SEBI - Takeover Code
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SEBI - Takeover Code
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SEBI - Takeover Code
- 1. SEBI - Takeover Code
- 3. Evolution... Pre - 1990 Clause 40 of Listing Agreement Nov 1990 Clause 40(A) & 40(B) of Listing Agreement Nov - 1994 SEBI Takeover Code Feb - 1997 New Takeover Code (Bhagwati Committee) Oct - 2002 Few amendments as per Bhagwati Committee’s reco. Apr-2007 SEBI amended Code Pre - 1990 Post - 1994
- 4. Modes of Restructuring – Where does TOC fit in Indian M&A Amalgamations Merger De-merger Acquisitions Asset Purchase Stock Purchase The Takeover Code, 1997 Slump Sale Itemized Sale
- 6. Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997
- 7. Framework of the Code… Chapter 1 Preliminary, Definitions, exemptions and the takeover panel Chapter 2 Disclosures of shareholding and control in a listed company Chapter 3 Substantial Acquisition of shares and control Chapter 4 Bail out takeovers Chapter 5 Investigation and action by the Board
- 8. Definitions
- 13. Disclosures
- 15. Open Offers
- 18. Exemptions
- 28. DATE OF PUBLIC ANNOUNCEMENT Filing of Letter of Offer with the SEBI Within 14 days Offer to reach the shareholders Within 45 days Offer to open Within 55 days Offer to close Dispatch consideration to shareholders SEBI may permit extension on payment of interest for delay MOU Within 4 days Within 20 days Open a Special A/c for Payment Within 7 days Within 15 days of Offer Closure Timelines
- 29. Thank you
Notas do Editor
- 2 First attempts at regulating takeovers - Pre-1990 Clause 40 of the listing agreement: Not an effective regulatory tool Pre-1990 Clause 40 of the listing agreement First attempt at regulating takeovers Threshold limit for public offer - 25 % Very high limit led to circumvention of clause Nov 1990 – Clause 40 amended. New clauses 40(A) & 40(B) Threshold acquisition level down from 25% to 10% Change in ‘management control’ also to trigger the code Mandatory Public Offer – Minimum 20% Minimum offer price, provision for disclosures 1994 - SEBI Takeover Code A specialised framework was needed Nov 1994 – First Takeover code notified by SEBI Ambiguous, loopholes, not comprehensive Nov 1995 – Appointment of Bhagwati Committee Jan 1997 – Bhagwati Committee presents report Report approved with some amendments by the SEBI Board Feb 1997 – New Takeover Code 1997 notified New Takeover Code – 1997 More liberal and less ambiguous than before Jun 1998 – SEBI asks Justice Bhagwati to undertake a complete review and suggest measures for “fine-tuning” May 2002 – Committee comes out with its recommendations Sep 2002 – Report approved with minor modifications Oct 2002 – Amendments take effect Jan 2005 – SEBI Amends the code again Among others it made an open offer mandatory for any acquisition beyond 55% of a company’s shares
- Faster route for growth and expansion as opposed to complying with the often tedious processes of traditional, scheme based options such as merger, demerger etc. Takeover – acquisition of a certain block of equity or controlling interest in a company, which enables the acquirer to exercise control over the company’s affairs. (i.e. share acquisition) TOC OBJECTIVES: To allow full play to the predatory instincts of the corporate and business class. (i.e. facilitating legitimate takeovers) To turn the heat on inefficient and vulnerable managements. To ensure fairness, transparency and equality to all investors / parties. For this purpose, the spirit and the intent behind the code has often been upheld to override a legal, technical interpretation.
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- TOC regulations framed under the powers given to the board under section 30 and 11(2)h) of the SEBI Act
- 3 Acquirer – It covers – Persons – both individual and juristic person Who either directly or indirectly acquires or agrees to acquire Shares Voting rights or Control of the target company By himself or with any person acting in concert Person not defined hence derives meaning from general clauses act; can be individual or body corporate, incorporated or not. Includes R/NR Indirect introduced in 2002 BP Amco Plc – the moment acquirer sets into motion the process of acquiring shares or control, acquisition takes place; even agreement to acquire covered Target company – means listed co whose shares or voting rights or control is directly or indirectly acquired or is being acquired – introduced in 1997 Shares Shares with voting rights includes shares with even differential voting rights Securities not defined Key point: “ includes any security which would entitle the holder to receive shares with voting rights” i.e. Instruments like Partly or Fully Convertible Debentures or Convertible Warrants etc. (that are convertible into equity shares, carrying voting rights, at a later date) will be treated as “shares” for the purpose of the Code = FCCBs?? Since the preference shares give any voting rights only in certain specific circumstances, the same have been specifically excluded by committee. - 2002 Treatment of ADRs / GDRs: Reg. 3(2) specifically exempts ADRs & GDRs from the applicability of the Code, only as long as they are not converted into shares carrying voting rights . TOC attracted not at the time of acquisition but at the time of conversion Control – Actual appointment of majority directors not required as long as right vested TOC of 1994 did not cover control; it was only contained in 40A and 40B;included in TOC 1997 Term control by its very nature difficult to define – inclusive definition Control may not necessarily mean 50% and above. Discuss change in control later.
- 3 Definition profusely modified and the burden of proof has been shifted to the person who claims that he is not acting in concert Bhagwati committee report – certain bright line tests to be followed – commonality of objectives, community of interest which could be acquiring shares or voting rights or control and acquisition must serve this common objective All persons on the basis of their position / business relations with the acquirer presumed to be PAC However, PAC only within its own group and not other group Modi Spinning Mills case
- 3 Definition of Promoter is wide: Since control does not necessarily come from holding shares in the target, a Promoter can also be a person in indirect control of the target. In case of an individual: immediate family, firm or HUF in which he or his family is a partner, company in which he or his family holds 26% equity and a company in which such company holds 50% equity. In case of company: holding or subsidiary. Any company that holds 26% equity in the company or in which the company holds 26% equity. Company under the same management. NOTE: A financial institution, scheduled commercial bank, FII or VC fund cannot be a promoter simply by virtue of its shareholding. However, they shall be deemed to be promoters of their subsidiaries and of the mutual funds sponsored by them. CASE STUDY I – A promoter need not be a Person Acting in Concert (PAC) and may tender his shares in an open offer to an acquirer. – Modi Spinning
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- 3 “ Acquirer” includes a pledgee, other than a Bank or a FI. Explain pledge concept – Banks / FIs not required to make disclosures 2 days of receipt of intimation of allotment of shares or acquisition of voting rights as the case may be Acquisition includes indirect acquisition of holding companies, whether listed or unlisted, in India or abroad. Disclosure to be made within 21 days of: Financial year ending March 31, and Record Date of the Company for the purposes of declaration of dividend Penalty provisions – ****
- All thresholds refer to the shares outstanding. PCD/FCD/ADR/GDR to be counted as acquisition only at the time of conversion. Agreement to acquire tantamounts to acquisition. Pledged shares – on invocation of pledge, TOC triggered. A gives loan to B. B in turn as a security pledges the shares of C Ltd (listed co) with A. B fails to discharge the liability as a result of which the pledge is invoked. A now acquires more than 15% stake in C Ltd. TOC triggered. Triggered irrespective of whether the acquirer or PAC previously owned any shares in the company or not; even fresh acquirers covered No acquirer is permitted to acquire shares or voting rights, either through market purchases or preferential allotment, that entitle an acquirer to exercise more than 55% voting rights in the company. If this happens, the acquirer shall disinvest the shares in excess of 55% and shall be liable for action. 10% incresaed to 25% - other countries more than 25% - 10% does not give Consolidation of Holdings: In view of the competitive free environment and to prevent hostile takeovers, it is essential for the persons in control to consolidate the holdings either suo moto or through building defences against takeoevr threats. If an acquirer and PAC with him already hold 15% but less than 55%, any acquisition of 5% or more (in any financial year ending 31 st March) shall trigger the open offer. NOTE: If a person acquired 4% during a year, sold 2% and then bought 2%, if (4 + 2)% >= 5%, the code will get triggered. – netting off of acquisition and disinvestment not allowed Thus an existing promoter is permitted to acquire additional shares and thus consolidate its shareholdings. Promoter – acquirer – Both separately defined and hence one could argue that a promoter is not an acquirer and hence a promoter can acquire any number of shares without open offer. However, in Modi Spinning. Mills, SAT has held that a promoter and PAC can also be an acquirer; if he agrees or acquires shares/voting rights/control it can be safely assumed that acquirer includes promoter for Regulation 11 purposes. Non promoters through creeping acquisition can shore up their holdings annually. Creeping acquisition vs. Insider trading Possible for the persons in control to acquire additional shares legally through creeping acquisition mechanism and thus indirectly influence the market price mechanism. Thus, take advantage of the price fluctuation resulting from the management buyout and misuse the regulation. How far the SEBI can control the misuse of this provision under insider trading regulations is yet to be seen. Reduces liquidity in the market and the role of the retail investor. The triggering point is the acquisition (as opposed to “holding” ) of shares or voting rights which would “entitle the acquirer to exercise 15% or more of the voting rights”. Keyword: Entitle Hence if the acquirer and the PAC with him were already entitled to 15% of the voting rights any further acquisition (upto 55%) would not trigger the open offer. (subject to Reg. 11 and Reg. 12) If an acquirer and PAC with him already holds 55% but less than 75%, any further acquisition can take place only by way of an open offer. For the purpose of this limit, shares or voting rights held by the acquirer and the PAC with him shall be taken. 2. An acquirer who seeks to acquire shares that reduce public holding below the limits set out in the Listing Agreement of the relevant stock exchange (25% in case of BSE), such acquisition shall be done only in accordance of the delisting guidelines of such relevant exchange. However, indirect acquisition of shares or voting rights or control pursuant to a global arrangement not covered. Voting capital used and not shares or voting rights. Voting capital means shares carrying voting rights. Voting rights as at the expiration of 15 days after the closure of the public offer shall be reckoned. Public shareholding = shareholding in the hands of persons other than acquirer and PACs Applicable to Regulations 10/11(1) - Explain with examples Change in control – Not applicable in case of special resolution
- The 3 Regulations are mutually exclusive
- Regulation 3 is a gateway for seeking exemption from making public offer. Lists down 13 exemptions and is important regulation. Exemption from making public offer. Novel idea and extensively used by the companies. Public offer – firm allotment – allotment to promoters, financial institutions or directors – Proviso If allotment made pursuant to firm allotment in a public issue, exemption only of disclosures in prospectus as regards identity of acquirer, purpose, changes in voting rights and control, BOD changes etc. Within 21 days - >15% to Board In case of convertibles – date of conversion Right issue To the extent of entitlement. Renunciation of rights by other shareholders not covered Beyond one’s entitlement but not more than 5% of the total equity capital of the target - Regulation 11 Additional allotment without any ceiling provided the Rights Letter of Offer states the intention to acquire the additional shares if the issue is under subscribed. However, this route not available if there is any change in control of management. Within 21 days - >15% to Board In case of convertibles – date of conversion Preferential allotment deleted from 2002 Most preferred route used by promoters earlier. However deleted to ensure investor protection. Hence, any acquisition which gives more than 15% rights alongwith he existing ones would be covered. As a result of the deletion, exemption can be sought under the unspecified category. Allotment to underwriters – underwriting defined under the SEBI (underwriting rules) – should be pursuant to underwriting agreement 3(1)(e) 3 years criteria of holdings shares by transferor and transferee; applicable only to promoter transfer – not applicable to group and relatives; hence a new member ie relative of group can be introduced as a shareholder. Exemption under (iii) and (iv) denied if inter se transfer of shares is at a price in excess of 25% of the offer price determined as per the regulation – give example given by committee Compliance with regulations 6, 7 and 8 as regards disclosures important - atleast 4 days in advance of acquisition 4 days prior - >5% - to SE Within 21 days - >15% to Board In case of convertibles – date of conversion MRTP Act, Section 2 (ef) Group – inter se transfer – control remains intact – should be disclosed in the last published annual report "group" means a group of - (i) two or more individuals associations of individuals firms trusts trustees or bodies corporate (excluding financial institutions) or any combination thereof which exercises or is established to be in a position to exercise control directly or indirectly over any body corporate firm or trust; or (ii) associated persons. Broadly ‘group’ would refer to persons who jointly and / or severally exercise or is established to be in a position to exercise, control directly or indirectly over a body corporate. CASE STUDY II – Inter-se transfer amongst promoters and foreign collaborators is exempt only if: Both, the transferor (s) and the transferee (s) have been holding shares in the target company for at least 3 years prior to the proposed acquisition. However, this condition is not required to be met in a case where inter-se transfer has taken place amongst a “group” or amongst “relatives”. TOC is not applicable to acquisition in the ordinary course of business by: Registered market maker / stock broker on behalf of clients – it is for the client to check whether he is under any obligation to make public offer; market maker specialises in buying and selling securities by offering two way quotations. Public Financial Institutions on their own account. Banks & PFIs as pledgees – no disclosure required to be made; open offer not triggered even on invocation of pledge. IFC, Asian Devt Bank, International Bank for Reconstruction and Devt etc. – Akin to Indian financial institutions. No particular interest in acquiring stake / control in the target co. Merchant Banker and promoter of the target co pursuant to a safety scheme. Acquisition of shares by a person in exchange of shares received under public offer made under these regulations – passive acquisitions – where shares of a listed co are received as consideration The above acquisitions are mere passive acquisitions and hence exempt. Whether an acquisition is in the ordinary course or no is a question of fact and the onus of proving it is on the person claiming the exemption. Succession & inheritance - not defined Inheritance could be by will. Succession could mean succession to a business; Acquisition by a business as successor would be eligible to exemption. Government cos / statutory corporations Disinvestment not covered to provide a level playing field amongst the bidders in a competitive bidding process. Compliance with regulations 6, 7 and 8 as regards disclosures important
- The offer can also be made conditional upon minimum level of acceptances from the shareholders
- English, Hindi and regional newspaper in vide circulation in the place of registered office and place where most frequently traded Copy of the PA to be presented to the SEBI, stock exchanges, target co to be placed before the board Offer deemed to have been made on the date of publishing in the newspaper Letter of offer – Within 14 days of PA to the SEBI Within 21 days thereafter to the shareholders or such later date in case of any revisions suggested by the SEBI Fee - 50000
- Shares are considered “infrequently traded” if their annualised (weighted average) trading turnover during the 6 calendar months prior to the month in which the PA is made is less than 5% by number of shares listed. Price in case of these shares is based on parameters such as net worth, book value, EPS and P/E multiple. Could be asked to obtain merchant banker certificate. Non compete fees In case of non compete fee exceeding 25% of the offer price to be added to the offer price In case of share / secured instruments issued as consideration – value determined in the same manner as above Offer price for partly paid up shares = Offer price for fully paid up – calls in arrears Case study discussed later
- Mode of payment can be altered in case of revision in offer price or size provided the amount of cash consideration in the letter of offer cannot be reduced Prior approval of shareholders in case of securities; no approval – entire payment in cash
- Letter of offer to be sent to the shareholders – shareholders as on the specified date not latter than 30 days from the PA Special A/c – to be opened with the bankers to an issue registered with the board and deposit such sum + 90% of the amount in escrow to make up the entire sum due and payable to the shareholders. Completion of all procedures relating to the offer including payment of consideration within 15 days. Board may grant extension of time if satisfied that the non receipt of statutory approvals was not due to any wilful default or neglect of the acquirer. - Kennametal Inc to acquire stake in Widia India Ltd (2003) – open offer formalities (opening of escrow a/c, applying to RBI etc) completed post receipt of FIPB approval