A Critical Analysis of Proposed Changes To Takeover Reg.

2011] SECURITIES LAWS 71
[2011] 105 SCL 71 (MAG)
SECURITIES LAWS
A CRITICAL ANALYSIS OF PROPOSED CHANGES TO
SEBI TAKEOVER REGULATIONS
VIVEK SADHALE*
VIKAS AGARWAL**
ndia has witnessed intense activities in corporate restructuring in past
few years. The number of takeovers of listed companies has increased
from an average of 69 a year during the period between 1997 and 2005
to 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 to
review the Takeover Regulations, 1997 and bring it in line with the
current understanding of the international market. A comparative study of
key provisions of the Takeover Regulations, 1997 and Proposed
Takeover Regulations with critical comments is given in this write-up.
A Brief History on Takeover Regulations

1. India has seen a steady but robust evolution of
regulations relating to substantial acquisitions of shares
and takeovers. With the statutory recognition given in the
form of the SEBI Act, 1992, wherein the SEBI was mandated
to regulate substantial acquisition of shares and
takeovers, the SEBI promulgated SEBI Substantial
Acquisition of Shares and Takeover Regulations in 1994
("Takeover Regulations, 1994"), which came into force on
November 4, 1994.
To review the Takeover Regulations, 1994, the SEBI had set
up a committee under the chairmanship of Justice P.N.
Bhagwati. Taking into consideration the recommendations of
the committee given in its report submitted in January
1997, the SEBI notified the SEBI Substantial Acquisition
of Shares and Takeover Regulations, 1997 (‘Takeover
Regulations, 1997’) on February 20, 1997, repealing the
Takeover Regulations, 1994. The Takeover Regulations, 1997
were periodically amended in response to events and
developments in the market place, regulatory and judicial
rulings as well as evolving global practices. In 2001, a
review of the Takeover Regulations, 1997 was carried out
by 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, further

amendments were made to the Takeover Regulations, 1997.
Constitution of TRAC
2. India has witnessed intense activities in corporate
restructuring
in past few years. The number of takeovers of listed
companies
has increased from an average of 69 a year during the
period be-
tween 1997 and 2005 to 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 to
review the Takeover Regulations, 1997 and bring it in
line with the current understanding of the international
market.
Accordingly, the SEBI, constituted the Takeover
Regulations Advisory Committee (TRAC) with the mandate
to examine and review the Takeover Regulations, 1997 and
to suggest suitable amendments to bridge the gap between
the decade-long regulations and a rapidly evolving M&A
market in the country, as deemed fit under the
chairmanship of Mr. C. Achuthan, Former Presiding
Officer, Securities Appellate Tribunal.
TRAC submitted its report to the SEBI on July 19, 2010
with a new set of Takeover Regulations taking into
consideration various decisions of the Courts in India
and rulings of Securities Appellate Tribunal,
international best practices (‘Proposed Takeover
Regulations’). Much like the proposed revamp of tax laws
by way of the Direct Taxes Code, the Proposed Takeover
Regulations fully rewrite the Takeover Regulations,
1997.
The report of TRAC is divided into three parts:
u Part I contains the salient features of the Proposed
Takeover Regulations.
u Part II contains the Committee deliberations and key
recommendations.
u Part III contains the draft text of the Proposed
Takeover Regulations.
A comparative study of key provisions of the Takeover
Regulations, 1997 and Proposed Takeover Regulations with
critical comments is given below:
Reg. Provisions of Reg. Recommendations of Major change
No. Takeover No. TRAC in Proposed
Regulations, 1997 Takeover
Regulations
Definition of
‘control’
2(1)(c) "control" shall 2(1)(b) "control" includes The
include the right the right or the definition
to appoint ability to appoint includes not
majority of the majority of the only the
directors or to directors or to right but
control the control the also the

management or manage-ment or ability to
policy decisions policy decisions of appoint
exercisable by a the target company, majority of
person or persons exercisable by a the directors
acting indivi- person or persons on the board
dually or in acting individually of the target
concert, directly or or company.
indirectly, in concert,
include- directly or

Regulations, 1997 Takeover Regulations
ing by virtue of indirectly, including
their shareholding by virtue of their
or management shareholding or
rights or management rights or
shareholders shareholders
agreements or agreements or voting
voting agreements agreements or in any
or in any other other manner.
manner.
Trigger of the
Takeover Code
10(1) No acquirer shall 3(1) No acquirer shall The threshold
acquire shares or acquire shares or for
voting rights which voting rights in a triggering of
(taken together target company which the Takeover
with shares or taken together with Code has been
voting rights, if shares or voting enhanced from
any, held by him or rights, if any, held 15 per cent
by persons acting by him and by to 25 per
in concert with persons acting in cent.
him), entitle such concert with him in
Exemption:
acquirer to such target company,
Omitted
exercise fifteen entitle them to
per cent or more of exercise twenty-five
the voting rights per cent or more of
in a company, the voting rights in
unless such such target company
acquirer makes a unless the acquirer
public announcement makes a public
to acquire shares announcement of an
of such company in open offer for
accordance with the acquiring shares of
regulations. such target company
in accordance with
these regulations.
11(1) No acquirer who, 3(2) No acquirer, who lThe creeping
together with together with persons acquisition
persons acting in acting in concert limit of 5
concert with him, with him, has per cent in
has acquired, in acquired and holds in one financial
accordance with the accordance with these year
provisions of law, regulations shares or increased
15 per cent or more voting rights in a from existing
but less than fifty target company "15 per cent
five per cent (55 entitling them to - 55 per
per cent) of the exercise twenty-five cent" to
shares or voting per cent or more of proposed "25
rights in a company, the voting rights in per cent - 75
shall acquire, the target company per cent".
either by himself or but less than the
lThe
through or with maximum permissible
acquisition
persons acting in non-public
can be made
concert with him, shareholding, shall
in any manner
additional shares or acquire within any
including
voting rights financial year
through open
entitling him to additional shares or
market
exercise more than 5 voting rights in such
purchases,
per cent of the target company
negotiated
voting rights, with entitling them to
deals, bulk
post acquisition exercise more than
or block
shareholding or five per cent of the
deals,
voting rights not voting rights, preferential

exceeding fifty five subject to their allotment.
per cent., in any aggregate post
financial year acquisition
ending on 31st shareholding not
March, unless such exceeding the maxi-
acquirer makes a mum permissible
public announcement non-public
to acquire shares in shareholding, unless
accordance with the the acquirer makes a
regulations. public

No acquirer, who announcement of an
together with open offer for
persons acting in acquiring shares of
concert with him such target company
holds, fifty-five in accordance with
per cent (55 per these regulations:
cent) or more but
Provided that such
less than
acquirer shall not
seventy-five per
be entitled to enter
cent (75 per cent)
into any agreement
of the shares or
to acquire shares or
voting rights in a
voting rights
target company,
exceeding such
shall acquire
number of shares as
either by himself
would take the
or through or with
aggregate
persons acting in
shareholding
concert with him
pursuant to the
any additional
acquisition under
share entitling him
the agreement to
to exercise voting
above the maximum
rights or voting
permissible
rights therein,
non-public
unless he makes a
shareholding.
public announcement
to acquire shares
in accordance with
these Regulations.
Acquisition of
Control
12 Irrespective of 4 Irrespective of Acquisition
whether or not acquisition or of control
there has been any holding of shares or over a
acquisition of voting rights in a target
shares or voting target company, no company
rights in a acquirer shall would
company, no acquire, directly or require the
acquirer shall indirectly, control acquirer to
acquire control over such target make an open
over the target company, unless the offer as a
company, unless acquirer makes a prerequisite
such person makes a public announcement .
public announcement of an open offer for
Exemption
to acquire shares acquiring shares of
provided
and acquires such such target company
earlier
shares in in accordance with
regarding
accordance with the these regulations.
obtaining
regulations:
shareholders
Provided that
approval is
nothing contained
deleted in
herein shall apply
the Proposed
to any change in
Regulations.
control which takes
place in pursuance
of a special
resolution passed
by the shareholders
in a general
meeting:
Size of Open Offer
21(1) The public offer 7(1) The open offer for The open
made by the acquiring shares to offer size is

acquirer to the be made by the proposed to
shareholders of the acquirer and persons be increased
target company acting in concert from 20 per
shall be for a with him under cent to 100
minimum twenty per regulation 3 and per cent.
cent of the voting regulation 4 shall
capital of the be for acquisition
company. of all the shares
held by all the
other shareholders
of the target
company as of the
last day of the
tendering period.

Regulations
Offer Price -
Direct
Acquisition
20(4) Offer price shall 8(2) Offer price shall l Volume-weighted
be the highest be the highest average market
of— of,— price ("VWAP")
l the negotiated for 60 trading
(a) the highest
price under the days prior to the
negotiated price
agreement public
per share of the
l price paid by announcement
target company for
the acquirer or would replace
any acquisition
persons acting average of the
under the
in concert with weekly high and
agreement
him for low of the
attracting the
acquisition, if closing prices of
obligation to make
any, including shares for past
a public
by way of 26 weeks or 2
announcement of an
allotment in a weeks.
open offer;
public or l In addition to
rights or (b) the highest
preferential volume-weighted negotiated price
issue during average price paid between parties
the twenty-six or payable for and highest price
week period acquisitions, paid by acquirer
prior to the whether by the and PAC during 26
date of public acquirer or by any weeks prior to
announcement, person acting in public
whichever is concert with him announcement,
higher; during the VWAP for shares
l the average of fifty-two weeks acquired by
the weekly high immediately acquirer and PAC
and low of the preceding the date during past 52
closing prices of the public weeks is also to
of the shares announcement; be considered for
of the target determining open
(c) the highest
company as offer price.
price paid or
quoted on the
payable for any
stock exchange
acquisition,
where the
whether by the
shares of the
acquirer or by any
company are
person acting in
most frequently
concert with him
traded during
during the
the twenty-six
twenty-six weeks
weeks or the
immediately
average of the
preceding the date
daily high and
of the public
low of the
announcement; and
prices of the
shares as (d) the
quoted on the volume-weighted
stock exchange average market
where the price of such
shares of the shares for a
company are period of sixty
most frequently trading days
traded during immediately
the two weeks preceding the
preceding the date of the
date of public public
announcement as
announcement. traded on the

stock exchange
where the maximum
volume of trading
in the shares of
the target
company is
recorded during
such period,
provided such
shares are
frequently
traded.
Offer Price -
Indirect
Acquisition
20(12) The offer price 8(3) Offer price shall New price indica-
for indirect be the highest tor introduced in
acquisition or of,—
control shall

be determined with (a) the highest the form of
reference to the negotiated price per highest price
date of the public share, if any, of the paid by
announcement for the target company for acquirer or
parent company and any acquisition under PAC between
the date of the the agreement date of
public announcement attracting the primary
for acquisition of obligation to make a acquisition
shares of the target public announcement and date of
company, whichever of an open offer; public
is higher, in announcement
(b) the
accordance with in addition
volume-weighted
sub-regulation (4) to the
average price paid or
or sub-regulation existing
payable for any
(5). price
acquisition, whether
indicators.
by the acquirer or by
any person acting in
concert with him
during the fifty-two
weeks immediately
preceding the earlier
of the date on which
the primary
acquisition is
contracted, and the
date on which the
intention or the
decision to make the
primary acquisition
is announced in the
public domain;
(c) the highest price
paid or payable for
any acquisition,
whether by the
acquirer or by any
person acting in
concert with him
during the twenty-six
weeks immediately
preceding the earlier
the primary
acquisition is
contracted, and the
date on which the
intention or the
primary acquisition
is announced in the
public domain; and
(d) the highest
price paid or
payable for any
acquisition, whether
by the acquirer or
by any person acting
in concert with him
between the earlier
the primary
acquisition is
contracted, and the

date on which the
intention or the
primary acquisition
is announced in the
public domain, and
the date of the
public an-

Regulations, Takeover
1997 Regulations
nouncement of the
open offer for
shares of the
target company
made under these
regulations;
(e) the
volume-weighted
average market
price of the
shares for a
period of sixty
trading days
immediately
preceding the
earlier of the
date on which the
primary
acquisition is
contracted, and
the date on which
the intention or
the decision to
make the primary
acquisition is
announced in the
public domain, as
traded on the
stock exchange
where the maximum
volume of trading
in the shares of
the target company
is recorded during
such period,
provided such
shares are
frequently traded.
Voluntary Open
Offer
11(2A) Where an 6(1) An acquirer, who Specific framework
acquirer who together with proposed for
(together with persons acting in voluntary open
persons acting concert with him, offer. Share-holders
in concert with holds shares or holding 25 per cent
him) holds voting rights in a or more in the
fifty-five per target target company may,
cent (55 per company entitling without breaching
cent) or more them to exercise minimum
but less than twenty-five per public sharehold-ing
seventy-five cent or more but requirements under
per cent (75 less than the the Listing
per cent) of maximum Agreement,
the shares or permissible voluntarily make an
voting rights non-public open offer.
in a target shareholding,
company, is shall be entitled
desirous of to voluntarily
consolidating make a public
his holding announcement of an
while ensuring open offer for
that the public acquiring shares
shareholding in in accordance with

the target these regulations,
company does subject to their
not fall below aggregate
the minimum shareholding after
level permitted completion of the
by the Listing open offer not
Agreement, he exceeding the
may do so by maximum
making a public permissible
announcement in non-public
accordance with shareholding.
these
regulations.
Delisting
21(2) If the 7(5) In the event the The acquirers have
acquisition acquirer has not the option to
made in disclosed his directly delist the
pursuance of a inten- target com-
public offer tion to delist the pany if the stake of
results in the shares of the
public target company at
shareholding in the time of the
the target detailed public
company being
reduced be-

low the minimum statement, or in acquirer
level required as the event the exceeds
per the Listing acceptances delisting
Agreement, the tendered in threshold
acquirer shall response to the (90 per
take necessary open offer were cent)
steps to such that the without
facilitate shareholding of the complying
compliance of the acquirer taken with the
target company together with onerous
with the relevant persons acting in requirements
provisions concert with him under the
thereof, within pursuant to Delisting
the time period completion of the Regulations.
mentioned therein. open offer would
entitle them to
If the acquirer
exercise more than
chooses to delist
the maxi-
the target company
mum permissible
pursuant to
non-public
acquisition in
shareholding
open offer, it
applicable to but
should be in
less than the
accordance with
delisting
provisions of the
threshold, the
SEBI (Delisting of
acquirer shall be
Equity Shares)
required to
Regulations, 2009.
either,—
(a) bring down the
non- public
shareholding to the
level specified and
within the time
permitted under the
listing agreement;
or
(b) proportionately
reduce the number
of shares acquired
under the open
offer and under any
agreement that
attracted the
obligation to make
such open offer,
other than shares
acquired by way of
allotment by the
target company,
such that the
holding of the
acquirer and
persons acting in
concert does not
exceed the maximum
permissible
non-public
sharehold-
ing:
Provided that the

option to
proportionately
reduce the number
of shares to be
acquired under this
clause shall not be
available where the
open offer is a
competing offer.

Regulations
Non-compete fees
20(8) Any payment made to Omitted. Promoters to be
the persons other paid the same
than the target price per share
company in respect as the public
of non- compete shareholders.
agreement in excess
of twenty-five per
cent of the offer
price arrived at
under
sub-regulation (4)
or (5) or (6) shall
be added to the
offer price.
Governance
22(13) Where the acquirer 26(2) (2) During the The acquirer
has not either, in offer period, can dispose
the public unless the approval assets inspite
announcement, and, of shareholders of of not stating
or in the letter of the target company such intention
offer, stated his by way of a special in public
intention to resolution by announcement if
dispose of or postal ballot is approval of
otherwise encumber obtained, the board shareholders of
any assets of the of directors of the target
target company either the target company is
except in the company or any of obtained
ordinary course of its subsidiaries through a
business of the shall not,— special
target company, the resolution.
(a) alienate any
acquirer, where he
material assets
has acquired
whether by way of
control over the
sale, lease,
target company,
encumbrance or
shall be debarred
otherwise or enter
from disposing of
into any agreement
or otherwise
therefor outside
encumbering the
the ordinary course
assets of the
of business;
target company for
a period of two (b) effect any
years from the date material borrowings
of closure of the outside the
public offer. ordinary course of
business;
(c) issue or allot
any authorised but
unissued securities
entitling the
holder to voting
rights:
23(4) (4) The board of 26(6) Upon receipt of the A committee of
directors of the detailed public independent
target company may, statement, the directors of
if they so desire, board of directors the target
send their unbiased of the target company
comments and company shall mandatorily
recommendations on constitute a required to
the offer(s) to the committee of give its

shareholders, independent reasoned
keeping in mind the directors to recommendations
fiduciary provide reasoned on the open
responsibility of recommendations on offer to the
the directors to such open offer, shareholders.
the shareholders and the target
and for the purpose company shall
seek the opinion of publish such
an independent recommendations
merchant banker or
a committee of
independent
directors.
An Analysis of the proposed changes

3. The points discussed below make an analysis of the
proposed changes:
u Increase in trigger threshold from 15 per cent to 25
per cent - The proposal is in recognition of the
changed scenario where very few promoters control
listed companies with 15 per cent shareholding. TRAC
appears to have taken its cue from the UK’s regulatory
regime for takeovers, where the takeover trigger is at
30 per cent of the shareholding. The increase in
threshold limit from 15 per cent to 25 per cent is a
welcome change for potential acquirers, particularly
private equity investors. Due to increase in initial
trigger threshold from 15 per cent to 25 per cent,
hostile takeovers for some of the listed companies
with lower promoter shareholding could become easy.
Anyone who controls at least 25 per cent of a
company’s shareholding wields the power to stop
special resolutions, that is, acquires negative
control. Raising the threshold for triggering an
open offer to the level that grants negative control
is likely to have major implications.
u Creeping acquisition - Creeping acquisition has been
permitted to the extent of 5 per cent per annum till
75 per cent for any acquirer holding 25 per cent or
more voting rights in the target company. The Takeover
Regulations, 1997 permits creeping acquisition only up
to 55 per cent.
The proposal to allow promoters to shore up their
shareholding to 75 per cent under the 5 per cent per
financial year creeping acquisition window should be
a welcome change for many, especially family-owned
businesses. This would be beneficial for the
promoters to gradually consolidate their
shareholding up to 75 per cent in the target company
without triggering open offer. Promoters can also
consolidate their shareholding through the voluntary
open offer route with minimum offer size being 10
per cent - this could provide a window to increase
shareholding outside the statutory public offer
route for 100 per cent shareholding.
u No non-compete fees - Promoters would 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. No distinction is possible between the price

paid to promoters and public shareholders in line with
international practices. This could dissuade many
promoters from selling their stakes in listed
companies. The recommendations of TRAC attempt to
ensure
equitable treatment of public shareholders which is

clearly evidenced by the deletion of this concept of
non-compete fees.
u Increase in open offer size - The Advisory Committee
has also vehemently argued in favour of an exit
opportunity for all shareholders on grounds of equity
and fairness as the exiting promoters may have de
facto control in many listed companies with
shareholding in the range of 25 per cent to 30 per
cent. Increasing the offer size from 20 per cent to
100 per cent would give all the shareholders an exit
opportunity for all their shares. This proposal could
mean that the cost of M&A transaction may
significantly increase, particularly in case of
widely-held companies and in situations where budgets
for M&A deals is a constraint, could lead to some
ongoing M&A decisions being reconsidered.
Financing a large takeover offer through bank finance
or private equity firms - which the offer for 75 per
cent stock of the target company must entail - is
bound to make the acquirer that much more reckless, as
such financing typically increases the principal
agency conflict. 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.
u Delisting - In what could be argued as a major
acquirer friendly proposal, the target company would
need to be delisted if pursuant to a statutory open
offer, the level of acquirer’s shareholding increases
beyond 90 per cent. Such delisting would be undertaken
by giving an exit window to public shareholders at the
open offer price. While the proposals have stopped
short of a compulsory minority squeeze out, this could
obviate the need of going through the cumbersome and
expensive reverse book building process under the
present delisting guidelines. Further, following the
public offer, if the acquirers shareholding is between
75 per cent and 90 per cent, necessary steps would
need to be undertaken to bring down their shareholding
to 75 per cent.
u Control - Definition of - There is 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
‘de
facto control’ as compared to ‘de jure control’. An
interesting proposal is to include the ‘ability’ in
addition to ‘right’ to
appoint majority directors or to control the
management and policy decisions in the definition of
‘control’. This could mean
that open offer could be triggered if the acquirer obtains

de facto control and not necessarily de jure control -
the determination of de facto control would be purely
factual and could be the subject-matter of litigation
in the times to come.
u Role of Independent Directors - 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. The public shareholders would benefit from
the wisdom of committee of independent directors who
will have to mandatorily make reasoned recommendations
on open offer.
Conclusion
4. TRAC has attempted to simplify the Takeover Code and
align it with the international best practices. The new
takeover regulation proposed by the C. Achuthan committee
is a welcome step and is in the right direction. It seeks
to bring global benchmarks to Indian takeover regulations
and will both enhance efficiency in the market for
corporate control and ensure fairness between large and
small stakeholders in a company being targeted for
takeover. The proposed changes will help to develop a
transparent and orderly takeover market, to be emulated by
other countries. ‘The philosophy of equitable and fair
treatment of all shareholders should have a primacy over
other considerations,’ said the report.
31-S

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2011] SECURITIES LAWS 71

[2011] 105 SCL 71 (MAG)

A Brief History on Takeover Regulations

* The author is a Company Secretary.

its report in May 2002. Based on the same, further

control the control the also the

Reg. Provisions of Reg. Recommendations of Major change

voting rights not voting rights, preferential

Reg. Provisions of Reg. Recommendations of Major change

made by the acquiring shares to offer size is

Reg. Provisions of Reg. Recommendations of Major change

announcement. traded on the

Reg. Provisions of Reg. Recommendations of Major change

contracted, and the

Reg. Provisions of Reg. Recommendations of Major change

shareholding in in accordance with

Reg. Provisions of Reg. Recommendations of Major change

Provided that the

Reg. Provisions of Reg. Recommendations of Major change

the offer(s) to the committee of give its

An Analysis of the proposed changes

company. No distinction is possible between the price

equitable treatment of public shareholders which is

only minority rights without positive control over the

that open offer could be triggered if the acquirer obtains

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