Module : Merger, Acquisition and g , q Corporate Restructuring

Session 7-8 Bhagwati Committee Report 1997 Salient Features of Takeover Regulations 1997


to review the guidelines issued earlier by the Securities and Exchange Board of India (SEBI). to examine areas of deficiencies in the existing g regulations and suggest amendments. BUSINESS_PCL_I_ MA&CR_SESSION_7-8 .Objectives j Bhagwati Committee was set up g p to regulate corporate restructuring transactions.

August 1996 g The draft code January 1997 Takeover Regulations of SEBI These regulations were modeled closely along the lines of the UK City Code of Takeovers BUSINESS_PCL_I_ MA&CR_SESSION_7-8 .Bhagwati Committee (BC) : the making of a regulation ki f l ti 1994 Acquisition of Shares and Takeovers Regulations .

8. Equality of treatment and opportunity to all shareholders. 4. The acquirer and all other intermediaries professionally involved in the offer.BC principles guiding the operation and interpretation of regulations. An offer to be announced only after the most careful and responsible consideration. No information to be furnished by the acquirer and other parties to an offer exclusively t one group of shareholders. and No action will be taken by the target company to frustrate an offer without the approval of the shareholders. to exercise highest standards of care and accuracy in preparing offer documents. 9. Protection of interests of minority shareholders. l i l to f h h ld Availability of sufficient time to shareholders for making informed decisions. 6. 7. regulations 1. 10. 2 3. Awareness of the limitations on freedom in the process of substantial acquisition of shares. All parties to an offer to refrain from creating a false market in the securities of the target company. Fair and truthful disclosure of all material information by the acquirer in all public announcements and offer documents. 2. BUSINESS_PCL_I_ MA&CR_SESSION_7-8 . 5.

Persons Acting in Concert: According to the Committee to be acting in concert with an acquirer persons must fulfill certain ‘bright line tests They bright line’ tests.The Committee also suggested that persons acting in concert should b grouped t convey th t d th t ti i t h ld be d to the presumption of relationship. BUSINESS_PCL_I_ MA&CR_SESSION_7-8 . including by virtue of their shareholding or management rights or shareholders’ agreements or voting agreements. directly or indirectly. Control: Control is defined to include the right to appoint majority of the directors or to control the management or policy decision exercisable by g y y person or persons acting individually or in concert. This definition covers indirect acquisition of listed companies by acquiring unlisted holdings of investment companies as well. must have community of interest which could be acquisition of shares or voting rights beyond the threshold limit or gaining control over the company and their very act of acquiring the shares or voting rights in a company must serve this common objective.Terms Defined by BC Acquirer: any person who directly or indirectly acquires or agrees to acquire equity or voting rights or control over the target company directly or indirectly.

and where promoter is a corporate body. Target Company: It is defined as the listed company which is the subject matter of acquisition or takeover takeover.Terms Defined by BC Promoter: Promoter means the persons in overall control of th company. a subsidiary or holding company which holds 10 percent of the equity and any corporate body in which a group of individuals who hold 20 percent or more of equity also hold 20 percent or more of the equity of the promoter. BUSINESS_PCL_I_ MA&CR_SESSION_7-8 . P t th i ll t l f the relations of the promoter. Public Shareholding: The Committee defined it to mean shareholding in the hands of any person other than the acquirer and persons acting in concert with him (shares include convertible debenture and GDRs).

Recommendations of the Committee The Bhagwati Committee recommended the exemption of acquisition of shares under Section 81A of the Companies Act The Committee also recommended that public offer must be made in case where preferential offers result in change in control of a company and in such cases the preferential price must also be taken into account in determining the offer price. change in management according to the Committee should necessarily be the concern of SEBI. The Committee recommended that the distinction between acquisition through negotiation and market transaction should b abandoned. Since investor protection is a mandate of SEBI takeover which entails a SEBI. The rate of acquisition is limited in the case of consolidation while none exists under preferential allotment. The Committee has not recognized the discrimination between preferential allotment and consolidation. The shareholders of the target company should have the right to decide whenever there is a change in incumbent management without attracting open offer. BUSINESS_PCL_I_ MA&CR_SESSION_7-8 . th h ti ti d k tt ti h ld be b d d The Committee Recommended in the final report that persons holding not less than 15% percent and not more than 75 percent may acquire up to 5 percent in a year without attracting mandatory public offer requirement.

f ki d f th t The public announcement should also disclose the highest and average price paid during the 12 month period prior to public announcement. shares or debt instruments. Public announcement of the offer was recommended to be made not later than four working days of the agreement. The merchant banker should be an independent person so offer that he can exercise independent due diligence in the discharge of his responsibilities. the acquirer would have to make the payment of the minimum offer price be retained with the additional disclosure about the highest price paid by the acquirer in the open market during the 12 months prior to the public announcement. Option is to be given to the investor. BUSINESS_PCL_I_ MA&CR_SESSION_7-8 . If the payment for consideration by a shareholder is made in cash. According to the Committee once a minimum level offer price is set it may be paid in cash. If the acquirer is a defaulter and blacklisted by financial institutions as compared to acquiring company which enjoys substantial credit limits supported by personal guarantees of the directors. The attitude of the financial institutions should be checked by the merchant banker. the financial institutions may not be willing to swap the guarantees.Recommendations of the Committee A merchant banker of Category I should be appointed before making any public announcement of offer. It is suggested by the Committee that the merchant banker should look out for the financial soundness of the acquirer.

Directors of the above company Mutual funds with sponsor or trustee or asset management company Foreign Institutional Investors (Flls) with sub-accounts Merchant Bankers with their clients as acquirer The common objective or purpose of persons acting in concert are Substantial acquisition of shares Voting rights Gaining control over the target company BUSINESS_PCL_I_ MA&CR_SESSION_7-8 .Salient Features of Takeover Regulations (1997) R l i Persons Acting in Concert According to the Takeover Regulations 1997 Persons acting in concert with other person include A company or holding company or subsidiary A company with any of its directors or any persons which is y y y entrusted with the management of funds of the company.

Global acquisitions. The public announcement has also to be sent to all the stock exchanges in which shares of target company are listed BUSINESS_PCL_I_ MA&CR_SESSION_7-8 . (4 days and 3 months) should be calculated and the offer should be made at the highest price. whereby a public announcement for global acquisition could be made within three months from the date of requisition. Such advertisement has to be submitted before issue by the y merchant banker to SEBI 2 days before issue. Hindi and other regional languages.Salient Features of Takeover Regulations (1997) R l i Timing for Public Announcement of Offer The Takeover Regulations 1997 has laid down that the merchant baker has to make the public announcement not later than 4 working days of acquisition. But the offer based on both dates. price Public announcement of offer should be made in national dailies in English.

t The contents of the public announcement of offer are designed to provide shareholders with an information base about the acquirers plan to enable the investors to take an investment decision.Salient Features of Takeover Regulations (1997) Letter of Offer The Takeover Regulations 1997 also emphasized that within 14 days of the public announcement. BUSINESS_PCL_I_ MA&CR_SESSION_7-8 . This should be placed before the board f directors of th t b d of di t f the target company. a draft letter of offer must be sent to the target company and the stock exchanges where the shares are listed.

BUSINESS_PCL_I_ MA&CR_SESSION_7-8 .Salient Features of Takeover Regulations (1997) Exemption from Public Offer but Reporting to SEBI Mandatory The Takeover Regulations 1997 exempts the following from public offer but made it mandatory to report to SEBI: Allotment in public issues. Group companies Relatives Transfer from state level financial institution to co-promoters of company. rights issue Preferential allotment Allotment – to issue underwriter Interse transfers among promoters will not be available if the transfer takes place at a 20% premium to the market price.

Market makers Public financial institutions on their own account Banks and FIs as pledges Acquisition of shares b way of transmission on succession or A i ii f h by f i i i by inheritance A scheme framed under section 18 of SICA 1985 Acquisition of shares in companies whose shares are not listed BUSINESS_PCL_I_ MA&CR_SESSION_7-8 . Regd Stock brokers on behalf of clients Regd. allotment to underwriter pursuant to any underwriting agreement acquisition of shares in ordinary course of business by Regd.Salient Features of Takeover Regulations (1997) Exemptions (from making an offer) Where Reporting to SEBI is not Mandatory The following transactions are exempted from making an offer and are not required to be reported to SEBI.

Salient Features of Takeover Regulations (1997) Form of Payment The Takeover Regulations 1997 laid down that the offer to acquire shares may be paid in Cash Exchange/or Transfer of shares Exchange and transfer of debt with credit rating A combination Determination of Minimum Offer Price (MOP) in Open Offer According to the Takeover Regulations 1997 MOP is the highest if. Price id by P i paid b acquirer under a preferential allotment made t hi or persons i d f ti l ll t t d to him acting in concert during 12 months up to closure of offer. Highest price paid by acquirer for any acquisitions including by way of public or rights issue during 20 week period prior to the date of public announcement. The changes notified (September 2002) dropped the average of weekly high and low of the closing price collected in the stock exchange during 26 weeks p preceding the p g public announcement. The negotiated price under the agreement entered into by the acquirers or persons acting in concert which triggered the open offer. BUSINESS_PCL_I_ MA&CR_SESSION_7-8 .

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