Takeover Code - An Insight

Introduction
This paper gives a brief explanation of the concept of Takeover and a summary of the procedure for Takeovers as enshrined in the Securities Exchange Board of India [i] (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 [ii] (“Regulations”) as amended in 2002.

 1.    The concept of Takeover
 Although, the term ‘Takeover’ has not been defined under the said Regulations, the term basically envisages the concept of an acquirer [iii] taking over the control [iv] or management of the target company [v]. When an acquirer, acquires substantial quantity of shares or voting rights of the target company, it results in the Substantial acquisition of Shares.

 For the purposes of understanding the implications arising from the aforementioned paragraph, it is necessary for us to dwell into what is the actual meaning of substantial quantity of shares or voting rights

 2. Meaning of substantial quantity of shares or voting rights
 The said Regulations have discussed this aspect of ‘substantial quantity of shares or voting rights’ separately for two different purposes:

(I) For the purpose of disclosures to be made by acquirer(s):
(1) 5% or more shares or voting rights:
A person who, along with ‘persons acting in concert’ [vi] (“PAC”), if any, acquires shares or voting rights (which when taken together with his existing holding) would entitle him to more than 5% or 10% or 14% shares or voting rights of target company, is required to disclose the aggregate of his shareholding or voting rights to the target company and the Stock Exchanges where the shares of the target company are traded within 2 days of receipt of intimation of allotment of shares or acquisition of shares [vii].

2) More than 15% shares or voting rights:
An acquirer who holds more than 15% shares or voting rights of the target company, shall within 21 days from the financial year ending March 31 make yearly disclosures to the company in respect of his holdings as on the mentioned date [viii].

The target company is, in turn, required to pass on such information to all stock exchanges where the shares of target company are listed, within 30 days from the financial year ending March 31 as well as the record date fixed for the purpose of dividend declaration.

(II) For the purpose of making an open offer by the acquirer
(1) 15% shares or voting rights:
An acquirer who intends to acquire shares which along with his existing shareholding would entitle him to more than 15% voting rights, can acquire such additional shares only after making a public announcement (“PA”) to acquire at least additional 20% of the voting capital of the target company from the shareholders through an open offer [ix].

(2) Creeping limit of 5%:
An acquirer who is having 15% or more but less than 75% of shares or voting rights of a target company, can consolidate his holding up to 5% of the voting rights in any financial year ending 31^st March. However, any additional acquisition over and above 5% can be made only after making a public announcement [x]. However in pursuance of Reg. 7(1A) any purchase or sale aggregating to 2% or more of the share capital of the target company are to be disclosed to the Target Company and the Stock Exchange where the shares of the Target company are listed within 2 days of such purchase or sale along with the aggregate shareholding after such acquisition /sale. An acquirer who has made a public offer and seeks to acquire further shares under Reg. 11(1) shall not acquire such shares during the period of 6 months from the date of closure of the public offer at a price higher than the offer price.

(3) Consolidation of holding:
An acquirer who is having 75% shares or voting rights of target company, can acquire further shares or voting rights only after making a public announcement specifying the number of shares to be acquired through open offer from the shareholders of a target company [xi].

In order to appreciate the implications arising here from, it is pertinent for us to consider the meaning of the term ‘public announcement’.

3. Public Announcement
A Public announcement is generally an announcement given in the newspapers [xii] by the acquirer, primarily to disclose his intention to acquire a minimum of 20% of the voting capital of the target company from the existing shareholders by means of an open offer [xiii].

However, an Acquirer may also make an offer for less than 20% of shares of target company in case the acquirer is already holding 75% or more of voting rights/ shareholding in the target company and has deposited in the escrow account in cash a sum of 50% of the consideration payable under the public offer [xiv].

The Acquirer is required to appoint a Merchant Banker registered with SEBI before making a PA and is also required to make the PA within four working days of the entering into an agreement to acquire shares, which has led to the triggering of the takeover, through such Merchant Banker.

The other disclosures in this announcement would inter alia include [xv]:

  Ø         the offer price,
Ø         the number of shares to be acquired from the public,
Ø         the identity of the acquirer,
Ø         the purposes of acquisition,
Ø         the future plans of the acquirer, if any, regarding the target company,
Ø         the change in control over the target company, if any
Ø         the procedure to be followed by acquirer in accepting the shares tendered by the shareholders and the period within which all the formalities pertaining to the offer would be completed.

The basic objective behind the PA being made is to ensure that the shareholders of the target company are aware of the exit opportunity available to them in case of a takeover / substantial acquisition of shares of the target company. They may, on the basis of the disclosures contained therein and in the letter of offer, either continue with the target company or decide to exit from it.

4.      Procedure to be followed after the Public Announcement
In pursuance of the provisions of Reg. 18 of the said Regulations, the Acquirer is required to file a draft Offer Document with SEBI within 14 days of the PA through its Merchant Banker, along with filing fees of Rs.50,000/- per offer Document (payable by Banker’s Cheque / Demand Draft). Along with the draft offer document, the Merchant Banker also has to submit a due diligence certificate as well as certain registration details [xvi].

The filing of the draft offer document is a joint responsibility of both the Acquirer as well as the Merchant Banker [xvii]

Thereafter, the acquirer through its Merchant Banker sends the offer document as well as the blank acceptance form within 45 days from the date of PA, to all the shareholders whose names appear in the register of the company on a particular date [xviii].

The offer remains open for 30 days. The shareholders are required to send their Share certificate(s) / related documents to the Registrar or Merchant Banker as specified in the PA and offer document [xix].

The acquirer is obligated to offer a minimum offer price as is required to be paid by him to all those shareholders whose shares are accepted under the offer, within 30 days from the closure of offer [xx].

5.Exemptions
The following transactions are however exempted from making an offer and are not required to be reported to SEBI [xxi]:

  Ø      allotment to underwriter pursuant to any underwriting agreement;
Ø       acquisition of shares in ordinary course of business by;
Ø       Regd. Stock brokers on behalf of clients;
Ø      Regd. Market makers;
Ø      Public financial institutions on their own account;
Ø     banks & FIs as pledges;
Ø       Acquisition of shares by way of transmission on succession or by inheritance;
Ø       acquisition of shares by Govt. companies;
Ø      acquisition pursuant to a scheme framed under section 18 of SICA 1985;
Ø       of arrangement/ restructuring including amalgamation or merger or de-merger under any law or Regulation Indian or Foreign;
Ø      Acquisition of shares in companies whose shares are not listed;
Ø      However, if by virtue of acquisition of shares of unlisted company, the acquirer acquires shares or voting rights (over the limits specified) in the listed company, acquirer is required to make an open offer in accordance with the Regulations.

 6.Minimum Offer Price and Payments made
It is not the duty of SEBI to approve the offer price, however it ensures that all the relevant parameters are taken in to consideration for fixing the offer price and that the justification for the same is disclosed in the offer document. The offer price shall be the highest of [xxii]:

-     Negotiated price under the agreement, which triggered the open offer.

-     Price paid by the acquirer or PAC with him for acquisition if any, including by way of public rights/ preferential issue during the 26-week period prior to the date of the PA

-     Average of weekly high & low of the closing prices of shares as quoted on the Stock exchanges, where shares of Target company are most frequently traded during 26 weeks prior to the date of the Public Announcement

 In case the shares of target company are not frequently traded, then the offer price shall be determined by reliance on the following parameters, viz: the negotiated price under the agreement, highest price paid by the acquirer or PAC with him for acquisition if any, including by way of public rights/ preferential issue during the 26-week period prior to the date of the PA and other parameters including return on net worth, book value of the shares of the target company, earning per share, price earning multiple vis a vis the industry average.

Acquirers are required to complete the payment of consideration to shareholders who have accepted the offer within 30 days from the date of closure of the offer. In case the delay in payment is on account of non-receipt of statutory approvals and if the same is not due to willful default or neglect on part of the acquirer, the acquirers would be liable to pay interest to the shareholders for the delayed period in accordance with Regulations. Acquirer(s) are however not to be made accountable for postal delays.

If the delay in payment of consideration is not due to the above reasons, it would be treated as a violation of the Regulations.

 7.Safeguards incorporated so as to ensure that the Shareholders get their payments
Before making the Public Announcement the acquirer has to create an escrow account having 25% of total consideration payable under the offer of size Rs. 100 crores (Additional 10% if offer size more than 100 crores) [xxiii]. The Escrow could be in the form of cash deposited with a scheduled commercial bank, bank guarantee in favor of the Merchant Banker or deposit of acceptable securities with appropriate margin with the Merchant Banker. The Merchant Banker is also required to confirm that firm financial arrangements are in place for fulfilling the offer obligations. In case, the acquirer fails to make payment, Merchant Banker has a right to forfeit the escrow account and distribute the proceeds in the following way.

1/3 of amount to target company

1/3 to regional Stock Exchanges, for credit to investor protection fund etc.

1/3 to be distributed on pro rata basis among the shareholders who have accepted the offer.

 The Merchant Banker advised by SEBI is required to ensure that the rejected documents which are kept in the custody of the Registrar / Merchant Banker are sent back to the shareholder through Registered Post.

Besides forfeiture of escrow account, SEBI can take separate action against the acquirer which may include prosecution / barring the acquirer from entering the capital market for a period etc.

8. Penalties
The Regulations have laid down the general obligations of the acquirer, target company and the Merchant Banker. For failure to carry out these obligations as well as for failure / non-compliance of other provisions of the Regulations, Reg. 45 provides for penalties. Any person violating any provisions of the Regulations shall be liable for action in terms of the Regulations and the SEBI Act.

If the acquirer or any person acting in concert with him, fails to carry out the obligations under the Regulations, the entire or part of the sum in the escrow amount shall be liable to be forfeited and the acquirer or such a person shall also be liable for action in terms of the Regulations and the Act.

The board of directors of the target company failing to carry out the obligations under the Regulations shall be liable for action in terms of the Regulations and SEBI Act.

The Board may, for failure to carry out the requirements of the Regulations by an intermediary, initiate action for suspension or cancellation of registration of an intermediary holding a certificate of registration under section 12 of the Act. Provided that no such certificate of registration shall be suspended or cancelled unless the procedure specified in the Regulations applicable to such intermediary is complied with.

For any mis-statement to the shareholders or for concealment of material information required to be disclosed to the shareholders, the acquirers or the directors where he acquirer is a body corporate, the directors of the target company, the merchant banker to the public offer and the merchant banker engaged by the target company for independent advice would be liable for action in terms of the Regulations and the SEBI Act.

The penalties referred to in sub-regulation (1) to (5) may include -

1. criminal prosecution under section 24 of the SEBI Act;

2. monetary penalties under section 15 H of the SEBI Act;

3. directions under the provisions of Section 11B of the SEBI Act.

Regulations have laid down the penalties for non-compliance. These penalties may include forfeiture of the escrow account, directing the person concerned to sell the shares acquired in violation of the regulations, directing the person concerned not to further deal in securities, monetary penalties, prosecution etc., which may even extend to the barring of the acquirer from entering and participating in the Capital Market. Action can also be initiated for suspension, cancellation of registration against an intermediary such as the Merchant Banker to the offer.

Conclusion
The provisions dealt with in this paper are some of the important provisions, which are required to be complied with when dealing with the procedure to be complied with in order to take over a company.

---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
You may also contact the author for any query concerning this article  : yashojitmitra@hotmail.com