g an sebi takeover presentation[1]

8/8/2019 G an SEBI Takeover Presentation[1]

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Ke Pers ectives on the

SEBI Takeover Code

G. AnantharamanDirector Tata Realty and Infrastructure Limited

April 2010


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An Overview

Shares may be acquired either by way of block dealwith select shareholders, tender offer (to all the

shareholders), or through open market purchases. Acquisition of a stake in a listed Indian company

requires compliance with key regulations.

- Securities and Exchange Board of India (SAST)

and Exchange Board of India (SEBI) The Takeover Code stipulates requirement, depending

upon the nature and quantum of the acquisition, ofmaking an offer to purchase shares from the publicshareholders, including

- The minimum number of shares for which the offer isto be made

- The minimum price at which the shares must beacquired


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An Overview

In the event the public shareholding in the Indian

Company falls below the specified 10%, then The acquirer has to make an offer to buy out the

outstanding shares remaining with theshareholders, resulting in de-listing of the

ompany, or or e s ng e company processprescribed under delisting guidelines needs to befollowed The acquirer has to divest, through anoffer for sale or by a fresh issue of capital to thepublic, to keep the public holding at the

prescribed levels and prevent a delisting FIPB and/or RBI approval may be required in

specific cases.


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Overview of Major Provisions of the

Takeover Act, 1997

SEBI (SAST) Regulations, 1997 (The Takeover Code),

governs acquisitions of stocks in listed Indiancompanies.

An Acquirer may begin purchasing stock without anyrequirement of a Tender Offer until a 15% ownership

Once this is reached, or if control is acquired at aholding below 15%, the Code requires the holder tolaunch a Tender Offer for a minimum of a further20% of the shares outstanding in the Target

At this point, assuming the Acquirer has a 35% stake

in the Target, it may do one of the several things:


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Takeover Act, 1997

Gain control (no other shareholder at 35%): if

the initial offer is for change of control,otherwise another offer

Not gain control and simply retain his interest at35%

Increase its stake by increments of less than 5%within a fiscal year, and can go up to 55%through preferential issuance / open marketpurchase / buy-back / negotiated transactions

From 55% to 75% the Acquirer can purchaseincrementally upto 5% only on a one time basisthrough open market normal segment on thestock exchanges i.e. not through bulk deals /preferential allotments/negotiated transactions


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Takeover Act, 1997

Increase its stake by increments more than 5%

within the fiscal year: if so, he is again requiredby the Code to launch another Tender Offer for atleast 20% of the shares outstanding

Each of these Tender Offers may be for stakes

arger an a e cqu rer s so e scre on.The minimum price and size are howeverregulated by The Takeover Code

Any acquisition beyond 75% would mandate atender offer for minimum of 20% and depending

on the market capitalization of the Target,Acquirer can hold upto 75% / 90%


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Takeover Code: Share Acquisition in

Listed Companies

Regulation 10

Substantial Acquisition of Shares Open Tender offer under Regulation 10 needs to

be made if the Acquirer (along with the PAC)decides to acquire, directly or indirectly, more

concerned target company. Once an entity has acquired a 15% stake in

target, individually or as part of a group, theentity must make a tender offer for a minimum of20% of the shares outstanding (not includingshares already owned)

Please note SATs decision in Hardy Oil (P) Ltd. vsSEBI (8-3-2006), the word unless in


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Takeover Code: Share

Acquisition in Listed Companies

Regulations 10 and 11 makes the acquisition

conditional upon a P.A. being made and it doesnot mean that P.A. has to be made beforeacquisition. Such P.A. can be made before orafter acquisition. The object of the Regulation isno o nu y e acqu s on


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Listed Companies

Regulation 11

Consolidation of Holdings Open Tender offer under Regulation 11 (1) needs

to be made by Acquirer along with the PersonActing in Concert (PAC) if:

Acquirer and PAC already hold > 15% but < 55% ofthe Voting Capital of Target Company

Want to exceed the creeping limit of 5% in afinancial year

Offer under Regulation 11 (2) needs to be made if

the Acquirer along with PAC want to exceed 55%shareholding in the Target Company


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Listed Companies

Regulation 12 Acquisition of Control Open Tender offer under Regulation 12 needs to

be made by the Acquirer and PAC if they want toacquire control over a Target Company

Offer needs to be made irrespective of:

Whether or not there has been any acquisition ofshares or voting rights in a target company Whether the control is acquired directly or indirectly

This regulation is not applicable if the change incontrol takes place pursuant to a specialresolution passed by the shareholders in ageneral meeting

Case (1) S.C. in the case of Swedish Match AB VsSEBI (2004) said Regulations 10, 11 and 12 exfacie operate in 3 different fields. They seek tocontrol creeping acquisition which may lead to


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substantial acquisition and ultimately total control ofcompany. Where there is a mere cessor of control byone out of two persons already in control or where anyperson or persons are given joint control and combineddegree of control is not greater than being presently

, .

But if the change of control from joint to sole is due toacquisition of shares from the joint holder at a pricehigher than the market price, then the acquirer has astatutory obligation to make a public announcement.

Case (2) Pipavav Shipyard (27-3-2010) - Punj Lloyd,was one of the two promoters of the above company,which went public in September 2009. As per ICDR, the

pre-issue capital of the promoter has to be maintained


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for one year from the date of IPO. On 27-3-2010,

there was a company announcement, disclosing thatPunj Lloyd was exiting the company for a share valueat a discount to the market, though much higher thanthe ori inal investment. Since Pun Llo d was sellin

their shares during the lock-in, the unexpired lock-inwould pass on to the acquirer. In addition, the sharetransfer may be amongst the promoters, but thetransferor and transferee have not been holding the

shares for a period of at least 3 years prior to thetransfer. Therefore, the exemption from open offercould not be available under take-over regulations.


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Takeover Code: Minimum Tender

Offer Price and Offer Size

If shares of the company are frequently traded - It shall not be less than the highest of the following : The Negotiated Price under an agreement, if any, triggering

the code Highest Price paid by the Acquirer during the 26-week

period prior to the date of public announcement for,

allotment in a public or rights issue The price paid by the Acquirer under a preferential allotment

at any time during the 26-week period up to the date ofclosure of the offer.

The average of the weekly high and low of the closing prices

of the shares of the target company as quoted on the mostfrequently traded stock exchange during 26 weeks precedingthe date of the public announcement

The Average of the weekly high and low of the closing pricesof the shares of the target company as quoted on the most

frequently traded stock exchange during 2 weeks precedingthe date of the public announcement.


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If the shares of the company are not frequently traded,

then it shall not be less than the highest of - The Negotiated Price under an agreement, if any,

triggering the code

Highest Price paid by the Acquirer during the 26-week

acquiring shares of Target Company, including by wayof allotment in a public or rights issue.

The Price paid by the Acquirer under a preferentialallotment at any time during the 26-week period up tothe date of closure of the offer.

Other parameters including return on net worth, bookvalue of shares, EPS, price earnings multiple vis--visthe industry average. In such cases, it is advisable toget valuation from a chartered accountant in line withthe Supreme Court decision in Tomco case.


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The Tender Offer shall be made to acquire a

minimum of 20% of the voting capital of thetarget company 15 days after the closure of theoffer.

Tender Offer under Regulation 11(2A) (i.e.consolidation of holdin be ond 55% can be for a

minimum of 20% of the voting capital of thecompany Such other lesser percentage of the voting capital

of the company, assuming full subscription to theoffer, enable the acquirer to increase its holding

to the maximum level possible 75% or 90%),meeting the requirements of minimum publicshareholding


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The offer can also be made conditional upon

minimum level of acceptances from theshareholders. In such a case, the acquirer willhave to deposit in the escrow account in cash asum of 50% of the consideration payable under

.

Such conditionality should be mentioned in thePublic Announcement will not work if offer istriggered pursuant to preferential allotment.

To be made latest with 4 working days of decisionto consolidate its holding.


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90-Day Window

Date of passing a firm and final resolution byBoard/constituted Committee (Trigger Date)

Draft copy of Public Announcement submitted toSEBI, Stock Exchanges & Target

Public announcement to be published in leading

In 4 working dates from the Trigger Date Application to RBI/FIPB for acquisition of shares

At the earliest of the Public Announcement (within 2 days ofPublic Announcement)

Draft Letter of Offer and due diligence cert. filed withSEBI. Stock Exchange & TargetNot later than 14 days from the Public Announcement

SEBI to provide comments on the draft Letter of Offer

SEBI comments, if any, latest within 21 days of LOF Submission


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90-Day Window

Final Printed Letter of Offer to SEBI

Letter of Offer to reach ShareholdersLetter of Offer to reach shareholders within 45 days ofPublic Announcement

Tender Offer O ens

Not later than 55 days from date of Public Announcement

Revision of price, if any (last date)

Upto 7 working days prior to the offer closing

Tender offer Closes

Offer to remain open for 20 days

Completion of all Formalities including Payment ofConsideration

Not later than 15 days from offer closing


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Regulations (in general)

Regulations are sub-ordinatelegislations Rule based regulations vs principle

Regulatory proceedings are quasi-judicial, based on preponderance ofprobabilities no mensrea (Sri RamMutual Fund - Supreme Court)


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Takeover Regulations

Principle

Kishore Rajaram Chhabria v. The Chairman SEBIMANU/SB/0105/2003, it was elucidated that the

purpose of the takeover regulations is remedialand regulatory. Its purpose is three-fold (i) to

ensure that the incumbent management of thetarget company is aware of the substantialacquisition, (ii) to ensure that in the process ofsubstantial acquisition, the securities market isnot distorted or manipulated and, (iii) to ensure

that the small investors are offered a choice viz,to either off-load their shares at a price generallyhigher than the prevailing market price or tocontinue as shareholders under the newdispensation.


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Hardy Oil Pvt. Ltd v. SEBI (Order of SAT

08/03/06):- The logic underlying the Regulationsis that when a person acquires a big chunk ofshares in the target company, the remainingshareholders other than those who have alreadysold their shares or have agreed to sell theirshares to him, should have a right to decide forthemselves whether they would like to continue inthe company under the new management or not.The shares already acquired or agreed to be

acquired are not and cannot be the subjectmatter of the public announcement. The publicannouncement will relate to further acquisition ofshares of the target company which will be a

minimum of 20%.


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Takeover regulations has to be read with 40A ofListing Agreements - Public -- level has to be

maintained.

Promoter - a person in control of the targetcompany or any person named as promoter in anyo er ocumen o e arge company or any ngswith the Exchanges pursuant to the listingagreement, whichever is later.

Qualifying promoters under regulation 3 refers toany person directly or indirectly in control or sospecified in any document

Mere fact a person is a promoter, he does notbecome an acquirer unless it is shown that he

intends to acquire on his own or acting in concertwith the acquirer (High Court - Modipan & K K Modi)


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Persons acting in concert - for a common objective orpurpose of substantial acquisition of shares or voting

rights or gaining control over the target companypursuant to an agreement or understanding(formal/informal) (direct/indirect). M. Srinivasulu Reddy,Lalbhai Group.

Case 1 - KK Modi Vs SEBI (2002) Bombay High Court heldthat a promoter in the target company does notautomatically become acquirer unless he intends toacquire or is acting in concert with the acquiror. Thus,where one promoter amongst several promoters decides

to increase his share holding through substantialacquisition that does not ipso facto mean that otherpromoters also share his objectives and becomeacquirers.

Case 2 -Technip SA Vs SMS Holdings P. Ltd. The standardof proof to establish concert is one of probability.


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An acquirer can acquire through direct or indirectacquisition - would include acquiring through and

consequently cover acquisition made by a principalthrough other companies (SAT in Kishore RajaramChhabria)

Control - includes the right to appoint majority of the

Directors or to control the management or policydecisions exercisable by a person or persons actingindividually or in concert - directly or indirectly,including by virtue of their shareholding ormanagement rights or in any other manner.

Case 1 - Ashwin K Doshi Vs SEBI (2002 SAT) it was acase involving share transaction between Tatas toAmbuja in ACC. The control can be exerciseddirectly or indirectly, it can be inferred fromshareholding, management rights, shareholders


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agreement, voting right, etc. It can be defacto controlalso, not de jure alone. Majority holding of shares is not

a decisive factor for control if the shareholding is widelydispersed, even a fractional holding would suffice forcontrol.

Case 2 - Subhkam Ventures (I) P. Ltd. Vs SEBI (SAT

15/1/2010) Control is positive power and not anegative power. It means effective control. Theacquirer should be in the drivers seat, controlling thesteering, accelerator, brakes, etc. Therefore, appointinga nominee Director on the Board or requiring the

presence of investor Director to constitute quorum forBoard Meetings, or affirmative vote of investor Directorin any of the protective provisions like amendment ofMemorandum or Articles, any consolidation, sub-divisionor alteration of any rights attached to any share capital,


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the acquisition of shares of another company, approval

of annual business plan, decision to create lien or tolease or mortage or pledge any assets of the company,valued in excess of 5% of net worth of the companywould not mean effective control. Such empowermentwas meant for good corporate governance and toprotect the interest of investors.

Case 3 - Any indirect acquisition through globalrestructuring - BP Plc (BP AMOCO) acquiring BurmahCastrol Plc. In turn, Burmah Castrol Plc through a chainof subsidiaries held 58% in Foseco India Ltd. The caseof BP Plc was that indirect acquisition of Foesco was anincidental.


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and unintended consequence to the global restructuringof Burmah Castrol. SAT upheld SEBIs decision of

indirect acquisition and directed BP AMOCO to make apublic announcement to the shareholders of Foseco.

Hardy Oil v SEBI (SAT 08.03.2006)

agreement with Unocal International Corporation onFebruary 14, 2005, to acquire the entire equity sharecapital of Unocal Bharat Ltd. (100% subsidiary). UnocalBharat Ltd., in turn, held 26.01% of Hindustan OilExploration Co. Ltd. (target company). In the said

Indian company, Hardy Oil Pvt. Ltd. was also ashareholder. Hardy Oil questioned the indirectacquisition of shares in the target company by allegingviolations of takeover code. Hardy Oil claimed their rightof preemption for purchase of shares in the target


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company. In deciding the various allegations,

SAT discussed the scope of unless appearing inregulations 10, 11 and 12. The distinctionbetween regulation 14.1 and 14.4 and also howregulation 22(16) would not apply to a foreigncompany.

Regulation 14.1 deals with direct acquisition and14.4 deals with indirect acquisition. In the caseof indirect acquisition, a public announcementhas to be made by the acquirer within 3 monthsof the confirmation of such acquisition.

Case (1) S.C. in Technip SA Vs SMS Holdings,upheld the chain principle of control in indirectacquisition. The two tests are whether theirshareholding in second company constitutes asubstantial part of the assets of the first company(a subsidiary)


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OR

Whether one of the main purpose of acquiringcontrol of the first company was to secure controlof the second company

The said principles were followed by SAT in thecase of Holcim India Ltd.

The question of proportionate ownership was notrecognised since a share holder is not the ownerof the assets of the company in which he holdsshares. Assets are owned by the investmentcompany. A shareholder in terms of his holdingsin the investment company has no legal right toexercise the voting rights available to the sharesin which the company has invested its funds.


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Regulations (in general) Also, the dividends/bonus shares are not Separately

treated and paid to the shareholder of the investor

company based on number of shares held by eachone of the shareholders of the investor company

Case (2) - The pricing of shares for open offer underre ulation 14 4 read with Re ulation 20 12 was

decided by SAT in the case of Dr. JayaramChigurupati Vs SEBI, Daichi Sankyo, Ranbaxy Laband Zenotec Lab on 7/10/09. Accordingly Regulation20 (12) was applied to relate back to an earlierperiod of January 2008 when Ranbaxy paid a higherprice of Rs. 160 for acquiring Zenotac shares, bytreating Ranbaxy as a person acting in concertbecause of its becoming a subsidiary of Daichi.


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Sudarshan Chemical - advance ruling - If there

are more than one promoter on the side oftransferor, it is sufficient that one group in thetransferors hold the shares for 3 years or more.


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Exemption from Regulations 10,

11 and 12

Regulation 3:

a. A firm allotment in the public issue, with fulldisclosure in the prospectus about the identity andcontrolling interest of the acquirer.

b. Allotment ursuant to Ri hts issue

i. To the extent of entitlementii. Upto the percentage specified in Regulation 11

However the limit under Regulation 11 would notapply to the acquisition of additional sharesconsequent to undersubscription, so long as thesame has been mentioned in the Rights Letter ofoffer and the acquirer is in control of thecompany. If the acquisition results in any changeof control of management, the exemption will not


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11 and 12

be available.

e. Inter se transfer of shares among qualifyingpromoters

Provided that the transferors as well as the

target company for a period of at least threeyears prior to the proposed acquisition

f. Acquisition of shares in the ordinary course ofbusiness by a stock broker, market maker, public

financial institutions on their own account or bybanks and PFIs as pledgees.


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11 and 12

j. Pursuant to a scheme of arrangement or

reconstruction including amalgamation or mergeror demerger under any Law or Regulation, Indianor foreign.

.

are not listed on any stock exchange, providedthat the exemption will not be available wheresuch acquisition in an unlisted company givesright to voting rights, acquisition of shares or

control over a listed company.l. Other cases as may be exempted from Chapter

III by the Board under Regulation 4


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Post Satyam Changes in SAST

Regulations

The scope of disclosures was enlarged to include

pledging of shares by promoters. Insertion of Regulation 25 (2B) no competitive

bid to open offer by an acquirer pursuant to

29A. Regulation 29A was inserted providing special

relaxation from Chapter III after the processesset up by Government approved Board in

Management change is approved by SEBI


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Thank-you

g an sebi takeover presentation[1]

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