g aanatharaman sebi takeover presentation

Key Perspectives on the Key Perspectives on the SEBI Takeover Code

G. AnantharamanDirector – Tata Realty and Infrastructure Limited

April 2010

An Overview

� Shares may be acquired either by way of block deal with 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) Regulations 1997 (the ‘Takeover Code’) of Securities Regulations 1997 (the ‘Takeover Code’) of Securities and Exchange Board of India (‘SEBI’)

� The Takeover Code stipulates requirement, depending upon the nature and quantum of the acquisition, of making an offer to purchase shares from the public shareholders, including

� - The minimum number of shares for which the offer is to be made

� - The minimum price at which the shares must be acquired

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 the shareholders, resulting in de-listing of the Company, or for delisting the company process Company, or for delisting the company process prescribed under delisting guidelines needs to be followed The acquirer has to divest, through an offer for sale or by a fresh issue of capital to the public, to keep the public holding at the prescribed levels and prevent a delisting

� FIPB and/or RBI approval may be required in specific cases.

Overview of Major Provisions of the

Takeover Act, 1997

� SEBI (SAST) Regulations, 1997 (The Takeover Code), governs acquisitions of stocks in listed Indian companies.

� An Acquirer may begin purchasing stock without any requirement of a Tender Offer until a 15% ownership (all thresholds refer to Shares Outstanding) threshold(all thresholds refer to Shares Outstanding) threshold

� Once this is reached, or if control is acquired at a holding below 15%, the Code requires the holder to launch a Tender Offer for a minimum of a further 20% 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:


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 at 35%

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

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


Takeover Act, 1997

� Increase its stake by increments more than 5% within the fiscal year: if so, he is again required by the Code to launch another Tender Offer for at least 20% of the shares outstanding

� Each of these Tender Offers may be for stakes larger than 20% at the Acquirer’s sole discretion. larger than 20% at the Acquirer’s sole discretion. The minimum price and size are however regulated by The Takeover Code

� Any acquisition beyond 75% would mandate a tender offer for minimum of 20% and depending on the market capitalization of the Target, Acquirer can hold upto 75% / 90%

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 than 15% of the shares outstanding in a than 15% of the shares outstanding in a concerned target company.

� Once an entity has acquired a 15% stake in target, individually or as part of a group, the entity must make a tender offer for a minimum of 20% of the shares outstanding (not including shares already owned)

Please note SAT’s decision in Hardy Oil (P) Ltd. vsSEBI (8-3-2006), the word “unless” in

Takeover Code: Share

Acquisition in Listed Companies

Regulations 10 and 11 makes the acquisition conditional upon a P.A. being made and it does not mean that P.A. has to be made before acquisition. Such P.A. can be made before or after acquisition. The object of the Regulation is not to nullify the acquisitionnot to nullify the acquisition


Listed Companies

Regulation 11

� Consolidation of Holdings

� Open Tender offer under Regulation 11 (1) needs to be made by Acquirer along with the Person Acting in Concert (PAC) if:Acting in Concert (PAC) if:� Acquirer and PAC already hold > 15% but < 55% of

the Voting Capital of Target Company

� Want to exceed the creeping limit of 5% in a financial 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


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 to acquire control over a Target Company

� Offer needs to be made irrespective of:Whether or not there has been any acquisition of � Whether or not there has been any acquisition of shares or voting rights in a target company

� Whether the control is acquired directly or indirectly

� This regulation is not applicable if the change in control takes place pursuant to a special resolution passed by the shareholders in a general meeting

Case (1) S.C. in the case of Swedish Match AB Vs SEBI (2004) said “Regulations 10, 11 and 12 ex facie operate in 3 different fields. They seek to control creeping acquisition which may lead to



substantial acquisition and ultimately total control of company. Where there is a mere cessor of control by one out of two persons already in control or where any person or persons are given joint control and combined degree of control is not greater than being presently exercised, a resolution in general meeting would suffice. exercised, a resolution in general meeting would suffice. But if the change of control from joint to sole is due to acquisition of shares from the joint holder at a price higher than the market price, then the acquirer has a statutory 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



for one year from the date of IPO. On 27-3-2010, there was a company announcement, disclosing that Punj Lloyd was exiting the company for a share value at a discount to the market, though much higher than the original investment. Since Punj Lloyd was selling the original investment. Since Punj Lloyd was selling their shares during the lock-in, the unexpired lock-in would pass on to the acquirer. In addition, the share transfer may be amongst the promoters, but the transferor and transferee have not been holding the shares for a period of at least 3 years prior to the transfer. Therefore, the exemption from open offer could not be available under take-over regulations.

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 acquiring shares of Target Company, including by way of acquiring shares of Target Company, including by way of 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 of closure 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 most frequently traded stock exchange during 26 weeks preceding the 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 mostfrequently traded stock exchange during 2 weeks precedingthe date of the public announcement.



� 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 period prior to the date of public announcement for period prior to the date of public announcement for acquiring shares of Target Company, including by way of 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 of closure of the offer.

� Other parameters including return on net worth, book value of shares, EPS, price earnings multiple vis-à-vis the industry average. In such cases, it is advisable to get valuation from a chartered accountant in line with the Supreme Court decision in Tomco case.



� The Tender Offer shall be made to acquire a minimum of 20% of the voting capital of the target company 15 days after the closure of the offer.

� Tender Offer under Regulation 11(2A) (i.e. consolidation of holding beyond 55% can be for a minimum of 20% of the voting capital of the consolidation of holding beyond 55% can be for a minimum of 20% of the voting capital of the company

� Such other lesser percentage of the voting capital of the company, assuming full subscription to the offer, enable the acquirer to increase its holding to the maximum level possible 75% or 90%), meeting the requirements of minimum public shareholding



� The offer can also be made conditional upon minimum level of acceptances from the shareholders. In such a case, the acquirer will have to deposit in the escrow account in cash a sum of 50% of the consideration payable under the public offer and also agree to cancel the MOU. the public offer and also agree to cancel the MOU. Such conditionality should be mentioned in the Public Announcement will not work if offer is triggered pursuant to preferential allotment.

� To be made latest with 4 working days of decision to consolidate its holding.

90-Day Window

� Date of passing a firm and final resolution by Board/constituted Committee (Trigger Date)

� � Draft copy of Public Announcement submitted to SEBI, Stock Exchanges & Target

� � Public announcement to be published in leading newspapers :newspapers :

In 4 working dates from the Trigger Date

� Application to RBI/FIPB for acquisition of sharesAt the earliest of the Public Announcement (within 2 days of Public Announcement)

� Draft Letter of Offer and due diligence cert. filed with SEBI. Stock Exchange & Target

Not 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

90-Day Window

� Final Printed Letter of Offer to SEBI

� Letter of Offer to reach Shareholders

Letter of Offer to reach shareholders within 45 days of Public Announcement

� Tender Offer Opens� Tender Offer Opens

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 of Consideration

Not later than 15 days from offer closing

Regulations (in general)

� Regulations are sub-ordinate legislations� Rule based regulations vs principle

based regulationsbased regulations

� Regulatory proceedings are quasi-judicial, based on preponderance of probabilities no mensrea (Sri Ram Mutual Fund - Supreme Court)

Takeover Regulations

� Principle

Kishore Rajaram Chhabria v. The Chairman SEBI MANU/SB/0105/2003, it was elucidated that the ‘purpose of the takeover regulations is remedial and regulatory. Its purpose is three-fold (i) to ensure that the incumbent management of the ensure that the incumbent management of the target company is aware of the substantial acquisition, (ii) to ensure that in the process of substantial acquisition, the securities market is not 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 generally higher than the prevailing market price or to continue as shareholders under the new dispensation.


� Hardy Oil Pvt. Ltd v. SEBI (Order of SAT 08/03/06):- The logic underlying the Regulations is that when a person acquires a big chunk of shares in the target company, the remaining shareholders other than those who have already sold their shares or have agreed to sell their sold their shares or have agreed to sell their shares to him, should have a right to decide for themselves whether they would like to continue in the company under the new management or not. The shares already acquired or agreed to be acquired are not and cannot be the subject matter of the public announcement. The public announcement will relate to further acquisition of shares of the target company which will be a minimum of 20%.


� Takeover regulations has to be read with 40A of Listing Agreements - Public -- level has to be maintained.

� Promoter - a person in control of the target company or any person named as promoter in any offer document of the target company or any filings offer document of the target company or any filings with the Exchanges pursuant to the listing agreement, whichever is later.

� Qualifying promoters under regulation 3 refers to any person directly or indirectly in control or so specified in any document

� Mere fact a person is a promoter, he does not become an acquirer unless it is shown that he intends to acquire on his own or acting in concert with the acquirer (High Court - Modipan & K K Modi)


� Persons acting in concert - for a common objective or purpose of substantial acquisition of shares or voting rights or gaining control over the target company pursuant to an agreement or understanding (formal/informal) (direct/indirect). M. Srinivasulu Reddy, Lalbhai Group.

Case 1 - KK Modi Vs SEBI (2002) Bombay High Court held Case 1 - KK Modi Vs SEBI (2002) Bombay High Court held that a promoter in the target company does not automatically become acquirer unless he intends to acquire or is acting in concert with the acquiror. Thus, where one promoter amongst several promoters decides to increase his share holding through substantial acquisition that does not ipso facto mean that other promoters also share his objectives and become acquirers.

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


it may be established having regard to their relations, their conduct, their common interest, etc. leading to a possible inference that they must be acting together. Evidence of actual concert is normally difficult to obtain and is not insisted upon. Where the circumstances are such that upon. Where the circumstances are such that human experience tells us that it can safely be taken that they must be acting together.

� Agreement - even an agreement to acquire shares would make the person an acquirer; it is not necessary that one should actually acquire shares, voting rights or control, to fall under the definition of acquirer (Rayban Sun Optics India Ltd and Ondel Nalco India Ltd.)


� An acquirer can acquire through direct or indirect acquisition - would include acquiring through and consequently cover acquisition made by a principal through other companies (SAT in Kishore RajaramChhabria)

� Control - includes the right to appoint majority of the Directors or to control the management or policy Control - includes the right to appoint majority of the Directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert - directly or indirectly, including by virtue of their shareholding or management rights or in any other manner.

Case 1 - Ashwin K Doshi Vs SEBI (2002 SAT) it was a case involving share transaction between Tatas to Ambuja in ACC. The control can be exercised directly or indirectly, it can be inferred from shareholding, management rights, shareholders


agreement, voting right, etc. It can be defacto control also, not de jure alone. Majority holding of shares is not a decisive factor for control if the shareholding is widely dispersed, even a fractional holding would suffice for control.

Case 2 - Subhkam Ventures (I) P. Ltd. Vs SEBI (SAT 15/1/2010) – Control is positive power and not a

Case 2 - Subhkam Ventures (I) P. Ltd. Vs SEBI (SAT 15/1/2010) – Control is positive power and not a negative power. It means effective control. The acquirer should be in the driver’s seat, controlling the steering, accelerator, brakes, etc. Therefore, appointing a nominee Director on the Board or requiring the presence of investor Director to constitute quorum for Board Meetings, or affirmative vote of investor Director in any of the protective provisions like amendment of Memorandum or Articles, any consolidation, sub-division or alteration of any rights attached to any share capital,


the acquisition of shares of another company, approval

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

Case 3 - Any indirect acquisition through global restructuring - BP Plc (BP AMOCO) acquiring BurmahCastrol Plc. In turn, Burmah Castrol Plc through a chain of subsidiaries held 58% in Foseco India Ltd. The case of BP Plc was that indirect acquisition of Foesco was an incidental.


and unintended consequence to the global restructuring of Burmah Castrol. SAT upheld SEBI’s decision of indirect acquisition and directed BP AMOCO to make a public announcement to the shareholders of Foseco.

� Hardy Oil v SEBI (SAT 08.03.2006)

Burren Energy Plc entered into a share purchase Burren Energy Plc entered into a share purchase agreement with Unocal International Corporation on February 14, 2005, to acquire the entire equity share capital of Unocal Bharat Ltd. (100% subsidiary). Unocal Bharat Ltd., in turn, held 26.01% of Hindustan Oil Exploration Co. Ltd. (target company). In the said Indian company, Hardy Oil Pvt. Ltd. was also a shareholder. Hardy Oil questioned the indirect acquisition of shares in the target company by alleging violations of takeover code. Hardy Oil claimed their right of preemption for purchase of shares in the target


company. In deciding the various allegations, SAT discussed the scope of ‘unless’ appearing in regulations 10, 11 and 12. The distinction between regulation 14.1 and 14.4 and also how regulation 22(16) would not apply to a foreign company.Regulation 14.1 deals with direct acquisition and � Regulation 14.1 deals with direct acquisition and 14.4 deals with indirect acquisition. In the case of indirect acquisition, a public announcement has to be made by the acquirer within 3 months of the confirmation of such acquisition.

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


OR

� Whether one of the main purpose of acquiring control of the first company was to secure control of the second company

� The said principles were followed by SAT in the case of Holcim India Ltd.case of Holcim India Ltd.

� The question of proportionate ownership was not recognised since a share holder is not the owner of the assets of the company in which he holds shares. Assets are owned by the investment company. A shareholder in terms of his holdings in the investment company has no legal right to exercise the voting rights available to the shares in which the company has invested its funds.

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 each one of the shareholders of the investor company

Case (2) - The pricing of shares for open offer under regulation 14(4) read with Regulation 20 (12) was regulation 14(4) read with Regulation 20 (12) was decided by SAT in the case of Dr. JayaramChigurupati Vs SEBI, Daichi Sankyo, Ranbaxy Lab and Zenotec Lab on 7/10/09. Accordingly Regulation 20 (12) was applied to relate back to an earlier period of January 2008 when Ranbaxy paid a higher price of Rs. 160 for acquiring Zenotac shares, by treating Ranbaxy as a person acting in concert because of its becoming a subsidiary of Daichi.


� Sudarshan Chemical - advance ruling - If there are more than one promoter on the side of transferor, it is sufficient that one group in the transferors hold the shares for 3 years or more.

Exemption from Regulations 10,

11 and 12

Regulation 3:

a. A firm allotment in the public issue, with full disclosure in the prospectus about the identity and controlling interest of the acquirer.

b. Allotment pursuant to Rights issueb. Allotment pursuant to Rights issuei. To the extent of entitlement

ii. Upto the percentage specified in Regulation 11

However the limit under Regulation 11 would not apply to the acquisition of additional shares consequent to undersubscription, so long as the same has been mentioned in the Rights Letter of offer and the acquirer is in control of the company. If the acquisition results in any change of control of management, the exemption will not


11 and 12

be available.

e. Inter se transfer of shares among qualifying promoters

Provided that the transferors as well as the transferees have been holding shares in the transferees have been holding shares in the target company for a period of at least three years prior to the proposed acquisition

f. Acquisition of shares in the ordinary course of business by a stock broker, market maker, public financial institutions on their own account or by banks and PFIs as pledgees.


11 and 12

j. Pursuant to a scheme of arrangement or reconstruction including amalgamation or merger or demerger under any Law or Regulation, Indian or foreign.

k. Acquisition of shares in companies whose shares k. Acquisition of shares in companies whose shares are not listed on any stock exchange, provided that the exemption will not be available where such acquisition in an unlisted company gives right 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

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 relaxation approved by SEBI under regulation relaxation approved by SEBI under regulation 29A.

� Regulation 29A was inserted providing special relaxation from Chapter III after the processes set up by Government approved Board in Management change is approved by SEBI

Thank-you

g aanatharaman sebi takeover presentation

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