Takeover Code: Regulatory Framework SM II_HANDOUT 07

Holding Company: Type of business organization that allows a firm (called parent) and its directors to
control or influence other firms (called subsidiaries). This arrangement makes venturing outside one's core
industry possible and, under certain conditions, to benefit from tax consolidation, sharing of operating
losses, and ease of divestiture. The legal definition of a holding company varies with the legal system.
Some require holding of a majority (80 percent) or the entire (100 percent) voting shares of the subsidiary
whereas other require as little as five percent.

Takeover Code identifies an “acquirer” as any person who, directly or indirectly, acquires or agrees to
acquire whether by himself, or through, or with persons acting in concert with him, shares or voting rights
in, or control over a target company.

Takeover Code defines ‘shares’ as, shares in the equity share capital of a target company carrying voting
rights, and includes any security which entitles the holder thereof to exercise voting rights. The definition
clarifies that ‘shares’ includes all depository receipts carrying an entitlement to exercise voting rights in the
target company. The emphasis of the Takeover Code is on the acquisition of ‘voting rights’ attached with
the shares. Consequently, the acquisition of ‘preference shares’ may not attract the same obligations as
that of the acquisition of shares under the Takeover Code.

Takeover Code has introduced the definition of “convertible security” as a security which is convertible
into or exchangeable with equity shares of the issuer at a later date, with or without the option of the
holder of the security, and includes convertible debt instruments and convertible preference shares.

Target Company: The company / body corporate or corporation whose equity shares are listed in a stock
Exchange and in which a change of shareholding or control is proposed by an acquirer, is referred to as the
Target Company.

An open offer is an offer made by the acquirer to the shareholders of the target company inviting them to
tender their shares in the target company at a particular price. The primary purpose of an open offer is to
provide an exit option to the shareholders of the target company on account of the change in control or
substantial acquisition of shares, occurring in the target company.
An open offer, other than a voluntary open offer under Regulation 6, must be made for a minimum of 26%
of the target company‟s share capital. The size of voluntary open offer under Regulation 6 must be for at
least 10% of the target company‟s share capital. Further the offer size percentage is calculated on the fully
diluted share capital of the target company taking in to account potential increase in the number of
outstanding shares as on 10th working day from the closure of the open offer.

Maximum permissible non-public shareholding in a listed company: is derived based on the minimum
public shareholding requirement under the Securities Contracts (Regulations) Rules 1957 (“SCRR”). Rule
19A of SCRR requires all listed companies (other than public sector companies) to maintain public
shareholding of at least 25% of share capital of the company. Thus by deduction, the maximum number of
shares which can be held by promoters i.e. Maximum permissible non-public shareholding) in a listed
companies (other than public sector companies) is 75% of the share capital.

Offer Period and Tendering Period

The term „offer period‟ pertains to the period starting from the date of the event triggering open offer till
completion of payment of consideration to shareholders by the acquirer or withdrawal of the offer by the
acquirer as the case may be. The term „tendering period‟ refers to the 10 working days period falling

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within the offer period, during which the eligible shareholders who wish to accept the open offer can
tender their shares in the open offer.

Offer price is the price at which the acquirer announces to acquire shares from the public shareholders
under the open offer.

Frequently traded or infrequently traded shares: The shares of the target company will be deemed to be
frequently traded if the traded turnover on any stock exchange during the 12 calendar months preceding
the calendar month, in which the public announcement is made, is at least 10% of the total number of
shares of the target company. If the said turnover is less than 10%, it will be deemed to be infrequently
traded.

Calculating Offer Price for Frequently traded shares: If the target company‟s shares are frequently traded
then the open offer price for acquisition of shares under the minimum open offer shall be highest of the
following:
 Highest negotiated price per share under the share purchase agreement (“SPA”) triggering the offer;
 Volume weighted average price of shares acquired by the acquirer during 52 weeks preceding the
public announcement (“PA”);
 Highest price paid for any acquisition by the acquirer during 26 weeks immediately preceding the PA;
 Volume weighted average market price for sixty trading days preceding the PA.

Calculating Offer Price for Infrequently traded shares:

If the target company‟s shares are infrequently traded then the open offer price for acquisition of shares
under the minimum open offer shall be highest of the following:
 Highest negotiated price per share under the share purchase agreement (“SPA”) triggering the offer;
 Volume weighted average price of shares acquired by the acquirer during 52 weeks preceding the
public announcement (“PA”);
 Highest price paid for any acquisition by the acquirer during 26 weeks immediately preceding the PA;
 The price determined by the acquirer and the manager to the open offer after taking into account
valuation parameters including book value, comparable trading multiples, and such other parameters
that are customary for valuation of shares of such companies.

Volume weighted average price means the product of the number of equity shares bought and price of
each such equity share divided by the total number of equity shares bought.
Example: Number of shares bought on a particular day: A
Market Price: B

Volume weighted Average Price = A1*B1+A2*B2+A3*B3………

A1+A2+A3……………..

Volume weighted average market price means the product of the number of equity shares traded on a
stock exchange and the price of each equity share divided by the total number of equity shares traded on
the stock exchange.
Example: Number of shares traded on the Stock Exchange on a particular day: X
Market Price: Y

Volume weighted Average Market Price = X1*Y1+X2*Y2+X3*Y3………

X1+X2+X3……………..

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Weighted average number of total shares means the number of shares at the beginning of a period,
adjusted for shares cancelled, bought back or issued during the aforesaid period, multiplied by a time-
weighing factor.

Hostile Offer/Bids: There is no such term as hostile bid in the regulations. The hostile bid is generally
understood to be an unsolicited bid by a person, without any arrangement or MOU with persons currently
in control. Any person with or without holding any shares in a target company, can make an offer to
acquire shares of a listed company subject to minimum offer size of 26%.

Persons Acting in Concert: Takeover Code defines persons acting in concert (“PAC”) as persons who, with a
common objective or purpose of acquisition of shares or voting rights in, or exercising control over a target
company, pursuant to an agreement or understanding, formal or informal, directly or indirectly co-operate
for acquisition of shares or voting rights in, or exercise of control over the target company.
To prove a concert relationship, the following four ‘bright line’ tests must be satisfied:
 one or more persons should have a common objective or purpose;
 the common objective or purpose should be the substantial acquisition of shares or voting rights in,
or gaining control of, a target company;
 these persons should directly or indirectly co-operate by acquiring or agreeing to acquire
shares or voting rights in, or control of, such target company; and
 such co-operation should be pursuant to a formal/informal agreement or understanding.

A PAC relationship can come into being only by design and not by accident, since the definition
presupposes the meeting of minds of two parties in relation to a common objective. However, a PAC
relationship does not depend on the existence of a pre-existing relationship; two strangers may be PACs if
they have the requisite common objective.
The onus of proving that two persons were, in fact, acting in concert with each other will be on SEBI and it
must establish that all of the above bright line tests were satisfied in a given fact situation.

To prove a concert relationship, the following four ‘bright line’ tests must be satisfied:
 one or more persons should have a common objective or purpose;
 the common objective or purpose should be the substantial acquisition of shares or voting rights in, or
gaining control of, a target company;
 these persons should directly or indirectly co-operate by acquiring or agreeing to acquire shares or voting
rights in, or control of, such target company; and
 such co-operation should be pursuant to a formal/informal agreement or understanding.

A PAC relationship can come into being only by design and not by accident, since the definition
presupposes the meeting of minds of two parties in relation to a common objective. However, a PAC
relationship does not depend on the existence of a pre-existing relationship; two strangers may be PACs if
they have the requisite common objective. The onus of proving that two persons were, in fact, acting in
concert with each other will be on SEBI and it must establish that all of the above bright line tests were
satisfied in a given fact situation. The Supreme Court of India has also observed that evidence of actual
“concerted acting” is normally difficult to obtain and is not insisted upon. The standard of proof required to
establish a concert relationship is one of probability and such standard will be satisfied if, having regard to
the relationship between the parties, their conduct and their common interests, it may be inferred that
they must be acting together.

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“Control” includes the right or the ability to appoint majority of the directors or to control the
management or policy decisions of the target company, exercisable by a person or persons acting
individually or in concert, directly or indirectly, including by virtue of their shareholding or management
rights or shareholders agreements or voting agreements or in any other manner.

OPEN OFFERS
SEBI (Substantial Acquisition of Share and Takeover) Regulation, 2011, classifies Open Offer under two
heads i.e. Mandatory Open Offer (MOO) and Voluntary Open Offer (VOO).

Mandatory Open Offer is a situation where the obligation is imposed on the acquirer along with person
acting in concert to make an open offer to the remaining shareholders so that they can exercise their exit
option, if they are desirous of doing so. In the mandatory open offer, the acquirer has to give an open offer
to the shareholders for acquisition of at least 26% of the total shares of the Target Company.

MOO is applicable in case of Acquisition of share which crosses:

(i) initial threshold limit under Regulation 3
(ii) Creeping Acquisition
(iii) Acquisition of Control and
(iv) Indirect Acquisition of shares or
(v) control under any of the above.

1. Mandatory Tender Offers

The Takeover Regulations prescribe certain circumstances where an acquirer is obligated to make a
Mandatory Tender Offer to the shareholders of the target company to acquire at least 26% of the shares of
the target company. These triggers are described below:
1.1. Initial Trigger
Any acquirer acquiring shares or voting rights, which taken together with shares or voting rights already
held by such acquirer along with persons acting in concert (“PACs”) with him, entitles them to exercise 25%
or more of the voting rights in the target company, is required to make a Mandatory Tender Offer. The
concept of PACs is discussed later.
1.2. Consolidation Trigger
Any acquirer who, together with PACs with him, holds 25% or more of the shares or voting rights but less
than the maximum permissible non-public shareholding limit in a target company, is required to make a
Mandatory Tender Offer on the gross acquisition, in a single financial year, of more than 5% of the shares
or voting rights of such target company. The limit of 5% is calculated by aggregating gross acquisitions, i.e.,
without taking into account any intermediate dilution in shareholding or voting rights.

1.3. Control Trigger

Irrespective of the extent of shares or voting rights held in the target company, any acquirer who acquires,
directly or indirectly, control over a target company is required to make a Mandatory Tender Offer. Any
acquisition of control over an unlisted company which in turn controls a listed company in India would be
considered an indirect acquisition of control, and would trigger a Mandatory Tender Offer. ‘Control’ under
the Takeover Regulations is widely defined and includes the right to appoint a majority of the directors of
the target company, or to control the management or policy decisions of the target company, whether
individually or with PACs, directly or indirectly, including by virtue of shareholding or management rights or
shareholders’ agreements or in any other manner. ‘Control’ includes both de facto and de jure control.
Since the test for control is not defined by an objective shareholding threshold, acquisition of control is
determined on a caseby-case basis by assessing whether the acquirer can exercise control over the

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management or policy decisions of the target company, whether through the exercise of contractual rights
or otherwise.
Unlike the 1997 Takeover Regulations, the Takeover Regulations do not distinguish between varying
degrees of control. Therefore, any cessation of control by a person in joint control with an acquirer will not
be considered an acquisition of control by the acquirer, and will not trigger a Mandatory Tender Offer.

1.4. Trigger on Indirect Acquisitions

The Takeover Regulations also provide clear and specific guidance that indirect acquisitions of voting rights
and/or control in a target company will also trigger a Mandatory Tender Offer. An indirect acquisition
occurs when the acquirer acquires the ability to exercise or direct the exercise of such percentage of voting
rights in, or control over, the target company that would trigger the initial, consolidation or control triggers
described above.
E.g., the acquisition of 25% of the shares or voting rights in a holding company which holds 40% of the
shares or voting rights in a target company together with a minority representation on the board of
directors of the holding company would not constitute an indirect acquisition. However, the acquisition of
70% of the shares or voting rights of the holding company simpliciter, or the acquisition of 30% of the
shares or voting rights along with ‘control’ rights in a holding company which holds 26% of a target
company would trigger Mandatory Tender Offer obligations. Where the acquisition of the target company
in India is only an incidental element of an international transaction, some leeway in relation to the tender
offer process has been provided to the acquirer. In such situations, the acquirer can formally launch the
Mandatory Tender Offer after the international transaction has been consummated and is eligible to price
protection in relation to the price payable under such Mandatory Tender Offer (subject to a 10% interest
payment requirement). The Takeover Regulations stipulate an objective test for what would constitute a
‘genuine’ indirect acquisition, i.e., where the acquisition of the target company is incidental to the
international acquisition and the target company not a predominant part of the business being acquired.
Therefore, this relaxation in the Mandatory Tender Offer process is available where the proportionate net
asset value/sales turnover/market capitalization of the Indian target company does not exceed 80% of the
entity or business being acquired under the primary (international) acquisition. Where the Indian target
company is a predominant part of the entity or business being acquired, based on the 80% test described
above, the transaction will be treated as a ‘direct acquisition’ for the purposes of making a Mandatory
Tender Offer under the Takeover Regulations.

2. Voluntary Offers
Voluntary Open Offer: A voluntary open offer under Regulation 6, is an offer made by a person who
himself or through Persons acting in concert, if any, holds 25% or more shares or voting rights in the target
company but less than the maximum permissible non-public shareholding limit.

The Takeover Regulations provide a distinct regime for acquirers to make Voluntary Offers to public
shareholders. A Voluntary Offer may be made by an existing shareholder or an acquirer who holds no
shares in the target company. The launch of a Voluntary Offer is subject to the fulfilment of certain
conditions. Therefore, if any acquirer or PACs with such acquirer has acquired any shares or voting rights of
the target company without attracting a Mandatory Tender Offer in the preceding 52 weeks, then such
acquirer will not be permitted to launch a Voluntary Offer. In addition, an acquirer who has launched a
Voluntary Offer is not permitted to acquire any shares of the target company during the offer period other
than under such tender offer. An acquirer who has launched a Voluntary Offer is also not permitted to
acquire shares of the target company for a period of 6 months after the completion of the Voluntary Offer,
except under another Voluntary Offer. This does not prohibit the acquirer from launching a competing
offer under the Takeover Regulations.

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3. Competing Offers
Competitive offer is an offer made by a person, other than the acquirer who has made the first public
announcement. A competitive offer shall be made within 15 working days of the date of the Detailed Public
Statement (DPS) made by the acquirer who has made the first PA.
If there is a competitive offer, the acquirer who has made the original public announcement can revise the
terms of his open offer provided the revised terms are favorable to the shareholders of the target
company. Further, the bidders are entitled to make revision in the offer price up to 3 working days prior to
the opening of the offer. The schedule of activities and the offer opening and closing of all competing offers
shall be carried out with identical timelines.

There is a prohibition on a competing acquirer making an offer or entering into an agreement that could
trigger a Mandatory Tender Offer at any time after the expiry of the said 15 business days and until
completion of the original offer. Therefore, time is of the essence. Once a competing offer has been
launched, the two competing offers are treated on par and the target company would have to extend
equal levels of information and support to each competing acquirer. A target company cannot favour one
acquirer over the other(s) or appoint such acquirer’s nominees on the board of directors of the target
company, pending completion of the competing offers.

A competing offer can be conditional upon a minimum level of acceptance only if the original tender offer
is also conditional. The ‘losing’ competing acquirer is not permitted to sell the shares acquired by him
under the competing offer to the winner of the competing bid. Therefore, any person making a competing
offer will continue to be a shareholder in the target company, even if his competing offer has failed.

CONDITIONS OF OPEN OFFER

If an acquirer has agreed to acquire or acquired control over a target company or shares or voting rights in
a target company which would be in excess of the threshold limits, then the acquirer is required to make
an open offer to shareholders of the target company.

Threshold limits for acquisition of shares / voting rights, beyond which an obligation to make an open
offer is triggered

Major thresholds limit as per SEBI (SAST) Regulations, 2011-

0%- 25%
25%-75%
75% and above
Initial Threshold Limit: Regulation 3(1) provides that when an acquirer together with PACs intends to
acquire shares or voting rights which along with the existing shareholding would entitle him to exercise
25% or more of the voting rights in the target company, in such a case the acquirer is required to make
public announcement to acquire at least additional 26% of the voting rights of Target Company from the
shareholders through an open offer.

(The 1st trigger point is during the acquisition of 25% or more shares of the target company by the acquirer
company.)

Creeping Acquisition Limit: Regulation 3(2) allows the persons either by themselves or through PAC with
them who are holding more than 25% but less than 75% shares or voting rights in the Target Company to

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acquire further up to 5% shares or voting rights in the financial year ending 31st March. The allowable
acquisition of 5% is popularly known as ‘Creeping Acquisition.’

(The 2nd trigger point is if the acquirer tries to acquire more than 5% of shares in a financial year after the
satisfaction of 1st trigger point.)

Acquisition of 25% or more shares or voting rights: An acquirer, who (along with PACs, if any) holds less
than 25% shares or voting rights in a target company and agrees to acquire shares or acquires shares which
along with his/ PAC‟s existing shareholding would entitle him to exercise 25% or more shares or voting
rights in a target company, will need to make an open offer before acquiring such additional shares.

Acquisition of more than 5% shares or voting rights in a financial year: An acquirer who (along with PACs, if
any) holds 25% or more but less than the maximum permissible non-public shareholding in a target
company, can acquire additional shares in the target company as would entitle him to exercise more than
5% of the voting rights in any financial year ending March 31, only after making an open offer.

Creeping Acquisition
Regulation 3(2) of the SEBI Takeover Regulations .provides that an acquirer who already holds 25% or more
shares or voting rights but less than maximum permissible non-public shareholding of the Target Company
can either by himself or through persons acting in concert with them acquire further upto 5% shares or
voting rights in the financial year ending 31st March. The allowable acquisition of 5% is known as ‘Creeping
acquisition’. Thus, the acquirer is permitted to acquire additional shares and consolidate his holdings
within the aforesaid limits.
In case the acquirer desires to acquire more than 5% shares or voting rights in one financial year, then he
can do so only by making a public announcement in terms of these regulations.

Further, the following points need consideration:

a) No Netting off allowed:
The Regulation specifically provide that for the purpose of determining the quantum of acquisition of
additional voting rights, the gross acquisitions without considering the disposal of shares or dilution of
voting rights owing to fresh issue of shares by the target company shall be taken into account.

b) Incremental voting rights in case of fresh issue on expanded capital

In the case of acquisition of shares by way of issue of new shares by the target company, the difference
between the pre-allotment and the post-allotment percentage voting rights shall be regarded as the
quantum of additional acquisition.

TRIGGERS
Triggers Redefined
Mandatory open offer obligations
The crucial obligation under the takeover regulations is the requirement to make an ‘open offer’ to the
public shareholders of the target company upon a substantial acquisition of shares or voting rights or
acquisition of control of the target company, directly or indirectly. The thresholds for acquisition of shares
have been redefined by the Takeover Code from those under the 1997Code.

Computing Trigger Limits

The word “shares” for disclosure purposes include convertible securities also. Hence for computation of
trigger limits for disclosures given above, percentage w.r.t shares shall be computed taking in to account

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total number of equity shares and convertibles and the percentage w.r.t voting rights shall be computed
after considering voting rights on equity shares and other securities (like GDRs, if such GDRs carry voting
rights) An illustration is provided below for the calculation of trigger limits for disclosures.
Total Shares/ voting capital of the company
 Company A has 100 equity shares, 50 partly convertible Debentures (PCDs) and 10 GDRs. 1 GDR
carries 1 voting right.
 Total shares of company A= 100+50+10 = 160
 Total voting capital of Company A= 100+10=110

Persons B‟s holding of shares and voting rights

 Person B has 8 equity shares, 7 PCDs and 1 GDR.
 Person B has 8+7+1 =16 shares (shares for disclosure purpose includes convertible securities)
 Person B‟s holding in terms of shares= 16/160=10% of shares
 Person B‟s voting rights= 8+1= 9 voting rights
 Person B‟s holding in terms of voting rights = 9/110=8 % of voting rights
Since person B is holding more than 5% of shares or voting rights, he is required to make disclosures for
any acquisition/ sale of 2% or more of shares or voting rights.

Acquisition by Person B Scenario I

 Person B acquires 2 equity shares and 2 PCDs.
 In terms of shares, person B has acquired 4/160=2.5% of shares
 In terms of voting rights, person B has acquired 2/110= 1.8% of voting rights
Since acquisition done by person B represents 2 % or more of shares, the disclosure obligation is triggered.

Scenario II Person B acquires 20 PCDs

In terms of shares, person B has acquired 20 shares, i.e. 20/160 i.e. 12.5% shares. In terms of voting rights,
he has not acquired a single voting right i.e. 0 voting right However, since acquisition done by person B
represents 2% or more of shares (though no voting rights), the disclosure obligation is triggered.

Difference between open offer and buyback

Some news reports mentioned the Unilever-HUL deal as a buyback. But a buyback is not traded on the
exchange and the shares get nullified. A buyback happens when a company decides to buy its own shares
from shareholders. In an open offer, the shares change hands, while the number of shares remains the
same. A buyback is done by the promoters, while an open offer can be launched by any controlling
stakeholder. A buyback is typically done when the promoter wants to increase his holding at a low cost
(typically, when the stock falls), or when a company intends to boost its share price by reducing the
number of shares traded. Also, the minimum thresholds (of share acquisition) are different for open offers
and buybacks.
The major difference between the two is the tax implications. In case of a buyback, securities transaction
tax (STT) is applicable. Currently, for purchase or sale of securities on stock exchanges, 0.1% STT is charged.
And long-term capital gains tax is nil if STT has been paid when shares exchange hands. In an open offer,
you don’t have to pay STT as the transaction is treated as a debt market transaction. However, this
transaction is not exempt from long-term capital gains tax. Hence, the gains are taxed at 10% without
indexation or 20% with indexation if held for more than a year. Tax at slab rate will be applicable if the
shares are held for less than a year.
In case the offer gets oversubscribed, the company will accept limited applications.