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SEBI Takeover Regulations 2011 Overview
Background SEBI at their Board Meeting held on 28 July 2011, had considered the report of Takeover Regulations Advisory Committee [TRAC] and accepted most of the recommendations made by TRAC. SEBI has, on 23 September 2011, notified SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 [SAST 2011]. SAST aims at protecting interest of the investors in securities of a listed company providing amongst others, an opportunity for the public shareholders to exit where there is a substantial acquisition of shares or voting rights or control over a listed company, consolidation of holdings by existing shareholders and related disclosures and penalties for non- compliance etc. SAST requires an acquirer to make an offer to shareholders of the target company on acquiring shares exceeding stipulated thresholds. It also contains provisions relating to open offer size and price, time bound process for making an open offer, exemption from making an open offer etc. Applicability SAST 2011 will come into force on the 30th day from the date of its publication in the Official Gazette. In view of this requirement, SAST 2011 will be effective from 22 October 2011 and SAST 1997 stands repealed from said date. Key provisions of SAST 2011 are summarized below. Triggers for making an open offer Direct acquisition of shares or voting rights • Any acquisition of shares or voting rights in the target company by the acquirer and PAC which entitle them to exercise in aggregate 25% or more voting rights. • Any acquisition of shares or voting rights exceeding permissible creeping limit (5%) in a financial year. This situation arises in cases where the acquirer and PAC have acquired and holds shares or voting rights in the target company which entitles them to exercise 25% or more but less than maximum permissible non-public shareholding and further acquires more than 5% shares or voting rights in a financial year. • Acquisition of shares by any person such that the individual shareholding of such person acquiring shares exceeds stipulated thresholds irrespective of whether there is a change in the aggregate shareholding with the PAC. • An indirect acquisition of shares or voting rights requiring an open offer would be considered as direct acquisition, for pricing, timing of open offer and other compliances/ requirements of open offer, where the proportionate net assets or sales turnover or market capitalization of the target company as a percentage of the consolidated net asset or sales turnover or the enterprise value for the entity or business being acquired is in excess of 80% on the basis of the most recent audited annual financial statements (Deemed Direct Acquisition).
the acquisition of which would otherwise trigger open offer obligation. other than the acquirer. Minimum open offer size Trigger for open offer • Direct acquisition of shares or voting rights or control over the target company • Indirect acquisition Minimum open offer size 26% of the total shares of the target company as of 10th working day from the closure of the tendering period. holds shares or voting rights in a target company entitling them to exercise 25% or more but less than the maximum permissible non-public shareholding. The post acquisition holding in such cases shall not exceed the maximum permissible non-public shareholding.• Any revision in voluntary offer size made by the acquirer within 15 working days from the PA of the competing offer. any company or other entity. shall be considered as an indirect acquisition of shares or voting rights in. – The aggregate shareholding of the acquirer and PAC after completion of the open offer cannot exceed the maximum permissible non-public shareholding. – An acquirer and PAC who have made a voluntary offer shall not be entitled to acquire any shares of the target company for a period of 6 months after completion of the open offer except pursuant to another voluntary open offer or making a competing offer upon any other person making an open offer or bonus issue or stock splits. who together with PAC. Any open offer shall be made to all shareholders of the target company. that would enable any person and PAC to exercise or direct the exercise of such percentage of voting rights in. Other conditions / observations Where post open offer shareholding of acquirer and PAC is in excess of the maximum permissible non-public shareholding: • it must be reduced within 1 year. Voluntary offer • An acquirer. shall be entitled to voluntarily make a PA of an open offer for acquiring shares. Indirect acquisition of shares or control Acquisition of shares or voting rights in. for the sale of shares of the target company. or control over. – Voluntary offer cannot be made where an acquirer or PAC has acquired shares of the target company in the preceding 52 weeks without attracting the obligation to make an open offer. A voluntary offer is subject to certain conditions which includes the following: – Minimum offer size is 10% of the total shares of the target company. Increase in mandatory open offer from 20% to 26% to make open offer process expensive 2 . PAC and the parties to any underlying agreement including persons deemed to be PAC with such parties. • it shall not be eligible to make a voluntary delisting offer under SEBI Delisting Regulations for 12 months from the date of the completion of the offer period Voluntary open offer 10% of the total shares of the target company. or control over the target company necessitating an open offer. – During voluntary offer period such acquirer shall not be entitled to acquire any shares otherwise than under the open offer. Acquisition of control Any direct or indirect acquisition of control of Target Company by an acquirer irrespective of acquisition or holding of shares or voting rights. or control over a target company.
within 60 days from the date of such acquisition except where acquisitions are pursuant to SEBI Delisting Regulations or open market purchases made in the ordinary course on the stock exchanges which are not negotiated deals or bulk deals or block deals or in any other form. comparable trading multiples and such other parameters as are customary for valuation of shares of such companies In case of Deemed Direct Acquisition where net assets value or sales turnover or market capitalization of the target company is more than 15% of consolidated net asset or sales turnover or the enterprise value of the entity or business being acquired as per latest audited annual financial statements.Minimum open offer price Minimum open offer price shall be the highest of the following: In cases of direct and Deemed Direct Acquisition of shares or voting rights or control over the Target Company Highest negotiated price per share of the target company under the agreement that attracted the open offer Volume-weighted average price paid or payable for acquisitions by the acquirer or PAC during 52 weeks preceding the date of PA In case of an indirect acquisition of shares. • date on which intention or decision to make primary acquisition is announced in public domain. and • date on which intention or decision to make primary acquisition is announced in public domain Where shares are frequently traded . to all the shareholders whose shares were accepted in the open offer. the acquirer and PAC shall pay the difference between the highest acquisition price and offer price. and • date on which intention or decision to make primary acquisition is announced in public domain Where minimum offer price cannot be computed as per any of the parameters. and • date on which intention or decision to make primary acquisition is announced in public domain Highest price paid or payable by the acquirer or PAC for any acquisition during 26 weeks preceding the earlier of: • date on which the primary acquisition is contracted. voting rights or control over the Target Company Highest negotiated price per share. comparable trading multiples. the per share value of the target company computed by the acquirer Highest price paid or payable for any acquisition by the acquirer or PAC during the earlier of: • date on which the primary acquisition is contracted. under the agreement attracting open offer Volume-weighted average price paid or payable for any acquisition by the acquirer or PAC during preceding 52 weeks immediately preceding the earlier of: • the date on which the primary acquisition is contracted. • date of PA under SAST 2011 Other parameters for determining offer price: • Where acquirer or PAC has any outstanding convertible instruments convertible into shares of the target company at a specific price. it shall be fair price determined by acquirer and manager to the open offer taking into account valuation parameters including. book value.the price determined by the acquirer and manager to open offer taking into account valuation parameters. and such other parameters as are customary for valuation of shares of such companies Where net assets value or sales turnover or market capitalization of the target company is more than 15% of consolidated net asset or sales turnover or the enterprise value of the entity or business being acquired as per latest audited annual financial statements. 3 Highest price paid or payable for any acquisition by the acquirer or PAC during 26 weeks preceding the date of PA Where shares are frequently traded . the price at which such instruments are to be converted shall be considered. • Where acquirer or PAC has acquired any shares of the target company during the period of 26 weeks after the tendering period at a price higher than the offer price paid. if any of the target company.volume weighted average market price during 60 trading days immediately preceding the earlier of: • the date on which the primary acquisition is contracted. the per share value of the target company computed by the acquirer . book value.volume weighted average market price of the target company during 60 trading days immediately preceding the date of PA Where shares are infrequently traded . including.
provided such period is more than 5 working days. and • After the implementation of the scheme. • Acquisition by way of transmission. • Acquisition pursuant to SEBI Delisting Regulations. where the record date for effecting the same falls 3 business days prior to the commencement of the tendering period • In case of an indirect acquisition. merger. – Persons named as promoters in the shareholding pattern filed by the target company for not less than 3 years. and the date of detailed public statement. • Acquisition in the ordinary course of business in specified cases like scheduled commercial bank acting as an escrow agent or invocation of pledge by scheduled commercial bank or public financial institution as a pledgee etc. • Acquisition of voting rights or preference shares carrying voting rights arising out of operation of section 87 (2) of the Companies Act. List of qualifying persons include: – Immediate relatives.• Minimum price shall include any price paid or payable in any form or manner and includes: – control premium. • An increase in voting rights in a target company pursuant to buy-back of shares which necessitate making an open offer shall be exempt provided such shareholder reduces his shareholding so that the voting rights fall below the threshold within 90 days Bonanza for public shareholders – payments like non-compete fees. or date on which the intention / decision to make primary acquisition is announced in public domain. the minimum offer price would stand increased by 10% p. • Acquisition pursuant to SARFAESI Act. General exemptions from making an open offer Illustrative list of acquisition which are exempted from making an open offer requirement (subject to conditions) are as under: • Acquisition pursuant to inter-se transfer of shares among qualifying persons. Such transactions are to be intimated to the stock exchange 4 working days in advance. – For corporate actions like rights issue/ bonus issue/ stock splits/ dividend/ de-mergers/ reduction of capital etc. for the period earlier of the date on which primary transaction is contracted. merger. the minimum offer price shall stand revised to such higher price.a. control premium etc. if any. – Of arrangement not directly involving target company or reconstruction not involving target company’s undertaking including amalgamation. – Specified ensemble of persons etc. the acquirer may indicate lower price for acquiring all the acceptances. – Where the open offer is subject to minimum level of acceptances and the open offer does not receive the minimum acceptance. de-merger pursuant to an order of court or an authority whether Indian or foreign. succession or inheritance. to be factored in offer price 4 . – non-compete fees or otherwise • Adjustment to minimum open offer price in following cases: – If during the offer period acquirer directly or through PAC agrees or acquires any shares or voting rights in the target company in any manner at a price higher than the minimum offer price. • Acquisition of shares of a target company not involving a change in control pursuant to scheme of corporate debt restructuring (CDR) notified by RBI subject to such scheme being authorized by the shareholders of the target company by postal ballot. – Of arrangement involving target company or reconstruction of the target company including amalgamation. • Acquisition pursuant to a scheme – – Made under section 18 of SICA. the persons holding minimum 33% of the voting rights in the combined entity are the same persons who held the entire voting rights before the implementation of the scheme. This exemption is subject to the following specific conditions viz: • Cash and cash equivalent paid is less than 25% of the consideration paid. • Acquisition at subsequent stages by an acquirer pursuant to an agreement of disinvestment. de-merger pursuant to an order of court or an authority whether Indian or foreign. – Persons acting in concert for not less than 3 years and disclosed to stock exchange.
In case of Deemed Direct Acquisition Acquisition under preferential issue Increase in voting rights pursuant to buy back not qualifying for an exemption Acquisition wherein the specific date of acquisition of title of shares. • SEBI may grant an exemption from the obligation to make an open offer for acquiring shares subject to such conditions as it deems fit. Open Offer process The open offer process is broadly divided into following sequential stages: • Public Announcement [PA]. 1. PA for an open offer for acquiring shares of the target company shall be made by the acquirer through the SEBI registered merchant banker to be appointed as the manager to the open offer in a specified manner. Acquiring shares or voting rights On the date of exercise of the option to convert or control upon conversion of such securities convertible securities (without fixed date of conversion) or upon conversion of depository receipts for the underlying shares Acquiring shares or voting rights or control upon conversion of convertible securities (with a fixed date of conversion) Acquisition pursuant to disinvestment In case of an indirect acquisition which is not a Deemed Direct Acquisition On 2nd working day preceding the scheduled date of conversion of such securities. • Acquisition of shares in a target company from a venture capital fund or a foreign venture capital investor registered with SEBI. Not later than 90th day from the date of increase in voting right beyond the stipulated threshold Not later than 2 working days from the date of receipt of intimation of having acquired such title. 1956. On the date of executing the agreement for acquisition. If the above conditions are not met and such shareholders reduce the increase in shareholding within 90 days to the creeping acquisition limit. • the acquirer has not renounced any of his entitlements in such rights issue. 2. • Detailed Public Statement [DPS]. by promoters of the target company pursuant to an agreement between such venture capital fund or foreign venture capital investor and such promoters. voting right or control is beyond the control of the Acquirer 5 .from the date on which the voting rights so increase. • Acquisition of rights shares or voting rights in the target company in excess of creeping limit (5%): – upto one’s entitlement. or – such shareholder in capacity as a director or any other interested director has not voted in favor of buy back at the board meeting of the target company where buy back is through board approval route. or • date on which intention / decision to make primary acquisition is made public On the date of passing special resolution under section 81 (1A) of Companies Act. and – the increase in voting rights does not result in an acquisition of control by such shareholder over the target company. Any time within 4 working days from the earlier of: • date on which primary acquisition is contracted. and • Letter of Offer [LO]. – beyond one’s entitlement if the following conditions are fulfilled viz. PA is to be sent to all stock exchanges where shares of the target company are listed for dissemination to the public. and • the price at which the rights issue is made is not higher than the ex-rights price of the shares of the target company computed in a specified manner • Increase in voting rights in a target company of any shareholder in excess of the creeping limit (5%) pursuant to buy-back of shares subject to conditions that: – such shareholders have not voted in favor of buy back resolution which is to be passed through postal ballot mechanism. SAST 2011 envisages different timelines for making PA which is as under: Event that would require PA Market purchases of shares Time of making PA Prior to placement of purchase order with the stock broker to acquire shares. or • date on which intention or decision to make primary acquisition is made public Earlier of: • date of primary acquisition is contracted. open offer obligations will not be attracted.
or control over the target company as contemplated. As per Securities Contracts (Regulation) Rules. Key definitions Acquirer Acquirer means any person who. Maximum permissible non-public shareholding Maximum permissible non-public shareholding means such percentage shareholding in the target company excluding the minimum public shareholding required under the Securities Contracts (Regulation) Rules. Immediate relative are deemed to be PAC unless contrary is established. and includes convertible debt instruments and convertible preference shares. DPS is to be published by the acquirer in the newspaper within 5 working days from the PA. act upon the agreement and the acquirer may complete the acquisition of shares or voting rights in. Escrow account is to be created not later than 2 working days prior to the date of DPS. with or without the option of the holder of the security. acquires or agrees to acquire whether by himself. However. or through. 7. sister or child of such person or of the spouse. Immediate relative Immediate relative means spouse of a person. shares or voting rights in. and includes parent. or with persons acting in concert with him. or control over a target company. it has been expressly clarified that a director or officer of a target company shall not be considered to be in control over target company merely by virtue of holding such position. Competing offers can be made within 15 working days from the date of the DPS published by the acquirer who has made the first PA. Upon receipt of the DPS. Control The basic definition of control has been retained. and disclosures of such acquisitions and holdings need to be made. Disinvestment Disinvestment would now include direct or indirect sale of shares / voting rights of. brother. the acquirer is required to file a draft letter of offer (LO) with SEBI and once the same is approved by SEBI. a target public sector undertaking by the government company. For the purpose of disclosure of shareholding and voting rights of the acquirer or promoter or PAC the acquisition and holding of convertible security would be regarded as shares. 6. Convertible security Convertible security has been defined to mean a security which is convertible into / exchangeable with equity shares at a later date. 8. 1957. 5. Upon completion of the process of PA and DPS. and the same shall be published in the newspapers. directly or indirectly. minimum 25% (10% in case of PSU) equity shareholding (excluding shares which are held by custodian against Cessation of joint control or change in nature and quantum of control to trigger open offer Change in control with approval of shareholders to trigger open offer 6 . 4. The acquirer shall not complete the acquisition of shares or voting rights in or control over the target company until the expiry of offer period except in following cases: Event An offer under preferential allotment Acquirer depositing in the escrow account 100% of the consideration payable under the open offer assuming full acceptance of the open offer Completion time Within 15 days from the date of passing special resolution by shareholders The parties to such agreement may after the expiry of 21 working days from the date of DPS. board of directors of the target company shall constitute a committee of independent directors to provide reasoned recommendations on open offer. it has to be given to the shareholders of the target company. 1957.3. or control over.
2. b. The change in the open offer trigger limit has given rise to various scenarios:. If the opportunity is not exercised by such shareholders before SAST 2011 becoming effective. Weighted average number of total shares Weighted average number of total shares means the number of shares at the beginning of a period. a. 7 . bought back or issued during the aforesaid period. A voluntary open offer will help an acquirer to consolidate their holding in a listed company at a minimum open offer size of 10% which is lower than the mandatory open offer size of 26% in other cases. The shareholders who are holding 25% or more shares or voting rights but less than maximum permissible non-public shareholding in a listed company may increase their shareholding or voting rights upto maximum permissible nonpublic shareholding through creeping acquisition route without making an open offer. adjusted for shares cancelled. multiplied by a time-weighing factor. Shareholders who are holding 20% or more but less than 25% shares or voting rights in a listed company have an opportunity to acquire upto 5% shares or voting rights before the SAST 2011 become effective under the creeping acquisition route of SAST 1997. 3. Volume weighted average price 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. trustee company and asset management company of a venture capital fund • Investment fund and any person having interest in such Investment Company or Investment Fund as a shareholder or unit holder having minimum 10% of the paid-up capital or unit capital of the fund and any other investment company or fund in which such person or his associate having minimum 10% of the paid-up capital of that investment company or unit capital of the fund (nothing in this sub-clause shall apply to holding of units of mutual funds registered with SEBI). will be required to make an open offer if his holding is to ever increase to 25% or more of shares or voting rights on a go forward basis unless any exemption under SAST is available. maximum permissible non-public shareholding in a listed company is 75% (other than PSU where it is 90%). The increase in the open offer trigger limit from 15% to 25% of shares or voting rights will permit strategic investors in listed companies to increase their shareholding in such companies. Volume weighted average market price 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. Promoter and promoter group The definition of “Promoter” and “Promoter Group” has been cross-referenced to SEBI ICDR to bring uniformity. Conclusion 1. c. Persons acting in concert The definition has been widened to include following additional category of persons: • any company under the same control • promoters and members of the promoter group • immediate relatives • trustee company of a mutual fund • collective investment scheme and its collective investment management company.One time opportunity to increase stake without an open offer for select class depository receipts issued overseas) must be maintained by public in every listed company. The shareholder who are holding 15% or more but less than 20% shares or voting rights in a listed company under SAST 1997. Accordingly. trustees and trustee company • trustees. then they will also be required to make an open offer if their holding is to ever increase to 25% or more of shares or voting rights unless any exemption under SAST is available.
control premium etc. 8. Glossary CDR DPS LO PA PAC PSU SARFAESI Corporate Debt Restructuring Detailed Public Statement Letter of Offer Public Announcement Persons Acting in Concert with Acquirer Public Sector Undertaking Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act. 5. 1997 SEBI (Substantial Acquisition of Shares and Takeovers) Regulations. The concept of payment of interest to the shareholders by the acquirer for delay in obtaining statutory approvals will add to the cost of acquisition. The timelines for completion of open offer process has been substantially crunched. 2011 Securities and Exchange Board of India SEBI (Delisting of Equity Shares) Regulations. 1985 Takeover Regulations Advisory Committee SAST SAST 1997 SAST 2011 SEBI SEBI Delisting Regulations SEBI ICDR SICA TRAC 8 . if any payable to the seller. SAST 2011 ushers in a fresh approach to takeover of shares and/or control listed companies and has substantially streamlined the process. It will be interesting to see how SAST 2011 is implemented. Assuming a trouble free run and all statutory approvals being received by the acquirer the entire open offer process is to be completed within 57 working days. 2009 SEBI (Issue of Capital and Disclosure Requirements) Regulations. 7. 2009 Sick Industrial Companies (Special Provisions) Act. DPS and LO. Separate provisions for indirect acquisition of shares and control have now been inserted with specified indirect acquisition being regarded as Deemed Direct Acquisition.4. Any delay in receiving statutory approvals by the acquirer would require the acquirer to pay an interest at rates to be specified by SBI to the shareholders who have accepted the open offer. Scope of exemption from open offer mandatory requirement has been tightened in case of inter se transfer of shares. 6. PA. The minimum price in open offer will have to be adjusted for including non-compete fees. Relaxation from making an open offer is given to an acquirer who would otherwise be required to make the mandatory offer as a consequence of buy back of shares if certain conditions are fulfilled. 2002 SEBI (Substantial Acquisition of Shares and Takeovers) Regulations SEBI (Substantial Acquisition of Shares and Takeovers) Regulations. Open offer process has been elaborated and has been broadly covered under 3 sequential stages viz.
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