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Introduction to Corporate Restructuring
Concept of Mergers and Acquisitions


Organic and Inorganic Growth


SEBI Takeover Code


Companies Act (Section 391-397)


Stock Exchange Bye-laws


Provisions of FEMA in case of cross border Mergers and Acquisitions


Case Study – Cairn and Vedanta


Case Study – ICICI and Bank of Rajasthan

Introduction to Corporate Restructuring
Restructuring is the corporate management term for the act of reorganizing the legal, ownership, operational, or other structures of a company for the purpose of making it more profitable, or better organized for its present needs. Alternate reasons for restructuring include a change of ownership or ownership structure, demerger, or a response to a crisis or major change in the business such as bankruptcy, repositioning, or buyout. Corporate restructuring is carried out by a company for the following purposes: Any change in business capacity or portfolio carried out by inorganic route: The acquisition of Larsen and Toubro‘s cement division in the form of a separate company named Ultratech Cement Ltd by Grasim by which the cement capacity under the control of Grasim went up from 14 million tonnes to 31 million tonnes per annum. This is a case of corporate restructuring by Grasim. Any change in capital structure of a company that is not in the ordinary course of its business: Capital structure refers to the proportion of debt and equity in the total capital of the company. The capital structure is never static and changes almost daily. Going further for an initial Public Issue or a Follow on Public Issue or buyback of equity shares would permanently or atleast in long run alter the capital structure of the company. Any change in ownership of company or control over its management: Such a change could be affected through various methods such as: a) Merger of two or more companies belonging to different promoters b) Demerger of a company into two or more with control of the resulting company passing on to other promoters c) Acquisition of a company d) Sell-off of a company or its substantial assets

e) Delisting of a company Main forms of corporate restructuring 1) Merger 2) Consolidation 3) Acquisition 4) Divestiture 5) De-merger (spin off/split up/split off) 6) Carve out 7) Joint venture 8) Reduction of capital 9) Buy back of securities 10) Delisting of securities/companies

Introduction to Mergers and Acquisitions
Mergers: It involves a combination of all the assets, liabilities, loans and businesses of two or more companies such that one of them survives. Merger is primarily a strategy of inorganic growth. It is one of the most frequently used forms of corporate restructuring around the world. Even in India every year thousands of companies get merged into other companies. Caselet: Kotak Mahindra merger Acquisitions: It is an attempt or a process by which a company or an individual or a group of individuals acquires control over another company called a ‗Target Company‘. Acquiring control over a company means acquiring the right to control its management and policy decisions. Since, generally a company is managed under the supervision of its Board of Directors and the policy decisions are to be made by the board of the acquiring company. In aqcusition, unlike merger, the target companies identity remains in tact. Caselet: Tata Corus Acquisition


Organic & Inorganic growth

Organic growth in business refers to a company expanding its business through the use of its own resources and assets. Growing organically means a company expands without the use of mergers and acquisitions or other takeovers. An emphasis on organic growth is valued by many executives and investors since it shows a long-term, solid commitment to building the business. Organic growth can also be negative, meaning the company's business is actually

contracting. Investors look at organic growth numbers to see if a company is increasing sales and revenues and if those increases are sustainable over the long term. 1. Significance  Organic growth shows how well management of a company is utilizing internal resources to increase sales and output. Mergers, acquisitions and takeovers can provide an artificial boost to a company's sales and revenue figures; this can cloud the picture of how the company is managing its resources. By focusing on the organic growth of the company, executives and investors can see exactly how the company is meeting its goals through its own internal means. Workforce Issues  Many executives prefer to grow their companies organically due to the complexity and organizational issues that result from mergers and acquisitions. One major issue is the effect of merging two company's workforces, which can often result in culture clashes and morale issues. Employees can resist changes in the chain of command or workflow procedures, and high turnover can result. Organic growth allows the company to avoid these workforce issues entirely. Strategic Concerns  Organic growth allows company executives to set and achieve corporate goals in whichever manner they choose. Combining two companies often comes with the burden of sharing management responsibilities with executives from both firms; this can have an impact on the entire strategic outlook of the new company. A merger pursued as a way to achieve specific goals can wind up changing those goals completely. Executives stay in complete control of the company, when it is growing organically, and can steer the business in a specific direction to achieve their objectives.

Significance to Investors  Investors love organic growth, not only because it shows management's effective use of resources and commitment to the business, but also because it makes analyzing the company a lot easier. When looking at a company's financials, it is important to note if sales and revenue figures have been inflated due to recent acquisitions. Often, investors will strip out all non-organic growth from a company's financials, showing the true growth potential of the core company. The less a company relies on mergers and acquisitions, the less work an analyst has to do to get to this core figure. Disadvantages  Growing a company organically takes an enormous commitment of resources and time. Equipment must be acquired, personnel hired and trained and sales conduits established. Often, companies utilize mergers and takeovers to acquire a fully developed business unit and avoid reinventing the wheel. Organic growth also puts all of the business risk squarely on the core company, as opposed to a company that acquires a new unit, sharing the risk between the core company and the new addition1. Case let: Back in 1983, the Rs 3,390-crore Dabur India was one of the earliest Indian companies to set up operations in international markets, when it started exporting products such as hair oil and honey to the Middle East. In 1989, the company set up a subsidiary in Dubai and later established a manufacturing facility as well. Since then, Dabur has set up manufacturing units in Nepal, Egypt, Bangladesh, Nigeria and the UAE. It also has regional offices in the UK, the US and other countries. The international business is worth Rs 678 crore and contributes a fifth of the revenues of Dabur India. Through the years, Dabur has stuck to a purely organic growth path in its overseas expansion. The reason is simple, says Dabur India CEO Sunil Duggal: the company‘s


ayurvedic roots. ―We have a portfolio of products based on Ayurveda and nature, and this is a USP no other company has offered‖2.

INORGANIC GROWTH A growth in the operations of a business that arises from mergers or takeovers, rather than an increase in the companies own business activity. Firms that choose to grow inorganically can gain access to new markets and fresh ideas that become available through successful mergers and acquisitions. Inorganic growth is seen often as a faster way for a company to grow when compared with organic growth. In many industries, such as technology, growth is often accelerated through increased innovation, and one way for firms to compete is to align themselves with those companies that are developing the innovative technology. The experience of most companies across the world shows that organic growth is generally the wiser choice when it comes to building up a business. But once a critical level is achieved, a successful acquisition can help that company grow rapidly. Since an acquisition plays a critical role in a company‘s growth path, it is important to consider all the aspects that go into making an acquisition successful. Do the businesses complement each other? If they do, are there synergies between the cultures of the two organisations? Can the distribution networks work in tandem? What are the relative strengths of the brands in question? What will be the command structure in the new set-up? All these issues will have to be addressed before an acquisition can contribute in a positive way to a company‘s future growth. Case let: Finding suitable acquisition targets hasn‘t been a hurdle for the Rs 11,700-crore Godrej Group, which has been on a global shopping spree for the past several years and has used the inorganic

route for all its overseas ventures. The group, according to an IDFC Securities report, has already spent over $600 million on its international buys. Its first acquisition was in the UK in 2005, when it bought Keyline Brands. Since then, the company has made roughly one foreign buy every year. In 2006, it bought African company Rapidol, which owned an ethnic hair-care brand called Inecto and a personal care brand called Sofelene. Two years later, it returned to the continent to pick up hair-extensions company Kinky. In the year 2010, Godrej bought two companies: Indonesian household care company Megasari in March and Nigerian personal care firm Tura a month later. Recently, it also bought out Sara Lee‘s 50% stake in the joint venture Godrej Sara Lee and rechristened the company Godrej Household Products. Godrej Industries Chairman Adi Godrej finds the acquisition route an easier way to grow, especially in alien geographies, where the group doesn‘t have an in-depth understanding of market dynamics and consumer tastes. ―It is only in markets such as Sri Lanka, Bangladesh and the Middle East, where consumers associate with Godrej, that we are present the organic way. In other markets, the acquisition route is a faster method of growth,‖ he says.

The reasons for the same are discussed below.  Economies of scale as fixed costs are shared over a larger output and common costs may be reduced;  Economics of vertical integration-through vertical mergers, large manufacturing companies can gain control over the production process by expanding back towards the output of the raw materials and forward to the ultimate customer. One way to achieve this is to merge with a supplier or a customer. Vertical integration makes co-ordination and administration easier.  Strength in size where complementary resources may be pooled together for more effective competition.

 Liquidity, where a company with surplus cash may make acquisitions to produce growth and synergy, or a company may acquire another company which is cash-rich through share swaps to gain control and use the surplus cash; or  Growth which is substantially higher than organic growth.  Unused Tax shelter  Diversification program to broaden their earning base and reduce risk.

From the beginning of the 21st century, India has witnessed a tremendous growth in M&A activities, both inbound & outbound. However, the recent economic downturn has eclipsed the M&A landscape almost halving the deals in both number and value. Cross border M&A deal values have fallen from USD 42 billion in H1 2007 and USD 12 billion in H1 2008 to just USD 1.4 billion in H1 2009. This marks an 85% decrease from last year highlighting the lack of overseas deals. The buoyancy in the domestic market could be attributed in part to Indian companies looking for group consolidation, cash repatriation strategies and avenues for balance sheet restructuring all in an attempt to tide over the current crisis. However, there remains a huge potential for M&A as in spite of the economic crisis, the advantages of inorganic growth still fit in the modern corporate rationale. Procedure for evaluating the decision for mergers and acquisitions

The three important steps involved in the analysis of mergers and acquisitions are: Planning: - of acquisition will require the analysis of industry-specific and firm-specific information. The acquiring firm should review its objective of acquisition in the context of its strengths and weaknesses and corporate goals. It will need industry data on market growth, nature of competition, ease of entry, capital and labour intensity, degree of regulation, etc. This will help in indicating the product-market strategies that are

appropriate for the company. It will also help the firm in identifying the business units that should be dropped or added. On the other hand, the target firm will need information about quality of management, market share and size, capital structure, profitability, production and marketing capabilities, etc.  Search and Screening: - Search focuses on how and where to look for suitable candidates for acquisition. Screening process short-lists a few candidates from many available and obtains detailed information about each of them.  Financial Evaluation: - of a merger is needed to determine the earnings and cash flows, areas of risk, the maximum price payable to the target company and the best way to finance the merger. In a competitive market situation, the current market value is the correct and fair value of the share of the target firm. The target firm will not accept any offer below the current market value of its share. The target firm may, in fact, expect the offer price to be more than the current market value of its share since it may expect that merger benefits will accrue to the acquiring firm. A merger is said to be at a premium when the offer price is higher than the target firm's pre-merger market value. The acquiring firm may have to pay premium as an incentive to target firm's shareholders to induce them to sell their shares so that it (acquiring firm) is able to obtain the control of the target firm.

A corporate action where an acquiring company makes a bid for an acquire is termed as takeover. If the target company is publicly traded, the acquiring company will make an offer for the outstanding shares. A welcome takeover is usually referring to a favourable and friendly takeover. Friendly takeovers generally go smoothly because both companies consider it a positive situation. In contrast, an unwelcome or hostile takeover can get very horrible. Takeover is a strategy of acquiring control over the management of another company – either directly by acquiring shares carrying voting rights or by participating in the management. Where

the shares of the company are closely held by a small number of persons a takeover may be affected by agreement within the shareholders. However, where the shares of a company are widely held by the general public, relevant regulatory aspects, including provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997 need to be borne in minds. Takeovers may be broadly classified as follows:  Friendly takeover: It is a takeover effected with the consent of the taken over company. In this case there is an agreement between the managements of the two companies through negotiations and the takeover bid may be with the consent of majority shareholders of the target company. It is also known as negotiated takeover. Example: TATA & VSNL  Hostile takeover: When an acquirer company does not offer the target company the proposal to acquire its undertaking but silently and unilaterally pursues efforts to gain control against the wishes of the existing management, such acts are considered hostile on the management and thus called hostile takeovers. Example: Mittal steel‘s acquisition of Arcelor was strongly opposed by the management of Arcelor, as they sneered as companies of Indian‘s. Hence Mittal had to resort to hostile takeover.  Bail out takeover: Takeover of a financially weak or a sick company by a profit earning company to bail out the former is known as bail out takeover. Such takeovers normally take place in pursuance to a scheme of rehabilitation approved by the financial institution or the scheduled bank, who have lent money to the sick company. In bail out takeovers, the financial institution appraises the financially weak company, which is a sick industrial company, taking into account its financial viability, the requirement of funds for revival and draws up a rehabilitation package on the principle of protection of interests of minority shareholders, good management, effective revival and transparency. The rehabilitation scheme should provide the details of any change in the management

and may provide for the acquisition of shares in the financially weak company as follows: 1. An outright purchase of shares or 2. An exchange of shares or 3. A combination of both Example:  Tech Mahindra takeover of Satyam

SEBI Takeover Code
Takeover is a process by which one company takes over the control and management of another company by purchasing the substantial shares of that company. In today‘s scenario takeover of companies is a very useful and popular strategy for corporate growth. A takeover bid applies that an acquirer acquires a substantial quantity of share carrying voting rights in excess of the limits specified by SEBI (Substantial acquisition of shares and Takeovers) Regulation 1997 in a target listed company either in a direct or indirect manner with a view to gain control over the management of such a company. Acquirer An acquirer means 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. It includes persons acting in concert (PAC) with the acquirer. Person acting in Concert Person acting in Concert are individual(s)/company or companies/ any other legal entity or entities who are acting together for a common objective or for a purpose of substantial acquisition of shares or voting rights or gaining control over the target company pursuant to an agreement or understanding whether formal or informal. Acting in concert would imply cooperation, co-ordination for acquisition of voting rights or control, either direct or indirect.

The concept of Person acting in Concert assumes significance in the context of substantial acquisition of shares since it is possible for an acquirer to acquire shares or voting rights in a company ―in concert‖ with any other person in such a manner that the acquisition made by them may remain individually below the threshold limit but collectively may exceed the threshold limit. Unless the contrary is established certain entities are deemed to be persons acting in concert like companies with its holding company or subsidiary company, mutual funds with its sponsor / trustee / Asset Management Company, etc. Target Company A Target Company is a company 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.

Threshold of disclosure to be made by acquirer(s):
1) 5% or more but less than 15% shares or voting rights: A person who, alongwith Person acting in Concert, if any, (collectively referred to as ―Acquirer‖ hereinafter) acquires shares or voting rights (which when taken together with his existing holding) would entitle him to exercise 5% or 10% or 14% shares or voting rights of target company, is required to disclose the aggregate of his shareholding to the target company within 2 days of acquisition or within 2 days of receipt of intimation of allotment of shares. 2) More than 15% shares or voting rights: (a) Any person who holds more than 15% shares but less than 75% or voting rights of Target Company, and who purchases or sells shares aggregating to 2% or more shall disclose such purchase/sale along with the aggregate of his shareholding to the target company and the stock exchanges within 2 working days.

(b) Any person who holds more than 15% shares or voting rights of target company or every person having control over the Target Company within 21 days from the financial year ending March 31 as well as the record date fixed for the purpose of dividend declaration, disclose every year his aggregate shareholding to the target company. The target company, in turn, is required to inform all the stock exchanges where the shares of Target Company are listed, every year within 30 days from the financial year ending March 31 as well as the record date fixed for the purpose of dividend declaration.

Trigger point for making an open offer by an acquirer
1) 15% shares or voting rights: An acquirer who intends to acquire shares which alongwith his existing shareholding would entitle him to exercise 15% or more voting rights, can acquire such additional shares only after making a public announcement (PA) to acquire atleast additional 20% of the voting capital of Target Company from the shareholders through an open 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, can consolidate his holding upto 5% of the voting rights in any financial year ending 31st March. However any additional acquisition over and above 5% can be made only after making a public announcement. However in pursuance of Reg. 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 two days of such purchase or sale along with the aggregate shareholding after such acquisition / sale. 3) Consolidation of Holding An acquirer who is having 75% share or voting rights of the 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 the target company.

Latest Amendments in the norms for Trigger Point
SEBI has done a fine balancing act by weighing the benefits for all stakeholders, including the public shareholder. Introduced in 1994, the takeover regulations have been amended several times, but a growing need was felt to overhaul the regulations to keep up with the changed M&A scenario. Now, after a year of release of the recommendations of the Takeover Regulation Advisory Committee (TRAC), the Securities and Exchange Board of India (SEBI) has cleared the new Takeover Code, albeit with some amendments to the changes proposed by TRAC. While several recommendations were accepted by the board, some key changes are discussed here.

Open offer trigger threshold increased to 25%:

While the final regulations are yet to be released, the most prominent change is the increase in initial open offer trigger threshold from 15% to 25%.While this is still lower than the limit in several countries, it should give a significant boost to M&A in India. The change can impact different stakeholders differently, and indeed, even the same stakeholder differently in different situations. To put in perspective, the impact of the amendment needs to be examined in the hands of each stakeholder, viz, investors, Investee Company, promoters and public shareholders. The increase in the initial threshold limit will provide greater flexibility for financial and strategic investors as they can move close to the striking distance of negative control without making an open offer and with lower cash outflow. The amendment will particularly benefit private equity investors, as they will have more headroom for deals of larger size both in absolute and percentile terms. Also, concentration of holding may enhance corporate governance standards. Thus, decisions that are not in the larger interest of the company or its shareholders may not sail through. The flip side, however, could be greater influence by substantial shareholder impacting operational flexibility. From a promoter‘s perspective, the amendment would open an opportunity of teaming with the substantial public shareholder in an event of hostile takeover. Further, in cases where promoter holding is below 25%, the ability to enhance the holding up to 25% without breaching the open offer limit is a boon. The ability to dilute higher shareholding without triggering the open offer will increase liquidity for promoters. The positive on the

industry side is shadowed by the negative side of the amendment for public shareholders. Rise in threshold limit for open offer and concentration of shareholding with a substantial non-promoter shareholder would mean a longer waiting period to public shareholder for exit. Further, the concentration of holding in a few hands will reduce public float and liquidity in the market. Needless to say, there will be a lot of speculation in the coming days as to which companies this provision might impact, and whether large investors will actually go in for increasing their Holdings up to 25%.

Minimum open offer size:

One of the key reliefs provided to prospective acquirers is that instead of increasing the size of the open offer to 100%, as had been recommended by the TRAC, the minimum offer size has been increased to 26% (from the existing 20%). This is a huge relief, especially to domestic investors, who otherwise faced the prospect of not having enough funding to finance large deals, given the restrictions on bank financing in India. This will surely do away with the unintended and unfair advantage that foreign investors may have had, having larger pools and means of funding at their disposal. However, from the perspective of the public shareholder, this is obviously not a positive change, as it will still not give them a full exit route. Also, technically, a person who acquires 25% would be able to control the company with 51% stake, if the open offer is successful. As a corollary to this point, and seeing this from the perspective of public shareholders, a major event i.e., a change in promoter could have happened, and a public shareholder may still have to be satisfied with a limited exit route.

Non-compete fee for promoters removed:

The Takeover Code hitherto permitted payment of non-compete fees of up to 25% of the total sale consideration to the promoters. In spite of a clear regulation, the non-compete fees have always been a matter of litigation in the past. The new Takeover Code does not recognise a specific exemption for payment of non-compete fees to promoters. Accordingly, with this amendment, the public shareholders and promoters will be given an exit at the same price. While

this may be a disincentive for promoters looking to exit, the change is in keeping with the spirit of the Takeover Code, the aim of which is essentially to safeguard interest of the public shareholder. However, this could also become a hindrance to transactions: paying a price with the non-compete built in will increase the cost for the acquirer, whereas exclusion of a noncompete clause may not be acceptable from a commercial perspective .Also, the question that arises is whether the promoter expectation for a higher price and a corresponding increase in cash outflow for the investor would make deals hard to materialise. On the positive side, a higher Offer price would mean more cash more cash for the public shareholder.

Mandatory recommendation of targets board: Recommendation on an offer by the target company‘s board prevails in most developed countries. The introduction of a similar requirement in the Takeover Code is an appreciable step. This is in line with international best practices and will improve governance and public confidence in the open offer process


Overall, the new Takeover Code seems beneficial to acquirers, hike in threshold triggering open offer and removal of non-compete fees a mixed bag for promoters, positive for fund raising and downside to the extent of possible negative control by acquirer and removal of non-compete fees and from a public shareholding perspective except for making the offer price in parity with promoters there is not much of a positive.

Procedure For Takeover
1) Appointment of a merchant banker [Regulation 13]

Before making any public announcement of offer referred to in regulation 10 or regulation 11 or regulation 12, the acquirer shall appoint a merchant banker in Category I holding a certificate of registration granted by the Board, who is not an associate of or group of the acquirer or the target company 2) Public Announcement A public announcement is an announcement made in the newspapers by the acquirer primarily disclosing his intention to acquire shares of the target company from existing shareholders by means of an open offer for not less than 20% of shares. Public Announcement is made to ensure that the shareholders of the target company are aware of an exit opportunity available to them. The disclosures in the announcement include:· The offer price, number of shares to be acquired from the public,  Identity of acquirer,  Purpose of acquisition,  Future plans of acquirer, if any, regarding the target company,  Change in control over the target company, if any,  The procedure to be followed by acquirer in accepting the shares tendered by the shareholders  The period within which all the formalities pertaining to the offer would be completed. Timing of the public announcement of offer [Regulation 14] The acquirer is required to make the P.A within four working days of the entering into an agreement to acquire shares or deciding to acquire shares/ voting rights of target company or after any such change or changes as would result in change in control over the target company.

In case of indirect acquisition or change in control, the PA shall be made by the acquirer within three months of consummation of such acquisition or change in control or restructuring of the parent or the company holding shares of or control over the target company in India. 3) Opening of Escrow Account [Regulation 28] Before making the Public Announcement, the acquirer has to open an escrow account in the form of cash deposited with a scheduled commercial bank or bank guarantee in favour of the Merchant Banker. The Merchant Banker is also required to confirm that firm financial arrangements are in place for fulfilling the offer obligations. The escrow amount shall be 25% of the consideration if offer size is less than Rs. 100 cr. and 10% for excess of consideration above Rs. 100 cr. 4) Filing of Letter of Offer with SEBI [Regulation 18] In pursuance of the provisions of Reg. 18 of the said regulations, the acquirer is required to file a Draft Offer Document with SEBI within 14 days of the Public Announcement through its Merchant Banker. The following should be filed along with the letter of offer:  A filing fees of Rs. 50,000/- per offer document (Payable by Banker‘s Cheque / Demand Draft)  A hard and soft copy of the Public Announcement made along with the cutting of newspaper in which advertisement has been published.  A due diligence certificate as well as certain registration details. The filing of the offer document is the joint responsibility of both the acquirer as well as the Merchant Banker. The acquirer shall within 14 days of the public announcement send a copy of draft LO to the target company and all stock exchanges. LO shall be dispatched to the shareholders within 21 days from submission to SEBI. The offer remains open for 30 days. The shareholders are required to send their share certificates/ related documents to the registrar or merchant banker as specified in the PA and offer document. 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, within 30 days from the closure of offer. Specified date [Regulation 19] The public announcement shall specify a date, which shall be the specified date for the purpose of determining the names of the shareholders to whom the letter of offer should be sent: However such specified date shall not be later than the thirtieth day from the date of the public announcement. 5) Minimum Offer Price and Payments made [Regulation 20] It is not the duty of SEBI to approve the offer price, 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. The offer price shall be the highest of:Negotiated price under the agreement.  Price paid by the acquirer or PAC with him for acquisition if any, including by way of public rights/ preferential issue during the 26-week period prior to the date of the PA.  Average of weekly high & low of the closing prices of shares as quoted on the Stock exchanges, 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, then the offer price shall be determined by reliance on the parameters, like: the negotiated price under the agreement, highest price paid by the acquirer or PAC. Minimum public offer [Regulation 21]  The public offer made by the acquirer to the share holders of the target company shall be for a minimum of 20% of the voting capital of the company  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 delay in payment is on account of non-receipt of statutory approvals and if the same is not due to wilful default or neglect on part of the acquirer, the acquirers would be liable to pay interest to the shareholders for the delayed period in accordance with Regulations. Acquirer(s) are however not to be made accountable for postal delays.  If the delay in payment of consideration is not due to the above reasons, it would be treated as a violation of the Regulations. 6) Other Obligations of Acquirer [Regulation 22] Public announcement shall be made only when the acquirer is able to implement the offer. During the offer period, the acquirer or persons acting in concert shall not be entitled to be appointed on the Board of the target company. The date of opening the offer cannot be later than 60th day from the date of public announcement and the offer is required remain open for a period of 30 days. 7) Obligation of the Board of Target Co. /Merchant Banker [Regulation 23 & 24] After public announcement or offer the board of the target company, unless approved by the members at a general body meeting shall not sell, transfer or dispose off assets of the company or its subsidiaries or issue or allot any un-issued securities or enter into any material contracts. The merchant Banker shall have to send a final report to SEBI within 45 days from the date of closure of the offer. 8) Withdrawal of Offer/ Acceptance [Regulation 27] The shareholders shall have the option to withdraw acceptance given by him up to 3 working days prior to the date of closure of the offer. An acquirer shall have no option to withdraw a public offer made except under following circumstances:  Statutory approvals required have been refused  The sole acquirer being a natural person has died  Such circumstances as in the opinion of the SRBI Board merits withdrawal. 9) Competition Bid

Competition bid is an offer made by a person other than the acquirer who has made the first public announcement. The bid must be equal to the present and proposed shareholding of the first acquirer. Revision of offer The acquirer who has made the public announcement of offer may make upward revisions in his offer in respect of the price and the number of shares to be acquired, at any time up to seven working days prior to the date of the closure of the offer. However such upward revision of offer shall be made only upon the acquirer—  Making a public announcement in respect of such changes or amendments in all the newspapers in which the original public announcement was made;  Simultaneously with the issue of such public announcement, informing the Board, all the stock exchanges on which the shares of the company are listed, and the target company at its registered office;  Increasing the value of the escrow account as provided under sub-regulation (9) of regulation 28.

Safeguards incorporated so as to ensure that the Shareholders get their payments
The regulations provide for opening of escrow account. In case, the acquirer fails to make payment, Merchant Banker has a right to forfeit the escrow account and distribute the proceeds in the following way.  1/3 of amount to target company  1/3 to regional Stock Exchanges, for credit to investor protection fund etc.  1/3 to be distributed on pro rata basis among the shareholders who have accepted the offer.

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. Besides forfeiture of escrow account, SEBI can take separate action against the acquirer which may include prosecution / barring the acquirer from entering the capital market for a period etc.

Withdrawal of offer
The offer once made cannot be withdrawn except in the following circumstances:  ·Statutory approval(s) required have been refused  The sole acquirer being a natural person has died  Such circumstances as in the opinion of the Board merits withdrawal. [Regulation 27]

SEBI (Substantial Acquisition of Shares) Regulation, 1997 lays down the obligations of Acquirer, Merchant Banker, Target Company etc. A failure or non-compliance of the provisions of the regulations of the takeover code would attract the penal consequences. The penalties may be in the following forms:  Forfeiture of escrow account  Directing the person in concert to sell the shares acquired in violation of the regulations and not to further deal in securities.  Monetary penalties  Prosecution proceedings

 Directing transfer of any proceeds to the Investor Protection Fund of the stock exchange  Debarring any person concerned from further dealing in the capital market etc Further, the Board of Directors of the target company would also be liable for action in terms of the Regulations and the SEBI Act for failure to carry out their obligations specified in the Regulations. Action can also be initiated for suspension, cancellation of certificate of registration against an intermediary such as the Merchant Banker to the offer.

SECTIONS 391 TO 396: Section 391: This section deals with the meeting of creditors/members and NCLT‘s sanction to Scheme. If majority in number representing at least three-fourths in value of creditors or members of that class present and voting agree to compromise or arrangement, the NCLT may sanction the scheme. NCLT will make order of sanctioning the scheme only if it is satisfied that company or any other person who has made application has disclosed all material facts relating to the company, e.g. latest financial position, auditor‘s report on accounts of the company, pendency of investigation of company etc. NCLT should also be satisfied that the meeting was fairly represented by members/creditors. Section 391(1) As per this sub-section, the company or any creditor or member of a company can make application to NCLT. If the company is already under liquidation, application will be made by liquidator. On such application, NCLT may order that a meeting of creditors or members or a class of them be called and held as per directions of NCLT. Section 391 (2) As per this sub-section, if NCLT sanction, it will be binding on all creditors or members of that class and also on the company, its liquidator and contributories. Section 391(3) As per this sub-section, Copy of NCLT order will have to be filled with Registrar of Companies. Section 391(4):- As per this sub-section, A copy of every order of NCLT will be annexed to every copy of memorandum and articles of the company issued after receiving certified copy of the NCLT order. Section 391(5) In case of default in compliance with provisions of section 391(4), company as well as every officer who is in default is punishable with fine upto Rs 100 for every copy in respect of which default is made.

Section 391(6) After an application for compromise or arrangement has been made under the section, NCLT can stay commencement of any suit or proceedings against the company till application for sanction of scheme is finally disposed of. Section 391(7) As per this sub-section, Appeal against NCLT order can be made to National Company Law Appellate Tribunal (NCLAT) where appeals against original order the NCLT lies. Section 392 This section contains the powers of NCLT to enforce compromise and arrangement Section 392(1) As per this section, where NCLT sanctions a compromise or arrangement, it will have powers to supervise the carrying out of the scheme. It can give suitable directions or make modifications in the scheme of compromise or arrangement for its proper working. Section 392(2) As per this section, if NCLT finds that the scheme cannot work, it can order winding up. Section 393 This section contains the rules regarding notice and conduct of meeting. Section 393(1) Where a meeting of creditors or any class of creditors, or of numbers or any class of members, is called under section 391:a) With every notice calling the meeting which is sent to a creditor or member, there shall be sent also a statement setting forth the terms of the compromise or arrangement and explaining its effect, and in particular stating any material interests of the directors, managing directors, or manager of the company, whether in their capacity as such or as members or creditors of the company or otherwise and the effect on those interests of the compromise or arrangement if, and in so far as, it is different from the effect on the like interests of other person, and b) In every notice calling the meeting which is given by advertisement, there shall be included either such a statement as aforesaid or a notification of the place at which creditors or members entitled to attend the meeting may obtain copies of such a statement as aforesaid.

Section 393(2) As per this sub-section, if the scheme affects rights of debenture holders, statement should give details of interests of trustees of any deed for securing the issue of debentures as it is required to give as respects the companies directors. Section 393(3) As per this sub-section, the copy of scheme of compromise or arrangement should be furnished to creditor/member free of cost. Section 393(4) Where default is made in complying with any of the requirements of this section, the company and every officer of the company who is in default, shall be punishable with fine which may extend to Rs. 50,000 and for the purpose of this sub-section any liquidator of the company and any trustee of a deed for securing the issue of debentures of the company shall be deemed to be an officer of the company. Provided that a person shall not be punishable under this sub-section, if he shows that the default was due to the refusal of any other person, being a director, managing director, manager or trustee for debenture holders, to supply the necessary particulars as to his material interests. Section 393(5) As per this section, any director, managing director, manager or trustee of debenture holders shall give notice to the company of matters relating to himself which the company has to disclose in the statement, if he unable to do so, he is punishable with fine upto Rs.5,000. Section 394 This section contains the powers while sanctioning scheme of reconstruction or amalgamation. Section 394(1) NCLT can sanction amalgamation of a company which is being wound up with other company, only if Registrar of Companies (ROC) has made a report that affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interest. Section 394(2) As per this sub-section, if NCLT issues such an order, NCLT can direct that the property will be vest in the transferee company and that the transfer of property will be freed from any charge.

Section 394(3) As per this sub-section, Copy of NCLT order shall be filed with Registrar within 30 days. In case of default, company as well as every officer who is in default is punishable with fine upto Rs.500. Section 394A As per this section, if any application is made to NCLT for sanction of arrangement, compromise, reconstruction or amalgamation, notice of such application must be made to Central Government. NCLT shall take into consideration any representation made by Central Government before passing any order. Section 395 This section provides that reconstruction or amalgamation without following NCLT procedure is possible by takeover by sale of shares. Selling shareholders get either compensation or shares of the acquiring company. This procedure is rarely followed, as sanction of shareholders of at least 90% of value of shares is required, and not only of those attending the meeting. This procedure can be followed only when creditors are not involved in reconstruction and their interests are not affected. Section 395(1) As per this sub-section, the transferee company has to be give notice in prescribed manner to dissenting shareholder that it desires to acquire his shares. The transferee company is entitled and bound to acquire those shares on the same terms on which shares of approving share holders are to be transferred to the transferee company. The dissenting shareholder can make application within one month of the notice to NCLT. The NCLT can order compulsory acquisition or other order may be issued. Section 395(2) As per this sub-section, if the transferee company or its nominee holds 90% or more shares in the transferor company, it is entitled to and is also under obligation to acquire remaining shares. The transferee company should give notice within one month to dissenting shareholders. Their shares must be acquired within three months of such notice. Section 395(3) As per this section, if shareholders do not submit the transfer deeds, the transferee company will pay the amount payable to transferor company along with the transfer deed duly signed. The transferor company will then record name of the transferee company as holder of shares, even if transfer deed is not signed by dissenting shareholders.

Section 395(4) As per this section, The sum received by transferor company shall be kept in a separate account in trust for the dissenting shareholders. Section 395(4A) When the transferee company makes offer to shareholders of transferor company, the circular of offer shall be accomplished by prescribed information in form 35A. Offer should contain statement by Transferee Company for registration before it is sent to shareholders of Transferor Company. Section 396 This section contains the power to Central Government to order amalgamation. Section 396(1) As per this sub-section, if central government is satisfied that two or more companies should amalgamate in public interest, it can order their amalgamation, by issuing notification in Official Gazette. Government can provide the constitution of the single company, with such property, powers, rights, interest, authorities and privileges and such liabilities, duties and obligations as may be specified in the order. Section 396(2) The order may provide for continuation by or against the transferee company of any legal proceedings pending by or against Transferor Company. The order can also contain consequential, incidental and supplemental provisions necessary to give effect to amalgamation. Section 396(3) As per this sub-section, every member, creditor and debenture holder of all the companies will have same interest or rights after amalgamation, to the extent possible. If the rights and interests are reduced after amalgamation, he will get compensation assessed by prescribed authority. The compensation so assessed shall be paid to the member or creditor by the company resulting from amalgamation. Section 396A This section deals with the preservation of books and papers of amalgamated company. Books and papers of the company which has amalgamated or whose shares are acquired by another company shall be preserved. These will not be disposed of without prior permission of Central Government. Before granting such permission, Government may appoint a person to examine the books and papers to ascertain whether they contain any evidence of commission of an offence in connection with formation or management of affairs of the company, or its amalgamation or acquisition of its shares.

Stock exchange bye-laws
CLAUSES 40A and 40B OF THE LISTING AGREEMENTS OF THE BSE and NSE Prior to the issuance of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1994, there was no comprehensive piece of legislation that governed the takeover bids. The first attempt to regulate the takeovers was made by the government by incorporating clause 40 in the listing agreements of stock exchanges. This clause provided for making a public offer to the share holders of a company by any person who sought to acquire 25% of the voting rights of the company. However, in the Indian context, where companies could be controlled (in the past) by acquiring much less than 25%, the basic purpose of the clause could be and was being defeated by acquiring shares just below the threshold limit of 25% and still acquiring control over the company. Hence, the need to lower the limit to 10% was felt accordingly, in 1990, even before SEBI became a statutory body, the government , in consultation with SEBI, replaced the clause 40 by clauses 40A and 40B. We refer to them as ‗original 40A‘ and ‗original 40B‘. The text of these clauses, as they stood till they amended w.e.f. 1 May 2006 is reproduced in the appendix 15. The gist of the provisions of theses clauses was as follows: ORIGINAL CLAUSE 40A a) When any person acquires or agrees to acquire the shares in the company and when the total nominal value of such shares, together with the shares already held by him exceeds

or shall exceed 5 % of the total voting capital of the company, the acquirer as also the company should notify the stock exchange of such acquisition within two days. b) Any person holding shares less than 10 % of the nominal value of shares in a company, shall not acquire any shares, when together with the shares already held carry 10% or more of the voting rights unless he notifies the stock exchange and fulfills the conditions specified in the clause 40B. ORIGINAL CLAUSE 40B Clause 40B mainly stipulated that in case of an acquisition of shares exceeding 10% of the voting capital of the company as above, the person so acquiring the shares shall make open offer to acquire at least 20% shares from the public through an open offer. It also contained various other provisions relating to open offer. Since these clauses have been substantially amended, we are not discussing them in detail. There were two difficulties in using these clauses for effective regulation of substantial acquisitions and takeover. They were a) These clauses did not have a statutory force behind them. They were of a contractual nature, the listing agreement being a contract between a company and a stock exchange. Hence they could be enforced upon an acquirer only if an acquirer was a listed company. If the acquirer was other than a listed company, the stock exchange could not do anything. Even in case of the acquirer company, strictly speaking any breach of clauses 40A and 40B made by an acquirer company, it was not a breach of its agreement with the stock exchange, but it was a breach of the agreement of the target company with the stock exchange which the acquirer company was not yet a privy. b) The only remedy for non compliance with these clauses was de-listing the shares of the target company. However this was contrary to the very object of the investor protection for which it was met. Therefore after acquiring statutory powers pursuant to the enactment of the SEBI act in 1992, SEBI came out with the SEBI regulations (Substantial Acquisition of Shares and Takeovers) in 1994.

When SEBI issued these regulations it retained the basic framework of the clauses 40A and 40B, though it made a substantial departure from them by dropping ‗change in control management‘ unaccompanied by substantial acquisition of shares beyond threshold limit as a ground to trigger an open offer (this has been restored under regulation 12 of the 1997 regulations now in force). SEBI also incorporated in 1994 regulations number of other provisions such as negotiated and open market acquisition rules, rules relating to competitive bids, revision of offer, withdrawal of offer, etc. Subsequent to the issuance of the takeover regulations of 1994, the original clauses 40A and 40B continued to exist in the listing agreements. Though the Justice Bhagwati committee rightly recommended that they had now become redundant and hence be replaced by more appropriate ones, it was in May 2006 that the new clauses 40A and 40B were made effective. These clauses, which we shall call as ‗new 40A‘ and ‗new 40B‘ have been reproduced in appendix 16. The gist of the provisions is as follows:

NEW CLAUSE 40A a) All listed companies, other than those mentioned hereunder, will be required to ensure the minimum level of public shareholding at 25% of the total number of issued shares of a class or kind for the purpose of continuous listing[subclause(i)]: (i) Companies which, at the time of initial listing, had offered to public less than 25% but not less than 10% of the total number of issued shares of a class or kind, in terms of rule 19(2)(b) of securities contract (Regulation) rules 1957 (SCRR) or companies desiring to list their shares by making an initial public offering(IPO) of less than 25 but at least 10% in terms of rule 19(2)(b) of SCRR[sub-clause (ii)] (ii) Companies which have reached or which would in future reach, irrespective of the percentage of their shares with the public at the time of initial listing, a size of 2 crore or more in terms of number of listed

shares and Rs1000 crore or more in terms of the market capitalization.[sub clause] (iii) The companies at (i) and (ii) above will be required to maintain the minimum level of public shareholding at 10% at the total number of issued shares of a class or kind for the purpose of continuous listing.

b) Those companies which are non-complaint with the aforesaid clause, as on 1st may, 2006, will have to become complaint by increasing the public shareholding to 25 or 10% as the case may be within a period, not exceeding two years, as granted by specified stock exchange (SSE). However, the SSE may, after shareholding and genuineness of the reasons submitted by the company, grant extension of time for a period not exceeding one year [sub-clause (iv)]

(c) Similarly, in respect of those companies which may subsequently become non-compliant on account of supervening extraordinary events such as compliance with directions of court, turbunial regulatory or statutory authority, compliance with the SEBI ( Substantial Acquisition and takeover) Regulations, 1997, reorganization of capital by way of scheme of agreement, etc., the SSE may grant a period of not exceeding one year, to become complaint, after examining and satisfying about the circumstances of the case ( sub-clause (vii)). This could be further extended by the SSE by a period not exceeding one year, shareholding and genuineness of the reasons submitted by the company (provision to sub-clause vii) (d) Where the public shareholding in the company, in respect of any clause or kind of shares has reduced below the stipulated minimum, the company shall not further dilute the same except on account of supervening extraordinary events (sub clause v) (e) A company shall not, except on account of supervening extraordinary events, issue shares to promoters or entities belonging to the promoter group or make any offer for buy-back of its shares or buy its shares for making sponsored issuance of the depositary receipts, etc. If it results into reducing the public shareholding below the stipulated minimum level (sub clause vi).

(f) Nothing contained in sub causes ( i ) yo ( vii ) shall apply to the government companies (as defined under section 617 of the companies act, 1956), infrastructure companies Guidelines, 2000 and referred to the Board for Industrial and Financial Reconstruction ( BIFR ). (g) The company shall, upon its public shareholding reducing below the stipulated minimum level, immediately take steps to increase the same above the stipulated minimum by any of the following methods:  Public issue through prospectus  Offer for sale of shares held by the promoters through prospectus  Sale of the shares held by the promoters in the secondary market  Any other method without adversely affecting the interest of the minority shareholders. (h) The term public shareholding for the purpose the of the continuous listing, comprises of shares held by entities other than promoters and promoter group and shares held by custodians against which depository receipts are issued overseas. The term ‗promoter‘ and ‗promoter group‘ shall have the same meaning as in assigned to them under the SEBE (DIP) Guidelines, 2000. (j) Where company fails to comply with the above provisions it is liable to be delisted in terms of the SEBI delisting guidelines. New Clause 40B: New clause 40B simply says that it is a condition for a continued listing that whenever a takeover offer is made or if there is a change in the management of the company, the person who secures the control of the management and of the company whose shares have been acquired shall comply with the relevant provisions of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997.

Cross border merger and acquisition in India with special reference to FEMA & RBI.
Cross border M&As –  Due to globalization, liberalization, technological developments and the resultant intensely competitive business environment, cross border mergers and acquisitions have become very popular throughout the world in the recent times  M&As have historically been the favourite tool used by companies for restructuring of their business.  Every merger or acquisition involves one or more methods of obtaining control of a public or private company, and the legal aspects of these transactions include issues relating to due-diligence, defining the parties‘ contractual obligations, structuring exit options, and the like  The positive as well as negative impact cross border M&As may have on the economy  Government has to be cautious to avoid any kind of over regulation, as the same may be fatal for the economic development and may result in discouraging foreign investors as well as domestic investors, seeking to acquire foreign companies. Inbound cross border M&As in India and the FEMA laws When we talk about inbound cross border M&As in India, we essentially mean foreign investment in India.Citizens of Bangladesh, Pakistan or Sri Lanka resident outside India and entities in Bangladesh or Pakistan are not permitted to purchase shares or debentures issued by Indian companies or any other Indian security without the prior approval of the RBI. Further, persons resident outside India are permitted to purchase shares or convertible debentures offered on a rights basis by an Indian company which satisfies the conditions restated hereinbelow: (i) The offer on right basis does not result in increase in the percentage of foreign equity already approved, or permissible under the Foreign Direct Investment Scheme in terms of FEMA 20;


The existing shares or debentures against which shares or debentures are issued by the company on right basis were acquired and are held by the person resident outside India in accordance with FEMA 20; The offer on right basis to the persons resident outside India is at a price which is not lower than that at which the offer is made to resident shareholders


For the purpose of FEMA 20, investment in India by a non-resident has been divided into the following 5 categories and the regulations applicable have been specified in respective schedules as under: 1) FDI scheme Under the FDI Scheme, a non resident or a foreign entity, whether incorporated or not, may purchase shares or convertible debentures of an Indian company. Any Indian company which is not engaged in the activity or manufacture of items listed in Annexure A to the FDI Scheme has been permitted to issue shares to a non resident up to the extent specified in Annexure B to the FDI Scheme, on a repatriation basis, provided that:[18] (i) The issuer company does not require an industrial licence; (ii) The shares are not being issued for acquiring existing shares of another Indian company; (iii) If the non resident to whom the shares are being issued proposes to be a collaborator, he should have obtained the Central Government‘s approval if he had any previous investment/collaboration/tie-up in India in the same or allied field in which the Indian company issuing the shares is engaged. Ceiling of 10% of the total paid-up equity capital or 10% of the paid-up value of each series of convertible debentures, and provides that the total holdings of all FIIs/subaccounts of FIIs put together shall not exceed 24% of paid-up equity capital or paid up value of each series of convertible debentures 2) Investment by NRIs/OCBs under the Portfolio Scheme Under Schedule 3, a NRI/OCB is permitted to purchase/sell shares and/or convertible debentures of an Indian company, through a registered broker on a recognised stock exchange, subject to the following conditions[24]: (i) The NRI/OCB designates a branch of an authorised dealer for routing his/its transactions relating to purchase and sale of shares/ convertible debentures under the Portfolio Investment Scheme, and routes all such transactions only through the branch so designated; The paid-up value of shares of an Indian company, purchased by each NRI/OCB both on repatriation and on non-repatriation basis, does not exceed 5% of the paid-up value of shares issued by the company concerned;



The paid-up value of each series of convertible debentures purchased by each NRI/OCB both on repatriation and non-repatriation basis does not exceed 5% of the paid-up value of each series of convertible debentures issued by the company concerned; The aggregate paid-up value of shares of any company purchased by all NRIs and OCBs does not exceed 10% of the paid up capital of the company and in the case of purchase of convertible debentures the aggregate paid-up value of each series of debentures purchased by all NRIs and OCBs does not exceed 10% of the paid-up value of each series of convertible debentures[25]; The NRI/OCB takes delivery of the shares purchased and gives delivery of shares sold; Payment for purchase of shares and/or debentures is made by inward remittance in foreign exchange through normal banking channels or out of funds held in NRE/FCNR account maintained in India if the shares are purchased on repatriation basis and by inward remittance or out of funds held in NRE/FCNR/NRO/NRNR/NRSR account of the NRI/OCB concerned maintained in India where the shares/debentures are purchased on non-repatriation basis; The OCB informs the designated branch of the authorised dealer immediately on the holding/interest of NRIs in the OCB becoming less than 60%.


(v) (vi)


Regulation of outbound cross border M&A transactions under FEMA laws Any outbound cross border M&A involving an Indian company, i.e. foreign investment by an Indian company in a foreign company is governed by FEMA. An Indian party is not permitted to make any direct investment in a foreign entity engaged in real estate business or banking business without the prior approval of RBI. There are several routes available to an Indian company which intends to invest in a foreign company, some of which are described herein below: I. Direct Investment in a Joint Venture/Wholly Owned Subsidiary

An Indian company is permitted to make a direct investment in a joint venture or a wholly owned subsidiary outside India, without seeking the prior approval of RBI subject to the following conditions being fulfilled[27]: (i) The total financial commitment of the Indian party will be capped at USD 50 Million or its equivalent in a block of 3 financial years including the year in which the investment is made, except investment in a Joint Venture/Wholly Owned Subsidiary in Nepal and Bhutan. (ii) In respect of direct investment in Nepal or Bhutan, in Indian rupees the total financial commitment shall not exceed Indian Rupees 1,200 Million in a block of 3 financial years including the year in which the investment is made; (iii) The direct investment is made in a foreign entity engaged in the same core activity carried on by the Indian company;

(iv) (v)


The Indian company is not on the RBI‘s caution list or under investigation by the Enforcement Directorate. The Indian company routes all the transactions relating to the investment in the joint venture or the wholly owned subsidiary through only one branch of an authorized dealer to be designated by it. However the Indian company is permitted to designate different branches of authorized dealer for onward transmission to the RBI. The Indian company files the prescribed Form ODA to the designated branch of the authorised dealer for onward transmission to the RBI.

II. Investment in a foreign company by ADR/GDR share swap or exchange An Indian company can also invest in a foreign company which is engaged in the same core activity in exchange of ADRs/GDRs issued to the foreign company in accordance with the ADR/GDR Scheme for the shares so acquired provided that the following conditions are satisfied[31]: (i) (ii) The Indian company has already made an ADR/GDR issue and that such ADRs/GDRs are currently listed on a stock exchange outside India. The investment by the Indian company does not exceed the higher of an amount equivalent to USD 100 Million or an amount equivalent to 10 times the export earnings of the Indian company during the preceding financial year. At least 80% of the average turnover of the Indian Party in the previous 3 financial years is from the activities/sectors included in Schedule or the Indian Party has an annual average export earnings of at least Indian Rupees1,000 Million in the previous 3 financial years from the activities/sectors included in Schedule 1 to FEMA 19; The ADR/GDR issue is backed by a fresh issue of underlying equity shares by the Indian company. The total holding in the Indian company by non-resident holders does not exceed the prescribed sectoral cap. The valuation of the shares of the foreign company is done in the following manner: a. b. If the shares of the foreign company are not listed, then as per the recommendation of an investment banker, or If the shares of the foreign company are listed then as per the formula prescribed therein.


(iv) (v) (vi)

Within 30 days from the date of issue of ADRs/GDRs in exchange of acquisition of shares of the foreign company, the Indian company is required to submit a report in Form ODG with RBI.[32] III. RBI approval in special cases In the event that the Indian company does not satisfy the eligibility conditions under Regulations 6, 7 and 8, as stated hereinabove, it may make an application to RBI for special

approval.[33] Such application for direct investment in Joint Venture/Wholly Owned Subsidiary outside India, or by way of exchange for shares of a foreign company, is to be made in Form ODI, or in Form ODB, respectively. In considering the application, the RBI may take into account the following factors[34]: (i) (ii) (iii) (iv) Prima facie viability of the joint venture/wholly owned subsidiary abroad. Contribution to external trade and other related benefits. Financial position and business track record of the Indian company and the foreign company; and Expertise and experience of the foreign company in the same or related line of activity of the joint venture or the wholly owned subsidiary abroad.

IV. Direct investment by capitalization: As per Regulation 11, an Indian Party is also entitled to make direct investment outside India by way of capitalisation in full or part of the amount due to the Indian Party from the foreign entity as follows:(i) Payment for export of plant, machinery, equipment and other goods/software to the foreign entity; (ii) Fees, royalties, commissions or other entitlements of the Indian party due from the foreign entity for the supply of technical know-how, consultancy, managerial or other services, however where the export proceeds have remained unrealised beyond a period of 6 months from the date of export, such proceeds can not be capitalised without the prior permission of RBI. V. Transfer by way of sale of shares of a JV/WOS

No Indian party is entitled to sell any share or security held by it in a Joint Venture or Wholly Owned Subsidiary outside India, to any person, except as otherwise provided in FEMA laws or with the permission of RBI.[37]


Pledge of Shares of Joint Ventures and Wholly Owned Subsidiaries

Further, FEMA 19 permits an Indian party to transfer, by way of pledge, shares held in a Joint Venture or Wholly Owned Subsidiary outside India as a security for availing of fund based or non-fund based facilities for itself or for the Joint Venture or Wholly Owned Subsidiary from an authorised dealer or a public financial institution in India. VII. Obligations of the Indian Party

Under Regulation 15, an Indian party which has acquired foreign security by way of direct investment in accordance with FEMA 19, is obliged to:


Receive share certificates or any other document as an evidence of investment in the foreign entity to the satisfaction of RBI within 6 months, or such further period as RBI may permit, from the date of effecting remittance or the date on which the amount to be capitalised became due to the Indian party or the date on which the amount due was allowed to be capitalised; Repatriate to India, all dues receivable from the foreign entity, like dividend, royalty, technical fees etc., within 60 days of its falling due, or such further period as RBI may permit; Submit to RBI every year within 60 days from the date of expiry of the statutory period as prescribed by the respective laws of the host country for finalisation of the audited accounts of the Joint Venture/Wholly Owned Subsidiary outside India or such further period as may be allowed by Reserve Bank, an annual performance report in Form APR in respect of each Joint Venture or Wholly Owned Subsidiary outside India set up or acquired by the Indian party and other reports or documents as may be stipulated by RBI.



TYPES OF INSTRUMENTS  Indian co. can issue capital / debentures, pricing must be decided/determined at the time of issue of instruments  FCCB/DR(ADRs/GDRs) – co should be authorized to issue by SEBI  Two-way Fungibility Scheme – put in place by GOI for ADR/GDR – share broker from India can purchase share to convert into ADR/GDR  Sponsored ADR/GDR issue: buybacks Indian shares from investors, converts into ADR/GRD & pays from capital generated from issue.

ENTRY ROUTES FOR INVESTMENT: The 2 routes are as follows:-

 The Automatic Route – does not require approval from RBI or GOI  And the Government Route – prior approval from GOI through FIPB

FDI – Industrywise Sectoral Caps
Resident Outside India or Foreign Companies for each Industry

 Sectoral Caps/Limits on Investments by Persons

S. No. 1. 2.


Private Banking Non-Banking Financial Companies (NBFC)

Investment Cap Sector 49% 100%

Description of Activity/Items/Conditions Subject to guidelines issued by RBI from time to time FDI/NRI investments allowed in the following 19 NBFC activities shall be as per the levels indicated below :

(a) Activities covered – Merchant Banking; Under Writing; Portfolio Management Services; Investment Advisory Services; Financial Consultancy; Stock-broking; Asset Management; Venture Capital; Custodial Services; Factoring; Credit Reference Agencies; Leasing & Finance; Housing Finance; Forex-broking; Credit Card Business; Money-changing Business; Microcredit; Rural credit.

(b) Minimum Capitalisation norms for fund based (NBFCs) – (i) For FDI upto 51%, US $ 0.5 million to be brought in upfront; (ii) If the FDI is above 51% and upto 75%, US $ 5 million to be brought upfront; (iii) If the FDI is above 75% and upto 100%, US $ 50 million out of which $ 7.5 million to be brought in upfront and the balance in 24 months.

(c) Minimum Capitalisation norms for non-fund based activities – Minimum Capitalisation norm

of US $ 0.5 million is applicable in respect of non-fund based NBFCs with foreign in¬vestment.

(d) Foreign investors can set up 100% operating subsidi¬aries without the condition to disinvest a minimum of 25% of its equity to Indian entities, subject to bringing in US $ 50 million as at (b) (iii) above (without any restriction on number of oper¬ating subsidiaries without bringing in additional capital).

(e) Joint Venture Operating NBFCs that have 75% or less than 75% foreign investment will also be allowed to set up sub¬sidiaries for undertaking other NBFC activities, subject to the subsidiaries also complying with the applicable minimum capital inflow i.e., (b)(i) and (b)(ii) above.







(f) FDI in the NBFC sector is put on automatic route subject to compliance with guidelines of the Reserve Bank of India. RBI would issue appropriate guidelines in this regard. FDI upto 26% in the Insurance sector is allowed on the automatic route subject to obtaining licence from Insurance Regulatory and Development Authority (IRDA) (i) In basic, Cellular, Value Added Services, and Global Mobile Personal Communications by Satellite, FDI is limited to 49% subject to licencing and securi¬ty requirements and adherence by the companies (who are investing and the companies in which the investment is being made) to the license conditions for foreign equity cap and lock-in-period for transfer and addition of equity and other license provisions.

(ii) ISPs with gateways, radio paging and endto-end bandwidth, FDI is permitted upto 74% with FDI, beyond 49% requiring Government approval. These services would be subject to licensing and security requirements.

(iii) No equity cap is applicable to manufacturing activities

(iv) FDI upto 100% is allowed for the following activities in the telecom sector – (a) ISPs not providing gateways (both for satellite and submarine cables); (b) Infrastructure providers providing dark fibre (IP Category I); (c) Electronic Mail, and (d) Voice Mail. The above would be subject to the following conditions – (a) FDI upto 100% is allowed subject to the condition that such companies would divest 26% of their equity in favour of Indian public in 5 years, if these companies are listed in other parts of the world. (b) The above services would be subject to licensing and security requirements, wherever required. (c) Proposal for FDI beyond 49% shall be considered by FIPB on case to case basis. FDI permitted upto 100% in case of private Indian companies Subject to the existing sectoral policy and regulatory frame-work in the oil marketing sector Subject to and under the policy of Government on private partici-pation in – (a) exploration of oil, and (b) the discovered fields of national oil companies Subject to and under the Government Policy and Regulations thereof.] Only NRIs are al¬lowed to invest upto 100% in the areas listed below – (a) Development of serviced plots and construction of built-up residential premises; (b) Investment in real estate covering construction of residential and commercial premises including business centres and offices; (c) Development of townships; (d)


(i)] Petroleum Refining (Private Sector) (ii) Petroleum Product Marketing (iii) Oil Exploration in both small and medium sized fields





(iv) Petroleum Product Pipelines Housing and Real Estate

100% 100%


Coal & Lignite


City and regional level urban infrastructure facilities, including both roads and bridges; (e) Investment in manufacture of building materials; (f) Investment in participatory ventures in (a) to (c) above; (g) Investment in Housing Finance Institutions which is also opened to FDI as an NBFC. (i) Private Indian companies setting up or operating power projects as well as coal and lig¬nite mines for captive consumption are allowed FDI upto 100%.

(ii) 100% FDI is allowed for setting up coal processing plants subject to the condition that the company shall not do coal mining and shall not sell washed coal or sized coal from its coal processing plants in the open market and shall supply the washed or sized coal to those parties who are supplying raw coal to coal processing plants for washing or sizing.

(iii) FDI upto 74% is allowed for exploration or mining of coal or lignite for captive consumption.


Venture Capital Fund (VCF) and Venture Capital Company (VCC) Trading ***


(iv) In all the above cases, FDI is allowed upto 50% under the automatic route subject to the condition that such investment shall not exceed 49% of the equity of a PSU. Offshore Ven¬ture Capital Funds/companies are allowed to invest in domestic venture capital undertaking as well as other companies through the automatic route, sub¬ject only to SEBI regulation and sector specific caps on FDI. Trading is permitted under automatic route with FDI upto 51% provided it is primarily export activi¬ties and the undertaking is an export house/trading house/super trading house/star trading house.

However, under the FIPB route – (i) 100% FDI is permitted in case of trading companies for the following activities : (a) exports; (b) bulk imports with

export/expanded warehouse sales; (c) cash and carry wholesale trading; (d) other import of goods or services provided at least 75% is for procurement and sale of the same group and not for third party use or onward transfer/distribution/sales.

(ii) The following kinds of trading are also permitted, subject to provisions of Exim Policy – (a) Companies for providing after-sales services (that is not trading per se); (b) Domestic trading of products of JVs is permitted at the wholesale level for such trading companies who wish to market manufactured products on behalf of their joint ventures in which they have equity participation in India; (c) Trading of hi-tech items/items requiring specialised after-sales service;

(d) Trading of items for social sector;

(e) Trading of hi-tech, medical and diagnostic items;

(f) Trading of items sourced from the small scale sector under which, based on technology provided and laid down quality specifications, a company can market that item under its brand name;

(g) Domestic sourcing of products for exports; (h) Test marketing of such items for which a company has approval for manufacture provided such test marketing facility will be for a period of two years, and investment in setting up manufacturing facilities commence

simultaneously with test mar¬keting;





Drugs Pharmaceuticals




Road and highways, Ports and harbours Hotel & Tourism




(i) FDI upto 100% permitted for e-commerce activities subject to the condition that such companies would divest 26% of their equity in favour of the Indian public in five years, if these companies are listed in other parts of the world. Such companies would engage only in business to business (B2B) e-commerce and not in retail trading. FDI allowed upto 100% in respect of projects relating to electricity generation, transmission and distribution, other than atomic reactor power plants. There is no limit on the project cost and quantum of foreign direct investment. FDI permitted upto 100% for manufacture of drugs and pharmaceuticals provided the activi¬ty does not attract compulsory licensing or involve use of recom¬binant DNA technology and specific cell/tissue targeted formula¬tions. FDI proposal for the manufacture of licensable drugs and pharmaceuticals and bulk drugs produced by recombinant DNA tech¬nology and specific cell/tissue targeted formulations will re¬quire prior Govt. approval. In projects for construction and maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunnels, ports and harbours. The term ‘hotels’ includes res¬taurants, beach resorts and other tourist complexes providing accommodation and/or catering and food facilities to tourists. Tourism related industry include travel agencies, tour operating agencies and tourist transport operating agencies, units provid¬ing facilities for cultural, adventure and wild life experience to tourists, surface, air and water transport facilities to tourists, leisure, entertainment, amusement, sports and health units for tourists and Convention/Seminar units and Organisations.

For foreign technology agreements, automatic approval is granted if – (i) Upto 3% of the capital cost of the project is proposed to be paid for technical and consultancy services including fees for architects

design, supervision, etc.; (ii) Upto 3% of the net turnover is payable for franchising and marketing/publicity support fee, and (iii) Upto 10% of gross operating profit is payable for management fee, including incentive fee.




(i) For exploration and mining of diamonds and precious stones FDI is allowed upto 74% under auto¬matic route,


(ii) For exploration and mining of gold and silver and minerals other than diamonds and precious stones, metallurgy and processing FDI is allowed upto 100% under automat¬ic route,

15. 16

Advertising Films

100% 100%

(iii) Press Note 18 (1998 series) dated 14-121998 would not be applicable for setting up 100% owned subsidiaries in so far as the mining sector is concerned, subject to a declaration from the applicant that he has no existing joint venture for the same area and/or the particular mineral. Advertising Sector – FDI upto 100% allowed on the automatic route Film Sector – (Film production, exhibition and distribution including related services/products) FDI upto 100% allowed on the automatic route with no entry-level condition.

17. 18.

Airports Mass Rapid Transport Systems

74% 100%


Pollution Control & Management



Special Zones



Govt. approval required beyond 74% FDI upto 100% is permit¬ted on the automatic route in mass rapid transport system in all metros including associated real estate development. In both manufacture of pollu¬tion control equipment and consultancy for integration of pollution control systems is permitted on the automatic route. All manufacturing activi¬ties except –

(i) Arms and ammunition, explosives and allied items of defence equipments, defence aircrafts and warships; (ii) Atomic Psychotropic Chemicals; substances, Sub¬stances Narcotics and and Hazardous

(iii) Distillation and brewing of Alcoholic drinks, and (iv) Cigarette/cigars and manufactured tobacco substitutes.




Any other 100% sector/activity (if not included in Annexure A) Air Transport 100% for No direct or indirect equity participation by Services (Domestic NRIs 49% for foreign airlines is allowed. Airlines) others Townships, 100% The investment shall be subject to the following housing, built up guidelines – infrastructure and construction (a) Minimum area to be developed under each development project shall be as under – projects. The sector would include, but (i) In case of development of serviced housing not be restricted to, plots—10 hectares housing, commercial (ii) In case of construction development premises, hotels, project—50,000 sq. mtrs. resorts, hospitals, educational (iii) In case of combination project, any one of institutions, the above two conditions. recreational facilities, city and regional level infrastructure (b) The investment shall be subject to the following conditions – (i) Minimum capitalization of US $ 10 million for wholly owned subsidiaries and US $ 5 million for joint ventures with Indian partners. The funds would have to be brought in within six months of commencement of business of the company. (ii) Original investment cannot be repatriated

before a period of three years from completion of minimum capitalization. However, the investor may be permitted to exit earlier with prior approval of the Government through the FIPB.

(c) At least 50% of the project must be developed within a period of five years from the date of obtaining all statutory clearances. The investor shall not be permitted to sell undeveloped plots.

(d) The project shall conform to the norms and stand¬ards, as laid down in the applicable building control regulations, bye-laws, rules, and other regulations of the State Gov¬ernment/Municipal/Local Body concerned.

(e) The investor shall be responsible for obtaining all necessary approvals, including those of the building/layout plans, developing internal and peripheral areas and other infra¬structure facilities, payment of development, external develop¬ment and other charges and complying with all other requirements as prescribed under applicable rules/bye-laws/regulations of the State Government/Municipal/Local Body concerned.

(f) The State Government/Municipal/Local Body con¬cerned, which approves the building/development plans, shall monitor compliance of the above conditions by the developer.

ENTRY CONDITIONS ON INVESTMENT  Applicable for investment only by non-resident entities

 Includes min capitalization, lock-in period, etc. OTHER CONDITIONS ON INVESTMENT  Confirmation from all relevant sectoral law  Compiled with national/internal securities related conditions  State Govt / Union Territories regulations are followed. GUIDELINES FOR CONSIDERATION OF FDI PROPOSALS BY FIPB:  Application to FIPB before 15days of meeting  30days for Govt decision  Also – should have industrial license if required & export projection with export destination if required APPROVAL LEVELS FOR CASES UNDER GOVERNMENT ROUTE  FIPB recommendations in case total foreign equity inflow of and below Rs.1200 crore.  More than 1200 crore would be placed for consideration of ministry of finance & CCEA.

Case study Cairn Vedanta

      

Name of Aquirer: Vedanta Resources plc Target company: Cairn India Type of take over: Cross border, Friendly Takeover Mode of Acquisition: Securities (Shares) Sell Consideration: $8.5bn Mode of Payment: Cash Funding of deal:  Vedanta Resources: bank debt facilities of up to US$6.5bn, ≥ 2 year tenure  Sesa Goa: c. US$3bn, primarily from cash resources

Companies Involved: Cairn India is primarily engaged in the business of oil and gas exploration, production and transportation. It is British oil explorer Cairn Energy's Indian business. Vedanta Resources plc is metals and mining company, first Indian manufacturing company listed on LSE.

Why Cairn Vedanta Deal: Vedanta was planning to secure oil and gas to fuel the power plants it controls in India. A stake in Cairn India would open Vedanta to the oil and gas exploration markets, and would give Cairn cash to fund its expansion in the Arctic region.

Facts of the Deal:  In August 2010 Vedanta proposed buying 51-60% stake in Cairn India for up to USD 9.6 billion in cash.  The Cairn Vedanta deal delayed due to the lack of government and regulatory approvals. Approval has been delayed over royalty payments that ONGC makes on behalf of Cairn India in Rajasthan oilfields. (Cairn and ONGC are the 70:30 joint-venture partners in the Rajasthan block, RJ-ON90/1. ONGC till now has been paying the entire royalty burden. ONGC wanted to be compensated for royalty payments it has been making on the oil produced at this field.

The firm expected the royalty to be $2 billion [Rs. 8,940 crore] over the life of the field. Cairn had earlier declined to make these payments. Similarly, Cairn has also challenged its cess dues and is paying these under protest).  (While approvals were being delay Vedanta bought stake in Cairn India through its subsidiary Sesa Goa.) At the end of April 2011 Vedanta was holding an 18.5% stake in Cairn India. Its subsidiary Sesa Goa Ltd picked up a 10.4% stake[200 million shares at 331 rupees ($7.44) apiece][i.e. at ~$1.49 billion] in Cairn India from Malaysia‘s Petronas International Corp. Ltd and a further 8.1% [155 million shares] through an open offer from other shareholders that closed on April 30 2011. [Sesa Goa Ltd. offered Rs. 355 per share to minority stakeholders and will be paying $1.24 billion to acquire 8.1% stake.]  In June 2011Cairn Energy agreed to sell a 40% stake in Cairn India to Vedanta. Cairn Energy PLC sold 10.0% shares [at ~$1.4 billion] to the Acquirer on 11 July 2011. Acquisition of an additional 30% [at ~$4 billion] by the Vedanta Group is subject to the final outcome of the conditional approval granted by the Government of India.  As per the letter dated 26 July, 2011, the transaction has been approved by the GoI (Government of India) subject to certain conditions.  In August 2011 Cairn Energy, which owns a 52.11% stake in Cairn India, "has voted to accept (government) conditions" so as to facilitate its stake sale to Vedanta Resources. Two of the government of India conditions - cess and royalty payable - are currently with Cairn India shareholders for approval (Cairn has voted to accept these conditions) with voting results due on September 14, 2011.

Introduction: The holding company of Cairn India Limited, Cairn UK Holdings Limited, along with its holding company, Cairn Energy PLC (Company‘s ultimate holding company) agreed to sell a substantial part of its shareholding in the Company to Vedanta Resources Plc (‗Acquirer‘). On 23 August 2011 Cairn Energy PLC announced sale of 40% shareholding of the fully diluted share capital in Cairn India Limited (CIL) to Vedanta Resources plc (Vedanta) to be completed in two stages:  The first tranche of 10% which realised ~$1.4 billion completed July 2011  The second tranche of 30%, approved by the Government of India (GoI) in June, subject to certain conditions, will realise ~$4 billion

Companies Involved: Cairn India: Cairn India is primarily engaged in the business of oil and gas exploration, production and transportation. It is British oil explorer Cairn Energy's Indian business. Cairn Energy Plc: Cairn Energy is one of Europe's largest independent oil and gas exploration and production companies. Based in Edinburgh, Cairn is listed on the London Stock Exchange and is part of the FTSE100. Cairn's principal interests are in India and Greenland. Vedanta Resources PLC: Vedanta Resources plc is a London Stock Exchange listed diversified FTSE 100 metals and mining company. Its business is principally located in India. In addition, it has additional assets and operations in Zambia and Australia. Vedanta Resources are primarily engaged in copper, zinc, aluminium and iron ore businesses, and are also developing a commercial power generation business. Sesa Goa: Sesa Goa is India's largest producer and exporter of iron ore in the private sector and is on course to be in the league of top four iron ore producing companies in the World. Apart from Iron ore it also produces pig iron and metallurgical coke. Other Companies being affected: Sterlite Industries India Limited: Sterlite Industries India Limited (SIIL) is the principal subsidiary of Vedanta Resources plc, a diversified and integrated FTSE 100 metals and mining company, with principal operations located in India and Australia. ONGC (Oil and Natural Gas Corporation): ONGC is Cairn India‘s partner in a joint venture that runs the latter‘s main oil asset—block RJ-ON-90/1 in Rajasthan.

Company Structure: Cairn Energy PLC:

Cairn Energy PLC has major holdings in Cairn India and Capricorn. Cairn India: Cairn India is committed to continuing investment in India and is very much focused on creating shareholder value by maximising and developing its world class resource base in Rajasthan. Holding: 52.2% On 16 August 2010, Cairn announced that it had entered into a conditional agreement with Vedanta Resources plc for the potential sale of a percentage of its shareholding in Cairn India. For more information, please see the announcement dated 16 August 2010. Cairn has now completed the sale of a 10% shareholding in Cairn India to Vedanta Resources. For more information please see the announcement dated 12 July 2011. Capricorn: Capricorn seeks to discover hidden value through entrepreneurial exploration and establish strategic positions in frontier locations with high hydrocarbon potential. Holding: 100%

Company Structure: Vedanta Resources PLC Vedanta Resources plc is a diversified metals and mining company with revenues in excess of US$6 billion. It is the first Indian manufacturing company listed on the London Stock Exchange.

The principal members of our consolidated group of companies are as follows: COPPER BUSINESS Sterlite Industries (India) Ltd: Sterlite is headquartered in Mumbai. Sterlite has been a public listed company in India since 1988, and its equity shares are listed and traded on the NSE and the BSE, and are also listed and traded on the NYSE in the form of ADSs. Vedanta owns 53.9% of Sterlite and have management control of the company. Konkola Copper Mines: We own 79.4% of KCM‘s share capital and have management control of the company. KCM‘s other shareholder is ZCCM Investment Holdings Plc. The Government of Zambia has a controlling stake in ZCCM Investment Holdings Plc. Copper Mines of Tasmania Pvt Ltd: CMT is headquartered in Queenstown, Tasmania. Sterlite owns 100.0% of CMT and has management control of the company. ZINC BUSINESS Hindustan Zinc Limited: HZL is headquartered in Udaipur in the State of Rajasthan. HZL‘s equity shares are listed and traded on the NSE and BSE. Sterlite owns 64.9% of the share capital in HZL and has management control. Sterlite has a call option to acquire the Government of India‘s remaining ownership interest. ALUMINIUM BUSINESS Bharat Aluminium Company Ltd: BALCO is headquartered at Korba in the State of Chhattisgarh. Sterlite owns 51.0% of the share capital of BALCO and has management control

of the company. The Government of India owns the remaining 49.0%. Sterlite exercised an option to acquire the Government of India‘s remaining ownership interest in BALCO in March 2004. Vedanta Aluminium Ltd: Vedanta Aluminium is headquartered in Lanjigarh, State of Orissa. Vedanta owns 70.5% of the share capital of Vedanta Aluminium and Sterlite owns the remaining 29.5% share capital of Vedanta Aluminium. IRON ORE BUSINESS Sesa Goa Limited: Sesa Goa is headquartered in Panaji, India, and its equity shares are listed and traded on the NSE and BSE. We own 57.1% of Sesa and have management control of the company. COMMERCIAL POWER GENERATION BUSINESS Sterlite Energy Limited: Sterlite Energy is headquartered in Mumbai. Sterlite owns 100.0% of Sterlite Energy and has management control of the company. Madras Aluminium Company Ltd: MALCO is headquartered in Mettur, India. MALCO‘s equity shares are listed and traded on the NSE and BSE. We own 93.9% of MALCO‘s share capital and have management control of the company.

Why Cairn Vedanta Deal:

Analysts said, Vedanta was planning to secure oil and gas to fuel the power plants it controls in India, which are now fired by coal. Cairn India controls the Mangala field in Rajasthan, the discovery of which in the early part of the decade transformed the fortunes of Cairn. Vedanta said in 2008 that it would spend $20bn in India on mines and power plants over four years. A stake in Cairn India would open Vedanta to the oil and gas exploration markets, and would give Cairn cash to fund its expansion in the Arctic region, analysts said.

Cairn Vedanta Deal:

In August 2010, Vedanta proposed buying a 51-60% stake in oil and gas explorer Cairn India for up to USD 9.6 billion in cash, but the deal delayed due to the lack of government and regulatory approvals. Approval has been delayed over royalty payments that ONGC makes on behalf of Cairn India in Rajasthan oilfields. Following the amendments to the sale and purchase agreement,  Vedanta was holding an 18.5% stake in Cairn India after its subsidiary Sesa Goa Ltd picked up a 10.4% stake in Cairn India from Malaysia‘s Petronas International Corp. Ltd and a further 8.1% through an open offer from other shareholders that closed on 30 April, 2011.  Cairn Energy PLC has sold 191,920,207 (10.0%) shares to the Acquirer on 11 July 2011. Post this transaction Vedanta Plc group holds 28.5% in Cairn India on a fully diluted basis. Acquisition of an additional 30% by the Vedanta Group is subject to the final outcome of the conditional approval granted by the Government of India (GoI). Cairn Energy PLC currently remains the majority shareholder of Cairn India with a 52.1 per cent shareholding.  As per the letter dated 26 July, 2011, the transaction has been approved by the GoI subject to certain conditions. The conditions include that in respect of the RJ-ON-90/1 block, the Company must agree that the royalty payable under the PSC is a contract cost eligible for cost recovery and that it shall withdraw the arbitration with respect to payment of cess.  The Company has also received a requisition from Cairn UK Holdings Limited on 21 July, 2011 under Section 169 of The Companies Act, 1956, to convene an extraordinary general meeting of the Company to consider the conditions imposed by the GoI.  Based on the abovementioned requisition, the Cairn India Board has noted its obligations under section 169 of The Companies Act, 1956 and has today, further to the letter from the GoI, reached a conclusion that it would be appropriate to hold a postal ballot of all the shareholders to consider the conditions imposed by the GoI.  It should be noted that if royalty were to be cost recoverable, it would lead to a decline in the revenues and profit after tax for the current quarter by `12,916 million (US$ 289 m).

Cairn India-ONGC JV Cairn India and ONGC joint venture commissioned the world‘s longest continuously heated and insulated pipeline in June, 2010. The pipeline originates from the Mangala Processing Terminal in Barmer, Rajasthan and after traversing a distance of approximately 670 kms terminates at Bhogat on the Gujarat coast. The heating of the pipeline is based on an electrical heating technology called Skin Effect Heat Management System. The pipeline has been entered into the Limca Book of Records as the longest continuously heated and insulated pipeline in the world. Cairn India Ltd. and its joint venture partner Oil and Natural Gas Corporation Ltd., or ONGC, began the sale of crude oil through its Barmer-Salaya pipeline network in June, 2010. Essar Oil's Vadinar refinery became the first recipient of the crude oil through Cairn India's insulated crude oil pipeline. The 590-km-long Barmer-to-Salaya section of the Barmer to Bhogat pipeline (670 km) is operational with oil supplies having commenced to private refineries from the delivery point at Salaya.

Why Cairn Vedanta Deal was delay: ONGC and Cairn India are 30:70 partners in the joint venture that runs the latter‘s main oil asset—block RJ-ON-90/1 in Rajasthan. ONGC had, much before the Cairn-Vedanta deal was announced, cited contractual provisions to demand that the royalty should be recovered as a cost from revenue. The state-owned firm maintained that as a partner, it has the right of preemption or first refusal and the deal should not proceed without its concurrence. Both Cairn and Vedanta disputed royalty being made cost-recoverable as it would dent Cairn India's profits. They also opposed the need for partner consent for the transaction. ONGC wanted to be compensated for royalty payments it has been making on the oil produced at this field. The firm expected the royalty to be $2 billion (Rs. 8,940 crore) over the life of the field. Cairn had earlier declined to make these payments. Similarly, Cairn has also challenged its cess dues and is paying these under protest.

Subsequent events:  The government said it granted Vedanta Resources conditional approval in June to buy a stake in British oil explorer Cairn Energy's Indian business, in a deal valued at around $ 6 billion.  In June 2011Cairn Energy agreed to sell a 40 per cent stake in Cairn India to Vedanta. The sale has been delayed for more than 10 months due to a disagreement over royalty payments.  The oil ministry has been pushing for Cairn India to share royalty payments with staterun Oil and Natural Gas Corp, which has a 30 per cent holding in the Cairn-operated fields in western India but pays 100 per cent of the royalties.  Cairn and Vedanta cut the price of the deal in June 2011 in a move interpreted as bringing the pair closer to agreeing to India's demand that royalty payments be shared.  Cairn India had on July 26 stated that its April-June quarter net profit would halve to Rs 1,435 crore if it was asked to share royalty on the Rajasthan crude oil.  The company currently does not pay any royalty on its 70 per cent interest in the Rajasthan fields. The royalty, as per the contract, is paid by state-owned ONGC, which got a 30 per cent stake in the 6.5 billion barrel field for free.  Treating royalty as a cost for developing the field would mean sharing the burden between the two partners, effectively reducing Cairn India's profitability. The total royalty burden over the life of the asset is estimated at Rs 180 billion ($ 4 billion).  Also Cairn India currently pays 70 per cent of cess liability under protest and has filed an arbitration case. Cess liability is estimated at 130 billion rupees over the life of the asset.  Cairn in June lowered the price it is demanding from Vedanta to make up for reduced profitability on acceptance of the preconditions. It removed a non-compete provision and related non-compete fee of Rs 50 per share.  Vedanta's total payment at the reduced price of Rs 355 per share for a 40 per cent stake in Cairn India will now be $ 6.02 billion instead of $ 6.84 billion previously.  The biggest beneficiary of the conditional approval to Cairn-Vedanta is ONGC. The company till now has been paying the entire royalty burden, with the 2010-11 share being Rs 1,300 crore on revenue of Rs 3,877 crore. The conditional approval and the revised agreement would see ONGC‘s royalty burden being reduced by around $700 million, show Religare research estimates. It would add Rs 2.50 a share to ONGC‘s 2011-12 earnings per share of Rs 30.5. Further, it will stand to gain from recovering the past royalty payments. This is a big boost for its coming follow-on public offer.

Cairn Energy asked Cairn India Accept all govt conditions on Vedanta deal:  The Cabinet Committee on Economic Affairs (CCEA) on June 27 gave consent to the Cairn-Vedanta deal, subject to Cairn or its successor agreeing to charge or deduct the royalty paid by ONGC from the revenues earned from the sale of oil before the profits are split between partners.  Aug 23, 2011, UK's Cairn Energy Plc said it wants Cairn India to accept all the government's conditions and agree to pay royalty and cess on the Rajasthan oilfields so as to facilitate its stake sale to Vedanta Resources.  Cairn Energy had previously said it would rather call off the deal than force Cairn India to accept these conditions. Because of it, Minority shareholders at Cairn India's AGM in Mumbai in July had booed Cairn Energy for changing track to get USD 6.02 billion from the stake sale to Vedanta.  Cairn Energy, which owns a 52.11 per cent stake in Cairn India, "has voted to accept (government) conditions‖. Two of the government of India conditions -- cess and royalty payable -- are currently with Cairn India shareholders for approval, Cairn has voted to accept these conditions, with voting results due on September 14, 2011.  Together with Vedanta's 28.5 per cent shareholding, Cairn Energy has enough votes to get any proposal passed by its shareholders, ignoring the resolution passed by the Cairn India board in February opposing the value demolishing preconditions.

Case study ICICI Bank & Bank of Rajasthan

ICICI Bank is India's second-largest bank with total assets of Rs. 3,634.00 billion (US$ 81 billion) at March 31, 2010 and profit after tax Rs. 40.25 billion (US$ 896 million) for the year ended March 31, 2010. The Bank has a network of 2,035 branches and about 5,518 ATMs in India and presence in 18 countries. ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialized subsidiaries in the areas of investment banking, life and non-life insurance, venture capital and asset management. The Bank currently has subsidiaries in the United Kingdom, Russia and Canada, branches in United States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai International Finance Centre and representative offices in United Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. Their UK subsidiary has established branches in Belgium and Germany. ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National Stock Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New York Stock Exchange (NYSE).

ICICI BANK(Betting big on the inorganic mode):
First it was the Bank of Madura. Then, it was Bank of Sangli. And now, the Bank of Rajasthan. ICICI Bank is seemingly strengthening its presence in the Indian banking space by undertaking a slew of acquisitions It was the February of 2008. The world was yet to come face-to-face with the debacle of the US banking giant Bear Stearns. Yet in India, officials of the largest private sector bank, ICICI Bank, had started feeling the heat. And it was not for the fact that they had already predicted the slowdown that was coming their way, it was due to the acquisition of the Centurion Bank of Punjab (CBoP) that proved the genesis of all headaches in the ICICI camp. CBoP had been on the radar of ICICI Bank for quite sometime already, but it was HDFC Bank that finally got hold of CBoP. ICICI Bank, which had held on to its numero uno position in the private banking space and second slot in the banking space apparently felt that it was losing its ground. It made ICICI realise that something‘s got to give, if it wanted to avoid nightmares of the likes of HDFC Bank, Axis Bank and Punjab National Bank beating it with the lesson cane! It decided that growing inorganic was the route to redemption.

What followed was interesting. Despite the Bear Stearns episode in March 2008, the Indian banking scenario continued sauntering without many hiccups. There were promises in the air, especially the air above the Indian banks. But something set the cat amongst the pigeons – the crash of the banking behemoth Lehman Brothers, which filed for bankruptcy in September 2008. The world economy was heading for its worst crisis since the Great Dipression and Indian banks set off the alarm. One which set off the louded was ICICI Bank. Reason – during that point in time, it had an exposure of around 57 million euros in Lehman senior bonds and another $30 million in the insurance company American International Group (AIG), whose financial health too was as shaky as Lehman Brothers‘. ICICI Bank was forced to pack its dreams (of steaming past others of its ilk in the Indian space) in a suitcase and catch the next flight to the land of protectionism. Times were too risky to take a plunge and ICICI Bank wanted to play safe. More than a 21 months later, after a prolonged phase of silence, the bank has stepped back into its aggressive boots. And this time around, it has given clear indications of a desire to grow through both organic and inorganic means. Even Chanda Kochhar (CEO of ICICI Bank) has done much work towards rebuilding the perception of the bank amongst its customers. May 3, 2010, also saw ICICI open its 2000th branch in the country (it opened it in Andheri West, Mumbai). But there was more in store for the market. Withing 20 days, the Board of Directors of the bank approved an amalgamation of Bank of Rajasthan (BoR) with ICICI Bank, subject to approval by shareholders and Reserve Bank of India, therefore sending that signal of aggression to competitors and customers alike.

Bank of Rajasthan (BoR)
Bank of Rajasthan, with its stronghold in the state of Rajasthan, has a nationwide presence, serving its customers with a mission of "together we prosper" engaging actively in Commercial Banking, Merchant Banking, Auxiliary services, Consumer Banking, Deposit & Money Placement services, Trust & Custodial services, International Banking, Priority Sector Banking, and Depository. Bank of Rajasthan, a leading Private Sector Bank, having branches all over India with prominent presence in Rajasthan having specialized forex and Industrial finance branches. The Bank is committed to the highest level of customer satisfaction through personalized and efficient services. Bank of Rajasthan is a listed old Indian private sector bank with its corporate office at Mumbai in Maharashtra and registered office at Udaipur in Rajasthan. At March 31, 2009, Bank of Rajasthan had 463 branches and 111 ATMs, total assets of Rs. 172.24 billion, deposits of Rs. 151.87 billion and advances of Rs. 77.81 billion. It made a net profit of Rs. 1.18 billion in the year ended March 31, 2009 and a net loss of Rs. 0.10 billion in the nine months ended December 31, 2009.

Why BoR
 ICICI Bank Ltd, India‘s largest private sector bank, said it agreed to acquire smaller rival Bank of Rajasthan Ltd to strengthen its presence in northern and western India.  Deal would substantially enhance its branch network and it would combine Bank of Rajasthan branch franchise with its strong capital base.  This acquisition would be ICICI Bank‘s third one after Bank of Madura in 200001 and Sangli Bank in 2006-07.  In February, RBI imposed 25 lakh Indian rupees penalty on Bank of Rajasthan for various violations. It also ordered a special audit of the books of the bank, after it found lapses in corporate governance and disclosure norms.

 The deal, which will give ICICI a sizeable presence in the northwestern desert state of Rajasthan, values the small bank at about 2.9 times its book value, compared with an Indian banking sector average of 1.84.  ICICI Bank may be killing two birds with one stone through its proposed merger of the Bank of Rajasthan. Besides getting 468 branches, India's largest private sector bank will also get control of 58 branches of a regional rural bank sponsored by BoR.  The board approved the merger after considering the results of the due diligence covering advances, investments, deposits, properties and branches and employeerelated liabilities, and the valuation report of Haribhakti and Co, Chartered Accountants.  Post-merger, ICICI Bank's branch network would go up to 2,463.This is the third merger for the bank, after it took over Bank of Madura and Sangli Bank.

The negatives for ICICI Bank are the potential risks arising from BoR's non-performing loans and that BoR is trading at expensive valuations. As on FY-10 the net worth of BoR was approximately Rs 760 crore and that of ICICI Bank Rs 5,17,000 crore, he added. For the December 2009 quarter, BoR reported a loss of Rs 44 crore on an income of Rs 373 crore.

Evaluating branch potential
Keeping aside the risk of further book value erosion from fresh NPA accretion post-acquisition, even the existing capital adequacy of BOR is on the lower side. Moreover, in our view, on a higher level of business per branch (from Rs37cr assets / branch at present to about 50cr), the normalized Net worth per branch would have to be at least Rs2.5-3.5cr, while BOR's existing Net worth per branch is Rs1.3cr. If we add this additional capital requirement to the acquisition price, then per branch acquisition price would be about Rs8.8cr (assuming NW / branch of Rs3.5cr). At this level, BOR's implied P/BV would work out to about 2.5x, not taking into account the 2-3 years it may take to scale up the productivity of these branches. Even on this basis, the acquisition looks expensive relative to peers.

Deal Structure/Valuation
The Board will consider the due diligence report and valuation report at a subsequent meeting. The proposal if approved by the Boards of both ICICI Bank and Bank of Rajasthan would then be placed before the shareholders of both banks for approval and would be submitted to Reserve Bank of India (RBI) for its consideration. Under the terms of the deal, ICICI Bank will offer 25 shares for every 118 shares of Bank of Rajasthan.

The valuation implied by the share exchange ratio is in line with the market capitalization per branch of old private sector banks in India, The final determination of the share exchange ratio is subject to due diligence, independent valuation and approvals. According to the Securities and Exchange Board of India (SEBI), Tayals, the promoters of Bank of Rajasthan hold nearly 55 percent stake in the bank. At the end of 2009, the promoters held a 28.6 per cent stake in the bank, according to stock exchange data. ICICI is offering to pay 188.42 rupees per share, in an all-share deal, for Bank of Rajasthan, a premium of 89 percent to the small lender, valuing the business at $668 million. The Bank of Rajasthan approved the deal, which will be subject to regulatory agreement.

Swap Ratio
The bank said the swap ratio is based on an internal analysis of the strategic value of the amalgamation, average market capitalisation per branch of old private sector banks and relevant precedent transactions. According to analysts, the swap ratio works out to a premium of 89.4 per cent over BoR's market price. The merger is not likely to have any material impact on ICICI Bank's capital and the only advantage is a readymade branch network. With a Tier-I capital of above 13 per cent, the impact on ICICI Bank's capital would be less than 3 per cent.

Problems Encountered EGM- Kolkata Civil Court
The extraordinary general meeting of Bank of Rajasthan convened to seek shareholders' approval for its merger with ICICI Bank witnessed high drama with a Kolkata court staying the meeting that was subsequently overruled by the High Court. Extraordinary general meeting that was called to approve the merger was first cancelled after a Kolkata civil court restrained the management from holding the EGM. This was based on a

complaint filed by a shareholder who was against the merger. The bank then went ahead and informed the exchanges that the EGM has been cancelled following a court order. The Managing Director of the bank then decided not to hold the meeting and he, along with other officers of the bank, left the venue. The bank also informed stock exchanges that the EGM has been cancelled following a court order. However, some of the directors and shareholders, including dominant shareholder Mr P.K. Tayal went ahead and held the meeting, chaired by Mr Dinesh Lakhani, a shareholder. However, Bank of Rajasthan moved the Calcutta High Court contending that the city court did not have the jurisdiction to hear the matter. The High Court vacated the stay. ―The BoR EGM happened. A lower court in Kolkata had issued an injunction against holding of the EGM. The Calcutta High Court has stayed the lower court order‖. According to legal experts, it was the bank which requisitioned the meeting and later cancelled it following the court order. Therefore, the meeting held by the shareholders after that is illegal and the outcome of the ballot will not be legally binding on the bank. The extraordinary general meeting of Bank of Rajasthan convened to seek shareholders' approval for its merger with ICICI Bank witnessed high drama with a Kolkata court staying the meeting that was subsequently overruled by the High Court. Out of the total 15 directors on the BoR board, 12 attended the board meeting held on May 18, said an association representative. While seven directors voted in favour of the amalgamation, five abstained from voting. The stay was lifted after an order of the Kolkata High Court moved by ICICI Bank. The boards of both the banks had approved the merger at a swap ratio of 1:4.72, – 4.72 shares of Bank of Rajasthan for one share of ICICI Bank.

EGM and Company Law
Of course you had all the shareholders who had gathered here and they decided that they could appoint their own Chairman and continue with the meeting. There is no real process for something like this. What the Companies Act provides is that 10% of the shareholders of a company could requisition a meeting and make a request to the Board of the company to hold a meeting, and then the Board would be mandated to hold such a meeting within a period of three weeks of such a requisition again by following all the procedures. Although you may have had the 10% who could have requisitioned the meeting but the onus eventually was on the Board to then to take it forward. So if you look at it from a very technical perspective, whether that shareholders meeting is a validly held meeting or not is very questionable. From a company law point of view it could easily be a 50-50 case. Maybe that meeting was not valid in its own right.

Union Strike

Three major employee unions of BoR -All India Bank of Rajasthan Employees Federation, All India Bank of Rajasthan Officers' Association and Akhil Bhartiya Bank of Rajasthan Karmchari Sangh, have called the strike demanding the immediate termination of the ICICI-BoR merger proposal. The United Forum of Bank of Rajasthan Unions has opposed the merger of Bank of Rajasthan with ICICI Bank, citing cultural compatibility issues. According to it, if a merger is essential it should be with a public sector bank. Employees fear that the merger would result in job losses as the work cultures of both banks are 'extremely' different. This would also destroy the identity of one of the oldest private sector banks in the country. More than 4,300 employees of BoR began a two-day all-India strike to protest against the merger.

Post Amalgamation Rajasthan High Court
The Rajasthan High Court issued notices to the Reserve Bank of India, Bank of Rajasthan (BoR), ICICI Bank and others on a petition filed by an employees union of the Udaipur-based BoR against its proposed merger with ICICI Bank, the country's largest private sector lender. "The High Court issued notices to all respondents - the Union of India, Reserve Bank, Sebi, BoR, ICICI Bank, P K Tayal and S K Tayal (BoR promoters)," who filed the petition on behalf of the Akhil Bharatiya BoR Karamchari Sangh. The petition claims that the BoR board decision on 18 May 2010 to merge with ICICI Bank was illegal as the Securities and Exchange Board of India had found out that the Tayals had acquired 55.1 per cent equity in the bank in violation of its regulations. All 463 branches of Bank of Rajasthan will function as ICICI bank branches from tomorrow with the Reserve bank of India (RBI) giving its approval to their merger.

Certainly, there is no denying that inorganic growth strategy is good for a bank like ICICI Bank in a growing economy, but going by what expected synergies indicate, it appears to be more of an inorganic strategy out of compulsion. And that isn‘t what‘s called following the road to glory. The dynamism in the Indian banking industry is set to go through major changes in the near future, when the Reserve Bank will start issuing new banking licenses and the expected new cash-rich entrants of the likes of the Ambanis, the Tatas and the Birlas will take competition to a new level altogether. How many more such forced takeovers will we witness from ICICI Bank?

The positive side is that if the BoR buyout works for ICICI, it will prove a preparation much before the real battle begins!

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