constitution of TRAC2. India has witnessed intense activities in corporaterestructuringin past few years. The number of takeovers of listedcompanieshas increased from an average of 69 a year during theperiod be-tween 1997 and 2005 to an average of 99 a year duringthe period between 2006 and 2010. With the growing levelof takeover activity, the SEBI felt it necessary toreview the Takeover Regulations, 1997 and bring it inline with the current understanding of the internationalmarket.

Accordingly, the SEBI, constituted the TakeoverRegulations Advisory Committee (TRAC) with the mandateto examine and review the Takeover Regulations, 1997 andto suggest suitable amendments to bridge the gap betweenthe decade-long regulations and a rapidly evolving M&Amarket in the country, as deemed fit under thechairmanship of Mr. C. Achuthan, Former PresidingOfficer, Securities Appellate Tribunal.

TRAC submitted its report to the SEBI on July 19, 2010with a new set of Takeover Regulations taking intoconsideration various decisions of the Courts in Indiaand rulings of Securities Appellate Tribunal,international best practices (‘Proposed TakeoverRegulations’). Much like the proposed revamp of tax lawsby way of the Direct Taxes Code, the Proposed TakeoverRegulations fully rewrite the Takeover Regulations,1997.

The report of TRAC is divided into three parts:

u Part I contains the salient features of the ProposedTakeover Regulations.

u Part II contains the Committee deliberations and keyrecommendations.

u Part III contains the draft text of the ProposedTakeover Regulations.

A comparative study of key provisions of the TakeoverRegulations, 1997 and Proposed Takeover Regulations withcritical comments is given below:

Reg.No.

Provisions ofTakeover

Regulations, 1997

Reg.No.

Recommendations ofTRAC in Proposed

TakeoverRegulations

Major change

Definition of‘control’

2(1)(c) "control" shallinclude the rightto appointmajority of thedirectors or to

2(1)(b) "control" includesthe right or theability to appointmajority of thedirectors or to

Thedefinitionincludes notonly theright but


control themanagement orpolicy decisionsexercisable by aperson or personsacting indivi-dually or inconcert, directly orindirectly,include-

control themanage-ment orpolicy decisions ofthe target company,exercisable by aperson or personsacting individuallyorin concert,directly or

also theability toappointmajority ofthe directorson the boardof the targetcompany.


Reg.No.


Regulations, 1997

Reg.No.


Takeover Regulations

Major change

ing by virtue oftheir shareholdingor managementrights orshareholdersagreements orvoting agreementsor in any othermanner.

indirectly, includingby virtue of theirshareholding ormanagement rights orshareholdersagreements or votingagreements or in anyother manner.

Trigger of theTakeover Code

10(1) No acquirer shallacquire shares orvoting rights which(taken togetherwith shares orvoting rights, ifany, held by him orby persons actingin concert withhim), entitle suchacquirer toexercise fifteenper cent or more ofthe voting rightsin a company,unless suchacquirer makes apublic announcementto acquire sharesof such company inaccordance with theregulations.

3(1) No acquirer shallacquire shares orvoting rights in atarget company whichtaken together withshares or votingrights, if any, heldby him and bypersons acting inconcert with him insuch target company,entitle them toexercise twenty-fiveper cent or more ofthe voting rights insuch target companyunless the acquirermakes a publicannouncement of anopen offer foracquiring shares ofsuch target companyin accordance withthese regulations.

The thresholdfortriggering ofthe TakeoverCode has beenenhanced from15 per centto 25 percent.

Exemption:Omitted

11(1) No acquirer who,together withpersons acting inconcert with him,has acquired, inaccordance with theprovisions of law,15 per cent or morebut less than fiftyfive per cent (55per cent) of theshares or votingrights in a company,shall acquire,either by himself orthrough or withpersons acting inconcert with him,additional shares orvoting rightsentitling him toexercise more than 5per cent of thevoting rights, withpost acquisitionshareholding or

3(2) No acquirer, whotogether with personsacting in concertwith him, hasacquired and holds inaccordance with theseregulations shares orvoting rights in atarget companyentitling them toexercise twenty-fiveper cent or more ofthe voting rights inthe target companybut less than themaximum permissiblenon-publicshareholding, shallacquire within anyfinancial yearadditional shares orvoting rights in suchtarget companyentitling them toexercise more thanfive per cent of the

lThe creepingacquisitionlimit of 5per cent inone financialyearincreasedfrom existing"15 per cent- 55 percent" toproposed "25per cent - 75per cent".

lTheacquisitioncan be madein any mannerincludingthrough openmarketpurchases,negotiateddeals, bulkor blockdeals,


voting rights notexceeding fifty fiveper cent., in anyfinancial yearending on 31stMarch, unless suchacquirer makes apublic announcementto acquire shares inaccordance with theregulations.

voting rights,subject to theiraggregate postacquisitionshareholding notexceeding the maxi-mum permissiblenon-publicshareholding, unlessthe acquirer makes apublic

preferentialallotment.


Reg.No.


Regulations, 1997

Reg.No.



Major change

No acquirer, whotogether withpersons acting inconcert with himholds, fifty-fiveper cent (55 percent) or more butless thanseventy-five percent (75 per cent)of the shares orvoting rights in atarget company,shall acquireeither by himselfor through or withpersons acting inconcert with himany additionalshare entitling himto exercise votingrights or votingrights therein,unless he makes apublic announcementto acquire sharesin accordance withthese Regulations.

announcement of anopen offer foracquiring shares ofsuch target companyin accordance withthese regulations:

Provided that suchacquirer shall notbe entitled to enterinto any agreementto acquire shares orvoting rightsexceeding suchnumber of shares aswould take theaggregateshareholdingpursuant to theacquisition underthe agreement toabove the maximumpermissiblenon-publicshareholding.

Acquisition ofControl

12 Irrespective ofwhether or notthere has been anyacquisition ofshares or votingrights in acompany, noacquirer shallacquire controlover the targetcompany, unlesssuch person makes apublic announcementto acquire sharesand acquires suchshares inaccordance with theregulations:Provided thatnothing containedherein shall applyto any change incontrol which takesplace in pursuanceof a specialresolution passedby the shareholdersin a generalmeeting:

4 Irrespective ofacquisition orholding of shares orvoting rights in atarget company, noacquirer shallacquire, directly orindirectly, controlover such targetcompany, unless theacquirer makes apublic announcementof an open offer foracquiring shares ofsuch target companyin accordance withthese regulations.

Acquisitionof controlover atargetcompanywouldrequire theacquirer tomake an openoffer as aprerequisite.

Exemptionprovidedearlierregardingobtainingshareholdersapproval isdeleted inthe ProposedRegulations.

Size of Open Offer

21(1) The public offer 7(1) The open offer for The open


made by theacquirer to theshareholders of thetarget companyshall be for aminimum twenty percent of the votingcapital of thecompany.

acquiring shares tobe made by theacquirer and personsacting in concertwith him underregulation 3 andregulation 4 shallbe for acquisitionof all the sharesheld by all theother shareholdersof the targetcompany as of thelast day of thetendering period.

offer size isproposed tobe increasedfrom 20 percent to 100per cent.


Reg.No.


Regulations, 1997

Reg.No.


TakeoverRegulations

Major change

Offer Price -DirectAcquisition

20(4) Offer price shallbe the highestof—l the negotiatedprice under theagreement

l price paid bythe acquirer orpersons actingin concert withhim foracquisition, ifany, includingby way ofallotment in apublic orrights orpreferentialissue duringthe twenty-sixweek periodprior to thedate of publicannouncement,whichever ishigher;

l the average ofthe weekly highand low of theclosing pricesof the sharesof the targetcompany asquoted on thestock exchangewhere theshares of thecompany aremost frequentlytraded duringthe twenty-sixweeks or theaverage of thedaily high andlow of theprices of theshares asquoted on thestock exchangewhere theshares of thecompany aremost frequentlytraded duringthe two weekspreceding thedate of public

8(2) Offer price shallbe the highestof,—

(a) the highestnegotiated priceper share of thetarget company forany acquisitionunder theagreementattracting theobligation to makea publicannouncement of anopen offer;

(b) thevolume-weightedaverage price paidor payable foracquisitions,whether by theacquirer or by anyperson acting inconcert with himduring thefifty-two weeksimmediatelypreceding the dateof the publicannouncement;

(c) the highestprice paid orpayable for anyacquisition,whether by theacquirer or by anyperson acting inconcert with himduring thetwenty-six weeksimmediatelypreceding the dateof the publicannouncement; and

(d) thevolume-weightedaverage marketprice of suchshares for aperiod of sixtytrading daysimmediatelypreceding thedate of thepublicannouncement as

l Volume-weightedaverage marketprice ("VWAP")for 60 tradingdays prior to thepublicannouncementwould replaceaverage of theweekly high andlow of theclosing prices ofshares for past26 weeks or 2weeks.

l In addition tohighestnegotiated pricebetween partiesand highest pricepaid by acquirerand PAC during 26weeks prior topublicannouncement,VWAP for sharesacquired byacquirer and PACduring past 52weeks is also tobe considered fordetermining openoffer price.


announcement. traded on thestock exchangewhere the maximumvolume of tradingin the shares ofthe targetcompany isrecorded duringsuch period,provided suchshares arefrequentlytraded.

Offer Price -IndirectAcquisition

20(12) The offer pricefor indirectacquisition orcontrol shall

8(3) Offer price shallbe the highestof,—

New price indica-tor introduced in


Reg.No.


Regulations, 1997

Reg.No.



Major change

be determined withreference to thedate of the publicannouncement for theparent company andthe date of thepublic announcementfor acquisition ofshares of the targetcompany, whicheveris higher, inaccordance withsub-regulation (4)or sub-regulation(5).

(a) the highestnegotiated price pershare, if any, of thetarget company forany acquisition underthe agreementattracting theobligation to make apublic announcementof an open offer;

(b) thevolume-weightedaverage price paid orpayable for anyacquisition, whetherby the acquirer or byany person acting inconcert with himduring the fifty-twoweeks immediatelypreceding the earlierof the date on whichthe primaryacquisition iscontracted, and thedate on which theintention or thedecision to make theprimary acquisitionis announced in thepublic domain;

(c) the highest pricepaid or payable forany acquisition,whether by theacquirer or by anyperson acting inconcert with himduring the twenty-sixweeks immediatelypreceding the earlierof the date on whichthe primaryacquisition iscontracted, and thedate on which theintention or thedecision to make theprimary acquisitionis announced in thepublic domain; and

(d) the highestprice paid orpayable for anyacquisition, whetherby the acquirer orby any person actingin concert with himbetween the earlierof the date on whichthe primaryacquisition is

the form ofhighest pricepaid byacquirer orPAC betweendate ofprimaryacquisitionand date ofpublicannouncementin additionto theexistingpriceindicators.


contracted, and thedate on which theintention or thedecision to make theprimary acquisitionis announced in thepublic domain, andthe date of thepublic an-


Reg.No.


Regulations,1997

Reg.No.


TakeoverRegulations

Major change

nouncement of theopen offer forshares of thetarget companymade under theseregulations;

(e) thevolume-weightedaverage marketprice of theshares for aperiod of sixtytrading daysimmediatelypreceding theearlier of thedate on which theprimaryacquisition iscontracted, andthe date on whichthe intention orthe decision tomake the primaryacquisition isannounced in thepublic domain, astraded on thestock exchangewhere the maximumvolume of tradingin the shares ofthe target companyis recorded duringsuch period,provided suchshares arefrequently traded.

Voluntary OpenOffer

11(2A) Where anacquirer who(together withpersons actingin concert withhim) holdsfifty-five percent (55 percent) or morebut less thanseventy-fiveper cent (75per cent) ofthe shares orvoting rightsin a targetcompany, isdesirous ofconsolidatinghis holdingwhile ensuringthat the public

6(1) An acquirer, whotogether withpersons acting inconcert with him,holds shares orvoting rights in atargetcompany entitlingthem to exercisetwenty-five percent or more butless than themaximumpermissiblenon-publicshareholding,shall be entitledto voluntarilymake a publicannouncement of anopen offer foracquiring shares

Specific frameworkproposed forvoluntary openoffer. Share-holdersholding 25 per centor more in thetarget company may,without breachingminimumpublic sharehold-ingrequirements underthe ListingAgreement,voluntarily make anopen offer.


shareholding inthe targetcompany doesnot fall belowthe minimumlevel permittedby the ListingAgreement, hemay do so bymaking a publicannouncement inaccordance withtheseregulations.

in accordance withthese regulations,subject to theiraggregateshareholding aftercompletion of theopen offer notexceeding themaximumpermissiblenon-publicshareholding.

Delisting

21(2) If theacquisitionmade inpursuance of apublic offerresults in thepublicshareholding inthe targetcompany beingreduced be-

7(5) In the event theacquirer has notdisclosed hisinten-tion to delist theshares of thetarget company atthe time of thedetailed public

The acquirers havethe option todirectly delist thetarget com-pany if the stake of


Reg.No.


Regulations, 1997

Reg.No.



Major change

low the minimumlevel required asper the ListingAgreement, theacquirer shalltake necessarysteps tofacilitatecompliance of thetarget companywith the relevantprovisionsthereof, withinthe time periodmentioned therein.

If the acquirerchooses to delistthe target companypursuant toacquisition inopen offer, itshould be inaccordance withprovisions of theSEBI (Delisting ofEquity Shares)Regulations, 2009.

statement, or inthe event theacceptancestendered inresponse to theopen offer weresuch that theshareholding of theacquirer takentogether withpersons acting inconcert with himpursuant tocompletion of theopen offer wouldentitle them toexercise more thanthe maxi-mum permissiblenon-publicshareholdingapplicable to butless than thedelistingthreshold, theacquirer shall berequired toeither,—

(a) bring down thenon- publicshareholding to thelevel specified andwithin the timepermitted under thelisting agreement;or

(b) proportionatelyreduce the numberof shares acquiredunder the openoffer and under anyagreement thatattracted theobligation to makesuch open offer,other than sharesacquired by way ofallotment by thetarget company,such that theholding of theacquirer andpersons acting inconcert does notexceed the maximumpermissiblenon-publicsharehold-ing:

acquirerexceedsdelistingthreshold(90 percent)withoutcomplyingwith theonerousrequirementsunder theDelistingRegulations.


Provided that theoption toproportionatelyreduce the numberof shares to beacquired under thisclause shall not beavailable where theopen offer is acompeting offer.


Reg.No.


Regulations, 1997

Reg.No.

Recommendations of TRAC in Proposed

TakeoverRegulations

Major change

Non-compete fees

20(8) Any payment made tothe persons otherthan the targetcompany in respectof non- competeagreement in excessof twenty-five percent of the offerprice arrived atundersub-regulation (4)or (5) or (6) shallbe added to theoffer price.

Omitted. Promoters to bepaid the sameprice per shareas the publicshareholders.

Governance

22(13) Where the acquirerhas not either, inthe publicannouncement, and,or in the letter ofoffer, stated hisintention todispose of orotherwise encumberany assets of thetarget companyexcept in theordinary course ofbusiness of thetarget company, theacquirer, where hehas acquiredcontrol over thetarget company,shall be debarredfrom disposing ofor otherwiseencumbering theassets of thetarget company fora period of twoyears from the dateof closure of thepublic offer.

26(2) (2) During theoffer period,unless the approvalof shareholders ofthe target companyby way of a specialresolution bypostal ballot isobtained, the boardof directors ofeither the targetcompany or any ofits subsidiariesshall not,—

(a) alienate anymaterial assetswhether by way ofsale, lease,encumbrance orotherwise or enterinto any agreementtherefor outsidethe ordinary courseof business;

(b) effect anymaterial borrowingsoutside theordinary course ofbusiness;

(c) issue or allotany authorised butunissued securitiesentitling theholder to votingrights:

The acquirercan disposeassets inspiteof not statingsuch intentionin publicannouncement ifapproval ofshareholders ofthe targetcompany isobtainedthrough aspecialresolution.

23(4) (4) The board ofdirectors of thetarget company may,if they so desire,send their unbiasedcomments andrecommendations on

26(6) Upon receipt of thedetailed publicstatement, theboard of directorsof the targetcompany shallconstitute a

A committee ofindependentdirectors ofthe targetcompanymandatorilyrequired to


the offer(s) to theshareholders,keeping in mind thefiduciaryresponsibility ofthe directors tothe shareholdersand for the purposeseek the opinion ofan independentmerchant banker ora committee ofindependentdirectors.

committee ofindependentdirectors toprovide reasonedrecommendations onsuch open offer,and the targetcompany shallpublish suchrecommendations

give itsreasonedrecommendationson the openoffer to theshareholders.


An Analysis of the proposed changes3. The points discussed below make an analysis of theproposed changes:

u Increase in trigger threshold from 15 per cent to 25per cent - The proposal is in recognition of thechanged scenario where very few promoters controllisted companies with 15 per cent shareholding. TRACappears to have taken its cue from the UK’s regulatoryregime for takeovers, where the takeover trigger is at30 per cent of the shareholding. The increase inthreshold limit from 15 per cent to 25 per cent is awelcome change for potential acquirers, particularlyprivate equity investors. Due to increase in initialtrigger threshold from 15 per cent to 25 per cent,hostile takeovers for some of the listed companieswith lower promoter shareholding could become easy.

Anyone who controls at least 25 per cent of acompany’s shareholding wields the power to stopspecial resolutions, that is, acquires negativecontrol. Raising the threshold for triggering anopen offer to the level that grants negative controlis likely to have major implications.

u Creeping acquisition - Creeping acquisition has beenpermitted to the extent of 5 per cent per annum till75 per cent for any acquirer holding 25 per cent ormore voting rights in the target company. The TakeoverRegulations, 1997 permits creeping acquisition only upto 55 per cent.

The proposal to allow promoters to shore up theirshareholding to 75 per cent under the 5 per cent perfinancial year creeping acquisition window should bea welcome change for many, especially family-ownedbusinesses. This would be beneficial for thepromoters to gradually consolidate theirshareholding up to 75 per cent in the target companywithout triggering open offer. Promoters can alsoconsolidate their shareholding through the voluntaryopen offer route with minimum offer size being 10per cent - this could provide a window to increaseshareholding outside the statutory public offerroute for 100 per cent shareholding.

u No non-compete fees - Promoters would not be able tocharge a premium on their stake sale as non-competefees and will be eligible for only such price as ispaid to other public shareholders of the target


company. No distinction is possible between the pricepaid to promoters and public shareholders in line withinternational practices. This could dissuade manypromoters from selling their stakes in listedcompanies. The recommendations of TRAC attempt toensure


equitable treatment of public shareholders which isclearly evidenced by the deletion of this concept ofnon-compete fees.

u Increase in open offer size - The Advisory Committeehas also vehemently argued in favour of an exitopportunity for all shareholders on grounds of equityand fairness as the exiting promoters may have defacto control in many listed companies withshareholding in the range of 25 per cent to 30 percent. Increasing the offer size from 20 per cent to100 per cent would give all the shareholders an exitopportunity for all their shares. This proposal couldmean that the cost of M&A transaction maysignificantly increase, particularly in case ofwidely-held companies and in situations where budgetsfor M&A deals is a constraint, could lead to someongoing M&A decisions being reconsidered.

Financing a large takeover offer through bank financeor private equity firms - which the offer for 75 percent stock of the target company must entail - isbound to make the acquirer that much more reckless, assuch financing typically increases the principalagency conflict. Domestic acquirers may have an issuein funding the acquisitions as banks have limitationson financing for acquisition of shares of anothercompany. However, it would be beneficial for foreignacquirers to acquire an Indian company as financeshould be easily available outside India at a cheapercost.

u Delisting - In what could be argued as a majoracquirer friendly proposal, the target company wouldneed to be delisted if pursuant to a statutory openoffer, the level of acquirer’s shareholding increasesbeyond 90 per cent. Such delisting would be undertakenby giving an exit window to public shareholders at theopen offer price. While the proposals have stoppedshort of a compulsory minority squeeze out, this couldobviate the need of going through the cumbersome andexpensive reverse book building process under thepresent delisting guidelines. Further, following thepublic offer, if the acquirers shareholding is between75 per cent and 90 per cent, necessary steps wouldneed to be undertaken to bring down their shareholdingto 75 per cent.

u Control - Definition of - There is no clarity on thedefinition of ‘control’ especially in situations wherePE investors get


only minority rights without positive control over theaffairsof the target company. More emphasis has been laid on‘defacto control’ as compared to ‘de jure control’. Aninteresting proposal is to include the ‘ability’ inaddition to ‘right’ toappoint majority directors or to control themanagement and policy decisions in the definition of‘control’. This could mean


that open offer could be triggered if the acquirer obtainsde facto control and not necessarily de jure control -the determination of de facto control would be purelyfactual and could be the subject-matter of litigationin the times to come.

u Role of Independent Directors - The independentdirectors of the target company are required to playan active role and give their reasoned recommendationsto the shareholders of the target company for oragainst the open offer. Such a provision would clearlyincrease the accountability of independent directorswho have already become more cautious post Satyamscam. This could also have an impact on the universeof independent directors available for listedcompanies. The public shareholders would benefit fromthe wisdom of committee of independent directors whowill have to mandatorily make reasoned recommendationson open offer.

Conclusion4. TRAC has attempted to simplify the Takeover Code andalign it with the international best practices. The newtakeover regulation proposed by the C. Achuthan committeeis a welcome step and is in the right direction. It seeksto bring global benchmarks to Indian takeover regulationsand will both enhance efficiency in the market forcorporate control and ensure fairness between large andsmall stakeholders in a company being targeted fortakeover. The proposed changes will help to develop atransparent and orderly takeover market, to be emulated byother countries. ‘The philosophy of equitable and fairtreatment of all shareholders should have a primacy overother considerations,’ said the report.

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a critical analysis of proposed changes to takeover reg

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