takeover code presentation ludhiana 17.9.06

:

DEMYSTIFYING TAKEOVER CODE

Pavan Kumar Vijay

KEYWORDS IN TAKEOVER CODEWhen an

"acquirer" takes over the “shares” or “control” of

the "target company",

it is termed as Takeover.

When an acquirer acquires "substantial quantity of shares or voting

rights" of the

Target Company, it results into substantial acquisition of

shares.

AKEOVER

SHARES

CONTROL

BOTH SHARES & CONTROL

Acquisition LIFTING THE VEIL

UNDERSTANDING SHARES Reg 2 (k)

REG 2(k)

Shares carrying voting rights & any security which would entitle to receive shares with voting rights

in future But shall not include PREFERNCE SHARES

ISSUE

What is the status of partly paid shares under SAST Regulations, 1997?The partly paid up shares are also shares under Takeover Code as voting rights is embedded in partly paid up shares.

UNDERSTANDING CONTROL

REG 2(c)

Control is the right to Appoint majority of the directors To control the management Control the policy decisionsBy virtue of Shareholding or Management rights or Shareholders Agreements or Voting Agreements or in any other manner.

THRESHOLDS DEFINED

FOR COMPLIANCE

Acquisition of more than 5%, 10%, 14%, 54% & 74%

[Regulation 7]

Persons, who are holding between 15% - 55%,

acquisition/ sale aggregating more than 2% or more voting

rights [Regulation 7(1A)]

THRESHOLDS DEFINED

FOR OPEN OFFER

Acquisition more than 15% or more voting rights [Regulation

10] Persons, who are holding

between 15% - 55%, acquisition more than 5% or

more voting rights in a financial year.[Regulation

11(1)]Persons, who are holding more than 55%, acquisition of

single share or voting right [Regulation 11(2)]

INTER – SE TRANSFER

Reg 3(1)(e)

An Insight

Legal Insight: Inter-se Transfer

• REGULATION 3(1)(e) OF SEBI (SAST) REGULATIONS,

1997 GOVERNS THE ACQUISITIONS THROUGH INTER

SE TRANSFERS. • EXEMPTION FROM APPLICABILITY OF REGULATION 10,11 & 12 i.e. REQUIREMENT FROM MAKING PUBLIC OFFER.

Acquirer & Persons acting in concert

Relatives under

Companies Act, 1956

Group under MRTP Act,

1969

Qualifying Promoters

Categories

Categories for Inter-se transfer

DETAILED ANALYSIS

Category I – Inter-se Transfer amongst Group

Main Features Group here is signifying the group as

defined under MRTP Act, 1959.

Where persons constituting such group have been shown as group in the last published Annual Report of the Target Company.

Category I – Group… contd

Definition of Group

SECTION 2(ef) OF MRTP ACT, 1969 DEFINES GROUP INTO TWO PARTS:

Associated Persons

Group of persons having control without exercising controlling interest. Associated persons such as relatives of director of a company, partner of a firm & any trustee in relation to a trust. Any associated person in relation to associated person.

-

Two or more Individuals, AOI, firms, trusts, body

corporates who are in the position to exercise control

, whether directly & indirectly over any body corporate, firm or trust.

Category II – Inter-se transfer amongst relatives

Main Features

Relatives under this regulation means the Relatives defined under Section 6 & Schedule 1A under Companies Act, 1956.

The definition of relative u/s 6 includes

Spouse Members of HUF Relative mentioned in Schedule 1A.

Schedule 1A gives a list of 22 persons.

Qualifying Indian

Promoter & Foreign

Collaborators, who are shareholde

rs.

Category III – Inter-se transfer for Qualifying Promoters

Qualifying Promoters

Category III – Promoters… contd

Category III – Promoters… contd

Qualifying Promoters - Defined

Any person whoDIRECTLY OR INDIRECTLY

is in control of the company

Who is named as Promoter in any

Offer Document OR Shareholding

Disclosure, Whichever is

later

& includes….

When person is individual

His relatives as Defined u/s 6 of Co.

Act 1956.Any company

controlled by P/R Firm or HUF in which

P/R is partner or coparcener ;stake

not < 50%

When person is body corporate

Holding & Subsidiary

Any company controlled by P/R

Firm or HUF in which P/R is partner

or coparcener ; stake not <

50%

Category III – Promoters… contd

Qualifying promoters..defined..contd

Category IV –… contd

Category IV – Acquirer and Persons acting in concert.

ACQUIRER

Reg 2(b)

PAC Reg2(e)

Exemption available only after 3 years from the date of closure of open offer

made under these Regulations.

Pre- Conditions for availing Inter- se transfer. Conditions Category I

(Group)Category II(Relative)

Category III

(Qualifying

Promoter)

Category IV

(Acquirer & PAC)

i. Transfer is at a price > 25% of the price determined in terms of Reg 20(4) & 20(5) of SEBI (SAST) Regs, 1997.

N N Y Y

ii. 3 yrs holding of shares by transferee & transferor.

N N Y N

iii. Compliance of Regulation 6, 7 & 8.

Y Y Y Y

Checks & Balances under Regulation 3

C

O

M

P

L

I

A

N

C

EReg 3(3) Reg 3(4) Reg 3(5)

Advance Intimation (4 days in Advance)

Report

(21 days of acquisition)

Fees to be accompanied with Report

(Rs 10000

25000)

Checks & Balances under Regulation 7

Acquirer : Compliance of regulation 7(1) or 7(1A)

Seller: Compliance of regulation 7(1A)

Target Company:Compliance of Regulation 7(3)

Taxation Issues

STT vs.

LTCG/STCG

Taxation Issues..contd.

Securities Transaction Tax

LTCG/STCG STT is levied when the transfer is made through stock exchange.

STT is @ 0.125% of the sale value.

LTCG/STCG is levied when the transfer is made in off market mode. LTCG – 20% with indexation benefit on the amount of capital gain . 10% without indexation benefit on amount of capital gain . STCG – 10% on the amount of capital gain.

A Comparative Study

INTER- SE TRANSFER : A STRATEGICAL MOVE

Good means for

consolidation of holdings in a Company.

INTER- SE TRANSFER: Clause 40A

Regulation 3(1A) “Nothing contained in sub-regulation (1) shall affect the

applicability of the listing requirements.”

Effect of Regulation 3(1A)The above-mentioned regulation is giving the effect that

the exemption under regulation cannot exceed the provisions of listing agreement,i.e.the minimum public

holding of 25% cannot be exceeded by the exemption of Inter- se Transfer

MATTER OF DEBATE:

HELD:

Regulation 3(4) is applicable to all cases wherever the acquisition exceeds the limit prescribed in the regulations irrespective of the existing holding of the acquirer.

NAAGRAJ GANESHMAL JAIN V P.SRI SAI RAM, THE SAT

Whether Reporting under Regulation 3(4) is one time reporting?

MATTER OF DEBATE:

HELD:It was held that when the belated filing of the report under 3(4) does not resulted in any gain to the appellant & also no loss to the invested, the imposition of the penalty is not justified.

SAMRAT HOLDINGS V SEBI

Whether the belated filing of report should not be considered as commission of offence when there is no substantial loss to the investors?

Inter-se transfer is a good tool forconsolidation of holdings…………..

However,the exemption is available subject to strict compliance of Regulation 3(3),3(4) & 3(5).

Concluding Remarks

An issue by a companyAn issue by a company

Equity sharesEquity shares / / Securities convertible into Securities convertible into equityequity//

FCDsFCDs//WarrantsWarrants//PCDsPCDs//

Convertible Preference SharesConvertible Preference Shares

pursuant to a resolution u/s. 81(1A) of Act, pursuant to a resolution u/s. 81(1A) of Act, to any select group of personsto any select group of persons by way of private placement.  by way of private placement. 

Of

What is Preferential allotment of shares?

BENEFITS Simple way to raise capital of the Company

No need to appoint Merchant Banker except in the case of QIP.

Economical way to raise capital.

Minimum Formalities.

The Companies Act, 1956

SEBI (Disclosure and Investor Protection) Guidelines, 2000 (Chapter – XIII & XIIIA)

SEBI (SAST) Regulations, 1997

Listing Agreement

GOVERNING LAW

Allotment to QIBs (not in Promoter Group)

by companies listed on NSE / BSE

OTHERS

Chapter – XIIIA of SEBI (DIP) Guidelines Chapter – XIII of

SEBI (DIP) Guidelines

Proposed Allottees

Time Line- Preferential Allotment

Relevant Date

30 days

General Meeting

Filing of applicatio

n of in-

principal approval

Despatch of Individual Notices

25 days

15 days (12 months in case of QIBs)

Board Meeting

Allotment of

Shares

Shareholders’ Resolution must be

implemented within 15 days (12 months in case of QIBs) except in case of pending regulatory

approvals

Pricing Schedule

General Meeting

Relevant Date

30 days2 weeks

6 months

QIBs Others

ExistingHolding

Preferential Allotment

ExistingHolding

Preferential Allotment

No Lock in For One Year, except in case

of Trading through Stock Exchange

For Six Months

PROMOTERS – 20% of Total Capital - for 3 YearsRemaining – for one Year

OTHERS – For One Year

Lock-in Requirement

Currency of Security Convertible into Equity Shares

QIBs OTHERS

FCDs/ PCDs/ any other convertible Security –60

Months from the date of allotment

Warrants convertible into Equity Shares –

can’t be issued to QIBs

FCDs/ PCDs/ any other convertible Security –No

time prescribed for conversion

Warrants convertible into Equity Shares - 18 months from the date of allotment

Preferential Allotment:- In- Principle & Listing

Process of identification of allottees. Bank Statements DIP Compliances – Pricing, Lock in , Identity Clause 40A of Listing AgreementChange in Management/Control

Preferential Allotment viz-a-viz

Takeover Code

Limit for Preferential Allotment

Limits are calculated taking into account the

EXPANDED CAPITAL of the Company

& not the EXISTING CAPITAL of the Company.

Acquirer(holding 20%)

Through Preferential Allotment

Acquirer’s holding cannot exceed 24.99% of Expanded Capital.

Illustration I

Acquirer(holding 5 %)

Through Preferential Allotment

Acquirer’s holding cannot exceed

14.99% of Expanded Capital.

Illustration II

Illustration III

Acquirer(holding

0%) Through Preferential Allotment

Acquirer’s holding cannot exceed

14.99% of Expanded Capital.

Example:Acquisition by a new entity upto allowable limit

Existing Capital of Company: 1,00,000 sharesMaximum Allowable Limit: 14.99%

USUAL WAY OF CALCULATION

100000* 14.99% = 14,990

THE RIGHT WAY 100000* 14.99% / 85.01

= 17633

The difference is because of the

calculation on expanded Capital Base.

17633- 14990 = 2643

Example:Acquisition by a existing entity holding 50% presently

Existing Capital of Company: 1,00,000 shares

Maximum Allowable Limit: 4.99%

USUAL WAY OF CALCULATION

100000* 4.99% = 4,990 THE RIGHT WAY

Non-promoter holding / 45.01%

50000/45.01%= 11108

The promoters will get extra 11108 equal to 4.99%. So, the resultant promoter shareholding = 50000 +11108 61108 shares equal to 54.99%

Queries

Suppose the present holding of a promoter is 54% and after preferential allotment the holdings of the promoter remains same as that of 54% of the expanded capital. The question is whether any disclosure or compliance required in the present situation

Query 1

Query 2

What is the maximum limit of preferential allotment? Can a Company through preferential allotment expand its capital without any limit?

Suppose the present holding of a promoter is 54% and after preferential allotment the holdings of the promoter remains same as that of 54% of the expanded capital. The question is whether any disclosure or compliance required in the present situation? What, if, the same question arises in case the promoter is holding 60%? The issue is as there is acquisition of shares but such acquisition has not change the voting rights. The question is what is relevant in terms of takeover code, acquisition or voting rights?

Query 3

Queries

Conclusion

To sum up… preferential allotment is becoming a buzz word these days…

However, it is subject to various checks & balances.

Pavan Kumar Vijay