business pcl-i ma cr session 7-8 bhagwati committee report

8/8/2019 Business PCL-I MA CR Session 7-8 Bhagwati Committee Report

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ObjectivesBha wati Committee was set u

to regulate corporate restructuring transactions.to examine areas of deficiencies in the existinregulations and suggest amendments.

to review the guidelines issued earlier by theSecurities and Exchange Board of India (SEBI),

BUSINESS_PCL_I_ MA&CR_SESSION_7-8


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Bhagwati Committee (BC) : thema ng o a regu a on

Takeovers Regulations .Au ust 1996 The draft code

January 1997 Takeover Regulationsof SEBI

These regulations were modeled closelyalong the lines of the UK City Code ofTakeovers



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BC principles guiding the operation and

1. Equality of treatment and opportunity to all shareholders;

.

.

3. Fair and truthful disclosure of all material information by the acquirer in allpublic announcements and offer documents;4. No information to be furnished by the acquirer and other parties to an offer

exc us ve y o one group o s are o ers;5. Availability of sufficient time to shareholders for making informed decisions;

6. An offer to be announced only after the most careful and responsibleconsideration;7. The acquirer and all other intermediaries professionally involved in the offer, to

exercise highest standards of care and accuracy in preparing offer documents;8. Awareness of the limitations on freedom in the process of substantial

9. All parties to an offer to refrain from creating a false market in the securities ofthe target company; and

10. No action will be taken by the target company to frustrate an offer without the


approval of the shareholders.


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Terms Defined by BC

Acquirer : any person who directly or indirectly acquires or agrees to

or indirectly. This definition covers indirect acquisition of listed companiesby acquiring unlisted holdings of investment companies as well.Control : Control is defined to include the right to appoint majority of thedirectors or to control the management or policy decision exercisable byperson or persons acting individually or in concert, directly or indirectly,including by virtue of their shareholding or management rights orshareholders agreements or voting agreements.Persons Acting in Concert : According to the Committee to be acting in

.must have community of interest which could be acquisition of shares orvoting rights beyond the threshold limit or gaining control over thecompany and their very act of acquiring the shares or voting rights in acompany must serve this common objective.The Committee also

sugges e a persons ac ng n concer s ou e groupe o convey epresumption of relationship.



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Terms Defined by BCPromoter :

romo er means e persons n overa con ro o e company,

relations of the promoter, and where promoter is a corporate body, asubsidiary or holding company which holds 10 percent of the equityand any corporate body in which a group of individuals who hold 20

the promoter.Public Shareholding :

The Committee defined it to mean shareholding in the hands of any(shares include convertible debenture and GDRs).Target Company :It is defined as the listed company which is the subject matter of

.



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Recommendations of the

The Bhagwati Committee recommended the exemption of acquisition of

Committee

The Committee also recommended that public offer must be made in casewhere preferential offers result in change in control of a company and in suchcases the preferential price must also be taken into account in determiningthe offer price.The Committee has not recognized the discrimination between preferentialallotment and consolidation. The rate of acquisition is limited in the case ofconsolidation while none exists under preferential allotment.The Committee recommended that the distinction between acquisition

roug nego a on an mar e ransac on s ou e a an one .The Committee Recommended in the final report that persons holding notless than 15% percent and not more than 75 percent may acquire up to 5percent in a year without attracting mandatory public offer requirement.

,change in management according to the Committee should necessarily bethe concern of SEBI. The shareholders of the target company should havethe right to decide whenever there is a change in incumbent managementwithout attracting open offer.



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Recommendations of the

A merchant banker of Category I should be appointed before making any public

Committee.

that he can exercise independent due diligence in the discharge of hisresponsibilities.It is suggested by the Committee that the merchant banker should look out for thefinancial soundness of the acquirer. If the acquirer is a defaulter and blacklisted by

credit limits supported by personal guarantees of the directors, the financialinstitutions may not be willing to swap the guarantees. The attitude of the financialinstitutions should be checked by the merchant banker.Public announcement of the offer was recommended to be made not later thanour wor ng ays o e agreemen .

The public announcement should also disclose the highest and average price paidduring the 12 month period prior to public announcement.According to the Committee once a minimum level offer price is set it may be paid

, . .payment for consideration by a shareholder is made in cash, the acquirer wouldhave to make the payment of the minimum offer price be retained with theadditional disclosure about the highest price paid by the acquirer in the openmarket during the 12 months prior to the public announcement.



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Salient Features of Takeover

Persons Acting in Concert

egu at ons

According to the Takeover Regulations 1997 Persons acting inconcert with other person include

A company or holding company or subsidiaryA company with any of its directors or any persons which isentrusted with the management of funds of the company,Directors of the above company

Mutual funds with sponsor or trustee or asset managementcompanyForeign Institutional Investors (Flls) with sub-accountsMerchant Bankers with their clients as acquirer

The common objective or purpose of persons acting inconcert are

Substantial acquisition of sharesVoting rightsGaining control over the target company



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Timing for Public Announcement of Offer

egu at ons

The Takeover Regulations 1997 has laid down that themerchant baker has to make the public announcement notlater than 4 working days of acquisition. Global acquisitions,

be made within three months from the date of requisition. Butthe offer based on both dates, (4 days and 3 months) shouldbe calculated and the offer should be made at the highest.Public announcement of offer should be made in nationaldailies in English, Hindi and other regional languages. Suchadvertisement has to be submitted before issue by themerchant banker to SEBI 2 days before issue.The public announcement has also to be sent to all the stockexchanges in which shares of target company are listed



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Exemption from Public Offer but Reporting to SEBI

Regulations (1997)

MandatoryThe Takeover Regulations 1997 exempts the followingfrom public offer but made it mandatory to report to SEBI:

Allotment in public issues, rights issuePreferential allotmentAllotment to issue underwriterInterse transfers among promoters will not be available if thetransfer takes place at a 20% premium to the market price.Group companies

RelativesTransfer from state level financial institution to co-promoters ofcompany.



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Exemptions (from making an offer) Where

Regulations (1997)

Reporting to SEBI is not MandatoryThe following transactions are exempted from making anoffer and are not required to be reported to SEBI.

allotment to underwriter pursuant to any underwritingagreement

acquisition of shares in ordinary course of business by.Regd. Market makersPublic financial institutions on their own accountBanks and FIs as pledges

cqu s t on o s ares y way o transm ss on on success on orby inheritanceA scheme framed under section 18 of SICA 1985Acquisition of shares in companies whose shares are not listed



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Form of Payment

Regulations (1997)

may be paid inCashExchange/or Transfer of shares

A combination

Determination of Minimum Offer Price (MOP) in Open Offer

According to the Takeover Regulations 1997 MOP is the highest if,persons acting in concert which triggered the open offer.Highest price paid by acquirer for any acquisitions including by way of publicor rights issue during 20 week period prior to the date of publicannouncement.

r ce pa y acqu rer un er a pre eren a a o men ma e o m or personsacting in concert during 12 months up to closure of offer.The changes notified (September 2002) dropped the average of weekly highand low of the closing price collected in the stock exchange during 26 weeks

recedin the ublic announcement.


business pcl-i ma cr session 7-8 bhagwati committee report

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