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JOY MUKHERJEE 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
it has been defined as “A Transaction or a series of transactions whereby a person acquires control over the assets of a company. Where the shares are held by the public generally the takeover may be effected” : 1) 2) 3) By agreement between the acquirers and the controllers of the acquired company. Disclosures shall be made of all material transactions at earliest opportunity Meaning and Concept of takeovers TAKEOVER. Takeover implies acquisition of control of a company which is already registered through the purchase or exchange of shares.e. . By means of a takeover bid. Where shares are closely held (i. the process of acquisition and mergers shall be completed in a time bound manner. In the words of M. 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.It’s Meaning Broadly speaking Takeover refers to the acquisition of one company by another company.the investors. Takeover can be either friendly which is done by a mutual agreement between two companies or it can be hostile. 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. a takeover will generally be effected by agreement with the holders of the majority of the share capital of the company being acquired.A. By purchase of shares on the stock exchange.. either directly by becoming the owner of those assets or indirectly by obtaining control of the management of the company. Weinberg one of the pioneers in the formation of law and practice relating to takeovers. by small number of persons).
E. 1985 to bail out the former from losses. [ii] Vertical Takeover .From legal perspective. takeover is of three types [i] Horizontal Takeover. The former is known as backward integration and latter is known as Forward integration. The most dominant purpose which has forced most of the companies to resort to this kind of takeover is increase in market share. takeover is of three types: [i] Friendly takeover. [ii] Bail out Takeover . 1956. This kind of takeover is resorted to further some common objectives of both the parties. 1997 In the context of business. The main purpose behind this kind of takeover is reduction in costs. Generally. [ii] Bail out takeover. takeover of Sona Steerings Ltd. takeover of Hutch by Vodafone. .Takeover by one company with its suppliers or customers.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. By Maruti Udyog Ltd. [iii] Conglomerate takeover.Takeover of one company by another company in the same industry.g. friendly takeover takes place as per the provisions of Section 395 of the Companies Act. [i] Horizontal Takeover.g.Takeover of a financially sick company by a financially rich company as per the provisions of Sick Industrial Companies (Special Provisions) Act. Thus it is also called Negotiated Takeover. E. The main purpose behind this kind of takeover is achieving the economies of scale or increasing the market share. [ii] Vertical takeover. [iii] Hostile 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. is backward takeover. The hostile takeover takes place as per the provisions of SEBI (Substantial Acquisition of Shares and Takeover) Regulations.
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 . 1997. the control acquired is equal to or less than the control exercised by person (s) prior to such acquisition of control. In this paper the researcher shall limit his analysis to listed companies.[iii] Conglomerate takeover. Procedure for Takeover The takeover could take place through different methods. [I] Acquirer.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. such control shall not be deemed to be a change in control [iv] Promoter. A company may acquire the shares of a unlisted company through what is called acquisition under Section 395 of the Companies Act. When an acquirer. 1997. [iv] Promoter.Takeover of one company by another company operating in totally different industries. 2004 and 2006 . However. Also if consequent upon change in control of the target company in accordance with regulation 3. [ii] Target Company. it involves the process as set out in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations. as amended in 2002. The term ‘Takeover’ has not been defined under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations. acquires substantial quantity of shares or voting rights of the target company.A Target Company is a listed company i.e. The main purpose of this kind of takeover is diversification.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 . the term basically envisages the concept of an acquirer taking over the control or management of the target company. 1956. 3(1)(e). [iii] Control. whichever is later. [v] Persons acting in concert and [vi] substantial quantity of shares or voting rights. it is necessary for us to dwell into what is the actual meaning of [I] Acquirer.” . 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. it results in the Substantial acquisition of Shares For the purposes of understanding the implications arising from the aforementioned paragraph.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. However where the shares of the company are widely held by the general public.
if any. parents. the term ‘Takeover’ has not been defined under the said Regulations. 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. it is necessary for us to dwell into what is the actual meaning of substantial quantity of shares or voting rights . .The clauses that formed part of the earlier definition but now stand deleted are. 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. 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. along with ‘persons acting in concert’ (“PAC”). brothers and children of the promoter. 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. 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. The takeover code has also modified the definition of individual. (The earlier threshold was 26%) 1. For the purposes of understanding the implications arising from the aforementioned paragraph. 3. acquires substantial quantity of shares or voting rights of the target company. Any company in which the company specified in sub-clause above holds 10% or more of the share capital. it results in the Substantial acquisition of Shares. Spouse. “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. 2. 2. sisters. the term basically envisages the concept of an acquirer taking over the control or management of the target company When an acquirer.The concept of Takeover Although. The new definition of individual includes: 1.
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. within 30 days from the financial year ending March 31 as well as the record date fixed for the purpose of dividend declaration. it is pertinent for us to consider the meaning of the term ‘public announcement’. 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. In order to appreciate the implications arising here from. However. which has led to the triggering of the takeover. 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. However. in turn. 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. 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. (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. through such Merchant Banker. (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. Public Announcement A Public Announcement is generally an announcement given in the newspapers by the acquirer. However in pursuance of Reg. (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.The target company is. any additional acquisition over and above 5% can be made only after making a public announcement. can consolidate his holding up to 5% of the voting rights in any financial year ending 31st March. 3. required to pass on such information to all stock exchanges where the shares of Target Company are listed. . An acquirer who has made a public offer and seeks to acquire further shares under Reg. 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.
Along with the draft offer document. 000/.50. 2. to all the shareholders whose names appear in the register of the company on a particular date. within 30 days from the closure of offer. Procedure to be followed after the Public Announcement In pursuance of the provisions of Reg. 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. along with filing fees of Rs. 4. 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. 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 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. 18 of the said Regulations. the Merchant Banker also has to submit a due diligence certificate as well as certain registration details. 5. 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. The number of shares to be acquired from the public. 3. regarding the target company. 4. The filing of the draft offer document is a joint responsibility of both the Acquirer as well as the Merchant Banker. if any 7. . The offer remains open for 30 days. either continue with the target company or decide to exit from it. on the basis of the disclosures contained therein and in the letter of offer. the Acquirer is required to file a draft Offer Document with SEBI within 14 days of the PA through its Merchant Banker. The future plans of the acquirer. They may.per offer Document (payable by Banker’s Cheque / Demand Draft). The purposes of acquisition. The identity of the acquirer. The change in control over the target company. 6. The offer price.The other disclosures in this announcement would inter alia include 1. if any. Thereafter.
. 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.Banks & FIs as pledges. 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.Price paid by the acquirer or PAC with him for acquisition if any. . companies. .Regd. 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. The offer price shall be the highest of. if by virtue of acquisition of shares of unlisted company. earning per share. the acquirer acquires shares or voting rights (over the limits specified) in the listed company.merger under any Indian law. • . highest price paid by the acquirer or PAC with him for acquisition if any.5. viz: the negotiated price under the agreement. Acquisition of shares in ordinary course of business by: . which triggered the open offer. 6. book value of the shares of the target company. price earning multiple vis a vis the industry average. Acquisition of shares by way of transmission on succession or by inheritance. Acquisition of shares in companies whose shares are not listed. . Acquisition of shares by Govt.Public financial institutions on their own account.Average of weekly high & low of the closing prices of shares as quoted on the Stock exchanges. 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. then the offer price shall be determined by reliance on the following parameters.Regd. However. Acquisition pursuant to a scheme framed under section 18 of SICA 1985 of arrangement/ restructuring including amalgamation or merger or de . including by way of public rights/ preferential issue during the 26-week period prior to the date of the PA . acquirer is required to make an open offer in accordance with the Regulations. Market makers. Stock brokers on behalf of clients. Negotiated price under the agreement. Minimum Offer Price and Payments made It is not the duty of SEBI to approve the offer price.
1/3 to regional Stock Exchanges. 3. 1/3 to be distributed on pro rata basis among the shareholders who have accepted the offer. 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. 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 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. it would be treated as a violation of the Regulations. The Merchant Banker is also required to confirm that firm financial arrangements are in place for fulfilling the offer obligations. 100 crores (Additional 10% if offer size more than 100 crores). bank guarantee in favor of the Merchant Banker or deposit of acceptable securities with appropriate margin with the Merchant Banker. Besides forfeiture of escrow account. 1/3 of amount to target company. Merchant Banker has a right to forfeit the escrow account and distribute the proceeds in the following way. The Escrow could be in the form of cash deposited with a scheduled commercial bank.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 acquirer fails to make payment. If the delay in payment of consideration is not due to the above reasons. 7.. SEBI can take separate action against the acquirer which may include prosecution / barring the acquirer from entering the capital market for a period etc. 2. 1. for credit to investor protection fund etc. Acquirer(s) are however not to be made accountable for postal delays. the acquirers would be liable to pay interest to the shareholders for the delayed period in accordance with Regulations.
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