SEBI TAKEOVER CODE

1

• SEBI TAKEOVER CODE
• AN OVERVIEW RECENT CHANGES
• VNS Legal, Advocates

2
BACKGROUND

• The SEBI Takeover Code aims to regulate
  acquisition of shares of a listed Company /
  acquiring control over a listed Company
• Effective October 22, 2011
• Earlier Takeover Code revamped post
  recommendations of advisory committee
• Constantly evolving code in line with
  international practices.

3
APPLICABILITY OF THE CODE

• Applies in case of substantial acquisition of
• Shares or
• voting rights or
• control,
• By an acquirer by itself or together with Persons
  Acting in Concert.
• Applies to direct and indirect acquisitions
  (global acquisitions also covered)

4
IMPORTANT DEFINITIONS

• Acquirer
• Any Person acquiring , directly or indirectly
• Shares or Voting Rights or Control
• In the Target Company
• By himself or Persons Acting in Concert
• Control
• Right to appoint majority of Directors or control
  the policy decisions of the company
• By means of their share holding, or management
  rights or share holders agreements or any other
  manner

5
IMPORTANT DEFINITIONS

• Person Acting in Concert
• Persons who for a common objective
• Directly or indirectly cooperate
• To acquire shares or voting rights or control
  over the Target Company
• By means of an agreement or understanding
• Certain cases of deemed PAC

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EARLIER PROVISION

• Upto 5 - no disclosures
• 5 to 14.9 - disclosures
• 15 above Open Offer for 20
• Above 15 holders permitted upto 5 p.a upto
  54.9
• To hold 55 - Open Offer (subject to min pub
  shldg)
• Above 55 holders Open offer (subject to min
  pub shldg)

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NEW PROVISIONS

• Upto 5 - no disclosures
• 5 upto 25 - disclosure to S.Exch
• To cross 25 - open offer of min 26
• Above 25 - upto 5 p.a upto 75
• Shareholding is Acq PAC in aggregate
• Increase in threshold offer size

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TRIGGER OF OPEN OFFER

• Reg 3 (1) If holding gt 25
• Reg 3 (2) for a person already holding above
  25, - if acq is more than 5 p.a
• Between 25 to 75 - upto 5 p.a allowed.
• Cannot acq more than permitted holding
• Only Gross Acqn considered
• Diff between post pre allot computation
• Individual plus aggregate holding considered now.
• Promoter treated on par with any other acquirer

9
ACQN OF CONTROL

• Reg 4 separate regulation for acqn of control
• Applicable irrespective of whether there is acqn
  of shares or not
• Earlier exemption of postal ballot resolution, is
  now removed.

10
INDIRECT ACQUISITION

• Reg 5 (1) defining indirect acqn
• Acq of shares, voting rts, control
• Over any company or other entity
• That would enable the person PAC to
• Exercise voting right or control over target co
• Such that it would attract open offer
• Direct (vs) percentage rule
• Reg 5 (2) - Indirect is construed as Direct if
  proportionate value of target is - gt 80 of
  acquired entitys value

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VOLUNTARY OFFERS

• Min eligibility 25
• Offer size minimum of 10
• Last 52 week voluntary acqn by self PAC -
  cannot make a volunt offer
• Cannot acq shares from open market during offer
  period
• Cannot acquire for 6 months post offer period
  except thro another volun offer
• Volun acq by Promoters whether hit by the bar
  on earlier acqn rule ?

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OFFER SIZE

• Reg 7 - Offer Size
• At least 26 of total shares as of 10th day of PA
  (including shares to be acq through PA)
• If shareholding would exceed the max limit,
  undertaking to bring it down within time given
  under SCR Act.
• Such person who has exceeded the max limit,
  cannot make a voluntary delisting offer for a
  period of 12 months post offer period

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OFFER PRICE

• In case of direct acqns as per Reg 8(2)
• In case of indirect acqns as per Reg 8 (3)
• If acq has any outstanding convertible
  instrument, conversion price of those also to be
  computed
• Non-compete fee to be added
• Higher price paid during offer period offer
  price will stand revised

14
PRICING

• Indirect acq if delay in PA more than 5 days,
  int _at_ 10 p.a
• Payment of diff in price if acq / PAC acquire
  post offer for a period of 26 weeks at a price
  higher than the offer price except for another
  open offer, delisting, market purchases other
  than thro negotiated deal. If Promoter subsc to
  Pref Offer _at_ higher price impact ?

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EXEMPTIONS

• Under Reg 10 (1) for exemption u/ 3 4
• Interse transfer of shs amongst qualifying
  persons between relatives, PAC, Promoters etc
• Acqn in the ord course of business by broker,
  Merch Banker, Bank / FI as pledgee
• Pursuant to scheme of merger / BIFR etc
• SARFAESI
• Delisting
• Transmission

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EXEMPTIONS

• Under Reg 10 (2) acqn of shares without change
  in control pursuant to CDR Scheme
• Under Reg 10 (3) - Increase in voting right
  beyond 25 pursuant to a buyback if the
  shareholding is not reduced lt 90 days of buyback.

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EXEMPTIONS

• Reg 10 (4) Exemption under Creeping Acqn of
  3(2)
• Rights issue
• Buy back as long as not participated
• Acqn by promoter from State Fin Corp pursuant to
  agmt
• Acqn by promoter from VC Fund / FVCI pursuant to
  agmt

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RECENT CHANGES PROCESS PROCEDURE

• Public Announcement on the date of acqn /
  agreeing to acquire. In case of market purchases
  prior to order placing.
• In case of Indirect acqn within 4 days.
• within 4 days of intent / acqn notify to S.Exch
• Detailed Public Statement within 5 days of PA

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PROCESS PROCEDURE

• Detailed PA to be sent to all S.Exch, SEBI to
  Company plus publication in papers.
• File Draft Letter of Offer to SEBI within 5 days
  of Detailed PS.
• Create escrow a/c within 2 days of Detailed PA
• First 500 crs 25
• Excess 10 of the balance
• Send LOO to shareholders lt 7 days of SEBI
  observations

20
PROCESS

• Acq PAC to disclose their acq during the offer
  period lt 24 hrs of acqn
• Acq PAC cannot acquire during the period 3 days
  prior to open of offer till close of offer
• Offer period 10 days open
• Once tendered cannot withdraw
• Acq to complete formalities lt 10 days of closure
  of offer

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OTHER ISSUES

• Completion of acquisition
• Can be made only after completion of offer
  process
• Exemption for pref allotment
• In case of 100 Escrow, can be completed after 21
  days of Detailed PA
• What happens to Open Offers triggered by Market
  purchases ?
• Board appt only after offer closes or 100
  escrow after 15 days of Det PA

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OBLIGATIONS OF TARGET COMPANY

• No matl changes during offer period unless spl
  resln thro postal ballot
• Constitute committee of Indp Dirs to recommend on
  open offer publish in papers send to SEBI /
  S.Exch
• Make available all info to acquirer

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DISCLOSURES

• Disclosure to S.Exch Company lt 2 days of
• Acqn exceeding 5 aggregate
• Once above 5, every acqn or disposal gt 2
  aggregate
• Acqn includes pledge. Except for Bk/FI
• Persons holdg gt 25 and Promoters shd disclose
  their aggregate holdg to S.Ex Co within 7 days
  of 31 MarPromoter to disclose creation /
  invocation / disposal of pledge lt 7 days by
  Promoter / PAC

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IMPACT OF THE NEW CODE

• Cost of open offers increases
• Hostile takeover quite remote
• Exemptions rationalised clarified
• Process procedures rationalised
• Foreign acquirer require FIPB clearances
• Role of SEBI in processing offer docs needs
  rationalisation clarity

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ROLE OF PRACTICSING COMPANY SECRETARIES

• Role of CS crucial / critical in listed
  entities
• Apart from ensuring compliance, can also assist
  in structuring transactions
• Role as advisor to Open Offers
• SEBI to consider empanelling CS to certify
  smaller offers.

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CONCLUSION

• Objective of SEBI regulations - increasing
  transparency and protecting interest of the
  investors in the Capital Markets
• Need to distinguish between large / small
  companies role of intermediaries
• Flexibility to be given to Promoters to increase
  holding
• International practices to be adapted to Indian
  context.