m&a guide to se asia and india cc 2009

8/8/2019 M&a Guide to SE Asia and India CC 2009

1/1402

The M&A guide tosouth east Asia and India


2/1403

www.cliordchance.com

This legal and investment guide does not purport to be comprehensive or constitute any legal advice. It is only a guide. The inormation

and the laws reerred to are correct as at July 2009, but they may change quickly. I you would like any advice or urther inormation

on anything contained in this guide, please contact Cliord Chance or any o the regional law rms who contributed to this guide - ull

contact details can be ound on the inside back cover.

Cliord Chance 2009


3/1401

Foreword 3

India 4

Indonesia 26

Malaysia 42

Philippines 62

Singapore 84

Thailand

Vietnam

Contents


4/1402


5/1403

ForewordAt the time o writing and publication o this, the rst Cliord

Chance M&A guide ocusing on south east Asia and India, the

atershocks o the global nancial crisis continue to be elt.

The past 18 months have seen bank and corporate ailures and

near-ailures, alling equity markets, and ever-increasing levels o

government money being used to prevent systemic ailure in the

nancial markets.

South east Asia - leading a recovery?

Globally, the economic turmoil has caused global M&A activity

to decline by some 50 per cent. However, whilst the decoupling

argument has been largely disproven, there remains a prevailing

view that the recession will be shorter and shallower in Asia than

in the West.

Singapore, or example, was one o the rst south east Asian

countries into recession, yet the signs o recovery are already

noticeable. Set against the bleaker landscapes o Europe, thisAsian recovery is strengthening the emerging markets ocus within

the business and nancial communities, with the region as the

centre o attention.

In addition, the indications are that private equity rms, hedge

unds and other nancial investors that had been ocussing on

portolio management are now starting to emerge rom that

process with cash to deploy, assisted by an easing in the tight

credit conditions that had previously stifed their ability to leverage

transactions. As a result, the suggested demise o these classes

o investors as major players in the regions M&A market seems

unwarranted.

Lingering difculties

However, hurdles remain. Until vendor and purchaser expectations

on the valuation o assets become more closely aligned, many

players with the resources to execute M&A transactions will sit on

the sidelines.

In addition, the relative complexity o navigating the regulatory

aspects o oreign direct investment in south east Asia and India

is uelling the conservatism that has emerged amongst investors

ater the nancial crisis. The appetite or risk has abated, resulting

in increased scrutiny o proposed transactions at investment

committee and board level, which in turn has led to the rejection

o many transactions that would have been executed easily in

recent times.

A number o jurisdictions in south east Asia have begun to ease

regulatory hurdles or oreign direct investment. For example,

new mining laws in Indonesia allow direct oreign ownership o

certain categories o mining concession. Malaysia has passed

a law relaxing the requirements or a specied proportion o the

equity o companies in certain sectors to be held by Malaysian

nationals the requirement to allocate 30 per cent o the equity

to Bumiputera has long acted as a deterring actor to oreigninvestors.

Into the future with the benet of experience

The legal systems o south east Asian countries are developing

rapidly and amendments and supplements to existing laws

are requent. This dynamic legal environment, together with

inconsistent interpretation and application, can create diculties

or oreign investors.

Given these diculties, the Cliord Chance Singapore oce,

in conjunction with AZB & Partners* (India), Castillo Laman Tan

Pantaleon & San Jose (Philippines), Chooi & Company (Malaysia),

the Cliord Chance Bangkok oce (Thailand), Mochtar Karuwin

Komar (Indonesia) and VILAF (Vietnam), has produced this guide

or oreign investors investing in south east Asia and India.

In January 2009, Cliord Chance and AZB & Partners entered

into a best riends agreement, which is a reciprocal arrangement

allowing both rms to oer clients the best possible service.

This sets a new benchmark or the delivery o legal services

or transactions involving Indian businesses or to international

businesses investing in India.

Cliord Chance regularly advises clients on M&A transactions

in each o the jurisdictions covered in this publication (as well

as other jurisdictions in Indochina and the sub-continent). In

addition to our ull service oce in Bangkok, we have lawyers on

secondment with Mochtar Karuwin Komar in Jakarta, and VILAF

in Ho Chi Minh City.

Our extensive experience in this region means that we are

uniquely positioned to advise our clients on national and pan-

Asian transactions, blending international standards with thebenets o local knowledge. Our team also has broad sector

experience, with particular strength in nancial institutions,

telecoms, natural resources and private equity.

We would like to thank each o the leading law rms across the

region or their contributions to this guide and are grateul, in

particular, to Wayne Palmer and Satbir Walia or the huge amount

o time and eort that they have dedicated to compiling this guide.

Philip Rapp

Partner, M&A/Private Equity

Cliord Chance, Singapore

Tel: +65 6410 2252

[email protected]

Lee Taylor

Partner, M&A/Private Equity

Cliord Chance, Singapore

Tel: +65 6410 [email protected]

* AZB & Partners is an Indian partnership rm with oces in Mumbai, Delhi, Bangalore, Pune, Chennai and Hyderabad


6/1404


7/1405

India

1. What are the orms o business entity In India?

Common orms o entity

nPrivate company limited by shares

nPublic company limited by shares, which could either be an

unlisted public company or a public company listed on a

recognised stock exchange in India (listed company).

Less common orms o entity

nCompany limited by guarantee

nUnlimited company

nPartnership rms

nLimited liability partnership1

nProprietary rms

nAssociation o persons

2. How is a company managed?

The basic management structure

What form does the management structure take?

The (Indian) Companies Act, 1956 (Companies Act) provides that

the board o directors (board) o every public company and private

limited company must comprise at least three directors and two

directors, respectively.

All the powers o management o the aairs o a company are

vested in the board, with the exception o certain powers that

can only be exercised with the shareholders consent or with the

approval o the Government o India (GoI), the Company Law

Board, the Regional Director, the Registrar o Companies (RoC) or

a court o law.

All the decisions o the board are normally taken by a majority o

the directors on the board, in accordance with the provisions o

the Articles o Association o the Company (AoA).

How are directors appointed to and removed from ofce?

The manner o appointment, removal and retirement o directors

o a company is governed by the AoA, the Companies Act and,

in the case o a listed company, also by the agreement executed

by the listed company with the stock exchange on which it is

listed (commonly known as a listing agreement). In addition,depending upon the sector in which the company is engaged,

certain regulatory approvals may be required or appointment and

removal o directors.

Appointment o directors: The board may, i permitted by its

AoA, appoint additional directors at a board meeting. However,

such additional directors can hold oce only until the next annual

general meeting o the shareholders.

In the case o a listed company, the listing agreement requires

that the board should have an optimum combination o executive

and non-executive directors with not less than 50 per cent o theboard comprising non-executive directors. Further, depending on

whether the chairman o the board is a non-executive director and

whether the non-executive chairman is a promoter or a related

person, the number o independent directors on the board o the

listed company will vary in accordance with the listing agreement.

Retirement o directors: In the case o a public company, one

third o the directors on the board can be non-rotational directors.

O the remaining directors, one third o the directors retire rom

their oce compulsorily at each annual general meeting, but are

eligible or reappointment.

A private company has the fexibility to provide in its AoA the

manner o appointment, retirement and vacation o the oce or

all its directors and there is no requirement or any director to retire

by rotation.

Removal o directors: Any company may, by an ordinary

resolution, remove a director beore the expiry o his term, subject

to compliance with the procedures set out in the Companies

Act, unless the directors have been appointed according to the

principle o proportional representation.

What powers does the board have?

The board has wide powers and is entitled to exercise all powers

and do all such acts, either on its own or through its committees,

with the exception o such powers and acts that are reserved or

the shareholders according to either its AoA or by the provisions

o the Companies Act.

The board may also delegate its powers, with certain exceptions,

to a particular director or to a committee.

Are there any residency requirements for directors?

In the case o a private company, there is no requirement thatdirectors must be resident in India. In the case o a public

1 The Limited Liability Partnership Act, 2008, was notied earlier this year on 9 January 2009. As a result, the limited liability partnership is not yet common.


8/1406

company, the Companies Act prescribes that a managing director

or a whole time director or a manager must be a resident in India.

Where such a person is a non-resident, the appointment would be

subject to GoI approval.

Board meetings can be held in India or outside provided the

quorum is present at that place. Participation in board meetings

by teleconerencing or videoconerencing is possible, as long as

the prescribed quorum is present in one place. For the purpose o

calculating the quorum at a meeting o the board, attendance by

teleconerencing or videoconerencing is not taken into account.

Is there any requirement for directors to hold shares?

There is no statutory requirement or the directors to hold shares.

What duties do directors owe?

Overview

The duties and responsibilities or directors o an Indian company

arise under both statutory and common law. Under the principles

o common law, directors, as agents and trustees o a company,

owe a duty o care, loyalty and trust to the company and are

required to act in a bona de manner and in its best interests.

Additionally, the Companies Act lays down the duties and

responsibilities or directors o Indian companies. These can be

broadly classied as:

nduciary duties to the company;

nduties arising in their capacity as an agent o the company; and

nother duties under the Companies Act to the company, its

employees, shareholders and creditors.

Duty to the company

As duciaries, the directors are expected to subordinate their

personal interests to those o the company and must act in a

bona de manner towards its best interests.

Directors are under a duty to disclose their interest in any contract

to the board. The term interest includes an indirect interest

and extends to cases where the relatives o the director have an

interest in the contract.

Directors are required to obtain the consent o the GoI in certain

cases where the directors are interested.

The directors cannot, except with the consent o the shareholders

by a special resolution, hold an oce or place o prot (whether

directly or indirectly) in the company.

The listing agreement stipulates urther duties that must be

observed by the directors. For example, directors have to make

various disclosures o their shareholdings in other companies to

the company, as well as oces held in other rms and bodies

corporate.

Directors, as agents o the company, should display the utmost

standards o care, skill and diligence while exercising powers and

unctions on behal o the company.

Duty to the shareholders

Ordinarily, directors are not the agents or trustees o the

shareholders and thereore they do not owe any duciary duties

to the shareholders. A directors duty to a shareholder does not

evolve rom a legal relationship such as in the case o a company

and is dependent on establishing an independent special actual

relationship between a shareholder and a director. However, a

director is expected not to mislead the shareholders.

The shareholders o an Indian company, whether public or private,

may, by way o a derivative action, bring a claim against the

directors in the name o the company or breach o their duties to

the company and breach o trust or miseasance (in the event o

raud by directors).

Similarly, an aggrieved shareholder may bring a claim against the

directors by way o a representative action either in his own name

or on behal o other aggrieved shareholders on the grounds o

mismanagement or oppression.

The Companies Act provides that shareholders, that are not less

than 100 in number or not less than one-tenth o the total number

o its members, whichever is less, or any member or members

holding not less than one-tenth o the issued share capital o the

company, can institute such action. However, such derivative/representative actions by shareholders are not common in India.

Duty to creditors

The directors have a statutory duty not to conduct the business

o the company in a manner so as to deraud the creditors o the

company.

Duty to employees

The directors must ensure that the interests o the employees are

saeguarded and all the statutory contributions and other benets

available to an employee under the various labour laws in India are

made available to the employees.


9/1407

What types of liability can directors incur?

Directors o Indian companies may incur both civil and criminal

liability. Apart rom the Companies Act, there is other Indian

legislation (such as labour and environmental laws) that holds

the directors in charge o and responsible or the conduct o the

business o the company liable or violations by the company o

any provisions o such legislation.

However, the directors may absolve themselves rom such liability

i they are able to prove that they were not involved in, or did notparticipate in, the violation o the relevant legislation.

The Companies Act deems certain ocers to be ocers in

deault, including the managing director and the whole-time

director o the company. However, i the company does not have

a managing director or a whole-time director, then any director

specied by the board would be liable as an ocer in deault.

I no such director is specied by the board, then all the directors

o the company would be liable or the contravention. In such

a situation, they can be held responsible or non-compliance,

deault, ailure or violation o any o the companys statutory

obligations and can be disqualied rom acting as a director or

being involved in the management o a company.

Directors may be liable in tort or negligently causing loss to a

person with whom the company has entered into a contract i the

circumstances impose a personal duty on the directors to act with

proper skill or care towards that person.

Directors may be liable or miseasance i the business o a

company is carried on with the intent, or or the purpose o,

derauding its creditors.

A person may be disqualied rom acting as a director orbeing involved in the management o a company in certain

circumstances, or example, i:

nhe is ound to be o unsound mind by a court o competent

jurisdiction;

nhe is an undischarged insolvent or has applied to be

adjudicated as an insolvent and his application is pending;

nhe does not attend three consecutive meetings o the board

or any meetings o the board or a continuous period o

three months, whichever is longer, without obtaining leave o

absence rom the board;

nhe ails to pay any call with respect to shares o the companyheld by him alone or jointly with others within six months o the

last date o payment;

nhe is convicted o any oence involving moral turpitude and

sentenced to imprisonment or not less than six months; or

nan order disqualiying him rom appointment has been passed

by the court.

What are the auditing requirements for companies?

Without exception, all incorporated companies in India must

comply with the statutory requirement o having their accounts

audited. The auditor should be a member o the Institute o

Chartered Accountants o India.

3. What are the most common types o M&A transaction?

Private companies

Share acquisitions

Share acquisition transactions involving private companies enjoy

a more relaxed regime while public companies are exposed to a

more stringent regulatory regime.

Subject to compliance with the oreign direct investment (FDI)

policies (briefy described in section 5), a non-resident entity can

acquire securities o an Indian company, by way o sale, rom a

resident entity under the Automatic Route (as dened in section

5), provided that the price at which the transer takes place is not

less than

nthe ruling market price, where the shares are listed on a stock

exchange, or

na air valuation o the shares by a chartered accountant as per

the guidelines issued by the Controller o Capital Issues, and

nin the case o unlisted shares, as certied by a chartered

accountant.

However, i the company whose shares are to be transerred

operates in the nancial services sector, or in cases where the

Takeover Code is applicable, the approval o the Reserve Bank o

India (RBI) is required.

In the case o the Regulated Sectors (as dened in section 5), the

acquisition would need to comply with the sectoral guidelines,

i any, and the approval o the applicable regulators, i required

under such guidelines, would have to be sought.

Transer o securities rom a non-resident entity to a non-resident

Indian and vice versa is not permissible under the Automatic

Route and the prior approval o the RBI (in addition to the approval

o the relevant regulator, i applicable) is required.

In the case o transer o securities rom non-resident to resident

and vice versa, Regulation 20 (again, dened in section 5)prescribes certain mandatory lings with the RBI through the

authorised dealer in the prescribed ormat, such as the Form

FCTRS. These lings, along with the lings required by the

Registrar o Companies under the Companies Act, must be made

within the stipulated time.


10/1408

Business/asset acquisitions

A buyer can either acquire the entire business or undertaking o a

company (i.e. the assets and liabilities o the company) or a lump

sum amount without assigning any values to individual assets and

liabilities (a slump sale) or can choose to cherry pick the assets

and liabilities o a company, leaving certain assets and liabilities

behind in the transeror entity (an asset transer).

Transer o immovable assets rom a resident Indian entity to a

non-resident entity is not permitted under the exchange controlregulations in India. However, a oreign buyer may set up a wholly

owned local Indian transeree company in India to acquire the

immovable assets.

Acquisition o movable assets/properties may be eected through

actual or constructive delivery, provided that the relevant transer

requirements are complied with.

Acquisition o intangible property must take place pursuant to

a written document and the transer must be recorded with the

relevant registration authority.

While structuring the acquisition o the business or assets o a

company, due attention must be paid to transaction costs in the

orm o stamp duty, capital gains tax, sales tax, etc.

A transaction that is considered to be a slump sale would be

taxed only i the consideration or the transer o the business

exceeds the net worth. Such prots are taxable as capital gains

and not as business income. Apart rom income tax, a slump sale

may also be benecial rom the perspective o value added tax

(VAT), which applies to the sale o goods. An asset transer (i.e.

sale o assets/goods as opposed to the sale o an undertaking as

in the case o a slump sale) is subject to VAT.

Amalgamations

The Companies Act sets out the procedure and requirements or

the amalgamation o companies. Apart rom an amalgamation

o Indian companies, the Companies Act also envisages an

amalgamation between an Indian company and an unregistered

company, which may include a oreign company or a branch

o a oreign company. Mergers between branches o oreign

companies in India with Indian companies have been sanctioned

in the past under the terms o the Companies Act.

Mergers must be sanctioned by the High Courts o the respectivestates in which the amalgamating companies are registered.

Generally, amalgamation o two companies takes approximately

six months.

The Income Tax Act, 1961 (the Tax Act), provides certain benets,

including a waiver o capital gains tax, i an amalgamation satises

the preconditions set out in the Tax Act.

Joint ventures

Subject to compliance with the FDI Policy, a non-resident entity

may set up a joint venture company in India with a resident entity.

In sectors under the FDI Policy with oreign equity ceilings, a joint

venture with an Indian entity oten becomes necessary to satisy

the conditions o balanced shareholding over and above theoreign investment ceiling.

In other sectors, rom a new entrants perspective, actors such

as the local partners pre-established marketing and distribution

chain, human resource availability, etc, play an important role in

deciding to opt or a joint venture.

Demerger

A business transer can also be eected by a demerger, pursuant

to a scheme o arrangement under the Companies Act (which

involves shareholder/creditor consent and court sanction) by one

company (the demerged company) o one or more undertakings

to another company (the resulting company) such that:

nall the property and liabilities o the undertakings in question are

transerred to the resulting company at the values appearing in

the books o accounts o the demerged company;

nthe resulting company issues shares in itsel to the

shareholders o the demerged company in consideration or

the above transer;

nshareholders holding not less than three-quarters in value o

the shares in the demerged company become shareholders o

the resulting company; and

nthe transer o the undertakings is on a going concern basis.

Public companies

Takeovers (see section 6 for a more detailed summary of

takeovers involving listed companies)

SEBI (Substantial Acquisition o Shares and Takeovers)

Regulations, 1997 (the Takeover Code) applies to any substantial

acquisition o shares or control o either a listed company, or

o an unlisted public company or a private limited company that

owns or controls a listed company.

A listed company must comply with Section 372A o the

Companies Act and the requirements o the Takeover Code. The

provisions or share acquisitions described in section 3 also apply

to public companies.


11/1409

Schemes of arrangement

As in the case o a private company, any corporate restructuring

o a public company is also governed by the provisions o the

Companies Act, which include inter alia the reorganisation o

the share capital o the company by consolidation o shares

o dierent classes, by division o shares into dierent classes,

reduction o the share capital o the company, and the issuance o

new shares or new classes o shares.

Corporate restructuring could either be achieved as a part ointernal restructuring methods which include the issuance o

new shares, buy backs o shares and reduction o share capital

(collectively, internal methods) or by the involvement o a third

party, by which either:

na new company is ormed to carry on the same business;

nthere is the sale o an undertaking to another company;

na demerger (disposal o an undertaking to another company);

nan amalgamation or merger o one or more companies; or

nthe rehabilitation o a sick industrial undertaking (collectively,

external methods).

When undertaking a reorganisation o the share capital o the

company by the consolidation o shares o dierent classes or

by the division o shares into shares o dierent classes, the

Companies Act requires that the company, a creditor o the

company, a member o the company, or the liquidator o the

company, as the case may be, present an application under

Section 391 o the Companies Act on the scheme o arrangement

or compromise to the High Court, which is required to conduct

the process o the restructuring as provided under Sections 391

and 394 o the Companies Act. These provisions are applicable

or listed and unlisted public companies and private companies.

When undertaking any o the external methods o corporaterestructuring, the board o a public company or a subsidiary o

a public company could sell the whole or substantially the whole

o an undertaking o the company only with the consent o the

members in a general meeting.

Further, as prescribed in the listing agreement o the relevant

stock exchange, a listed company is required to le any scheme/

petition proposed to be led beore any court or tribunal under

the Companies Act or the purposes o carrying out any corporate

restructuring, with the relevant stock exchange or approval at

least a month beore it is presented to the court or tribunal.

In demergers, such approval typically stipulates a condition

whereby the shares o the resulting company are required to be

listed on the relevant stock exchange. The provisions in relation to

business/asset acquisitions as described in section 3 also apply

to public companies.

Amalgamations

The various provisions or amalgamations described in section

3 also apply to listed and unlisted public companies. Further, as

prescribed in the listing agreement, a listed company is required to

le any scheme/petition proposed to be led beore any court or

tribunal or the purposes o such merger and amalgamation with

the relevant stock exchange or approval at least a month beore it

is presented to the court or tribunal.

Joint ventures

The various provisions or joint ventures described in section

3 apply to public companies subject to the specic corporate

governance and other conditions under the Companies Act

relating to public companies.

Public-to-private acquisitions (P2Ps)

There is no specic regulation governing a public-to-private

acquisition in India. However, such acquisitions may be made

by acquiring the publicly held shares o a listed company and

subsequently delisting the company. This route would be

regulated by the Delisting Guidelines and the Takeover Code, as

noted in sections 5 and 6, respectively.

Do the parties have an obligation to negotiate in good aith

to one another in M&A transactions?

There is no legal obligation on the parties to a proposed

transaction to negotiate in good aith. As such, it is possible or

a party to terminate the negotiations or to negotiate with another

prospective buyer at any time prior to signing o the agreement.

As a matter o comort, parties generally execute a preliminary

non-binding letter o intent, a term sheet or a memorandum ounderstanding that outlines the terms o the transaction, and

which may provide or a break ee and lock out clauses.

4. What percentage shareholding is required to achieve

eective control o a company?

Under the Companies Act, shareholder resolutions are

categorised into ordinary resolutions and special resolutions.

Actions that may be undertaken by way o ordinary resolution are

those actions that can be passed by a simple majority (50 per

cent or more) o the members o the company present and votingin person or by proxy. For example, such actions could include

amending the AoA, altering the share capital o the company,

appointing or removing the statutory auditors o the company, or

removing a director beore the expiry o his period o oce.


12/14010

Special resolutions on the other hand, are required to be passed

by at least three-quarters o the members o the company

present and voting either in person or by proxy. For example,

special resolutions would be required to alter the provisions o

the memorandum o association, to change the objects o the

company or change the place o the registered oce rom one

state to another.

Any shareholder holding more than 50 per cent o the share

capital o the company will be able to exercise eective control o

the company, as typically he would have the right to

nappoint the majority o directors on the board and thereore

control the board;

npass all the ordinary resolutions without having the need to

seek consent rom any other shareholder; and

nblock a special resolution item.

5. Regulation, consents and oreign investment restrictions

General ramework o oreign direct investment policy

The Foreign Exchange Management Act, 1999 (FEMA) is the

central legislation with which any oreign investor is required to

comply or its entry, operations and exit strategy in India, including

the regulations o FEMA and more specically Regulation 20, the

Foreign Exchange Management (Transer or Issue o Security by

a Person Resident Outside India) Regulations, 2000 (Regulation

20), which regulates the transer or issue o securities by or to

persons resident outside India.

Under Regulation 20, an Indian company may - subject to the

prescribed FDI, sectoral regulations and licensing requirements

applicable to various sectors and activities (i any) - issue equity

shares, compulsorily convertible preerence shares or compulsorily

convertible debentures (securities) to persons resident outsideIndia under the Automatic Route i.e. without the prior approval

o the Foreign Investment Promotion Board (FIPB).

However, oreign investment is not permitted under the Automatic

Route in certain sectors and specic approval o the FIPB (the

Approval Route) is required. (See later in section 5 or a list o

sectors where the Approval Route is required).

In certain specied circumstances, the Automatic Route or FDI is

not available. The key circumstances are:

nwhere the activities o the Indian company require an industrial

licence under the provisions o the Industries (Development

& Regulation) Act, 1951 (subject to exceptions) (the Licensed

Industries). These sectors are listed later in section 5.

nwhere more than 24 per cent oreign equity is proposed to

be inducted or manuacture o items reserved or the small

scale sector, unless the company undertakes signicant export

obligations. However, certain exemptions are made or oreign

investments in the small scale sector i the concerned unit is

an export oriented unit, or a unit in a ree trade zone, an export

processing zone, a sotware technology park or an electronic

hardware technology park (the small scale sector).

nwhere the non-resident investor has an existing (as o 12

January 2005) joint venture or technology transer or a trade

mark agreement in the same eld in which the Indian

company now issuing the shares, or o which shares are being

acquired, is engaged (existing ventures). In such a case, theoreign investor would have to obtain the prior permission o

the FIPB to make FDI in the Indian company. However, the

onus to provide the requisite justication and proo to the

satisaction o the FIPB that the new proposal would not in

any way jeopardise the interests o the existing partner would

lie equally on the non-resident investor and the Indian partner.

Normally, a no-objection certicate rom the Indian partner is

required to obtain approval. This embargo under the Automatic

Route is not applicable:

to the acquisition o shares o an Indian company engaged

in the inormation technology sector;

to investments by certain international nancial

institutions such as the International Finance Corporation,

Commonwealth Development Corporation, etc;

to the establishment o wholly-owned subsidiaries in the

mining sector (subject to the oreign investor having no

existing joint venture or the same area and/or the particular

mineral);

to investments made by venture capital unds registered

with the Securities and Exchange Board o India (SEBI);

where the investment by the Indian or oreign party in an

existing venture is less than 3 per cent and

where the existing venture is deunct or sick.

In addition to complying with the sectoral regulations, there

are licensing requirements or certain industries (the Regulated

Sectors). These sectors are listed later in this section.

FDI is prohibited in certain sectors and in certain activities (the

Prohibited Sectors). These sectors are listed on page 11.

The government has recently issued Press Notes 2, 3 and 4

(2009 Series), which seek to modiy and clariy the position or

calculating indirect oreign investment in Indian companies and the

transer o ownership or control rom residents to non-residents

in Indian companies. This may have an impact on whether or not

the approval o the FIPB is required in certain types o companies

and may also impact the quantum o oreign investment in certain

sectors.


13/14011

Are there any regulated industries?

FDI is prohibited in these Prohibited Sectors:

nretail trading (other than single brand retail);

natomic energy;

nthe lottery business;

ngambling and betting;

nreal estate business;

nagriculture (excluding foriculture, horticulture, development

o seeds, animal husbandry, piscicuture and cultivation ovegetables, mushrooms etc. under controlled conditions and

services related to agro and allied sectors) and plantations

(other than tea plantations);

nnidhi company;

nconstruction o arm houses; and

ntrading in transerable development rights.

Further, FDI is not permitted under the Automatic Route, and the

specic approval o the FIPB is required, in the ollowing cases:

i. sectors alling under the Approval Route i.e. (a) petroleum

rening (except or private sector oil rening), natural gas/LNG

pipelines; (b) investing companies in the inrastructure and

services sector; (c) deence and strategic industries; (d) atomic

minerals; (e) print media; () broadcasting; (g) postal services;

(h) courier services; (i) establishment and operation o satellites;

(j) development o integrated townships; (k) tea sector; (l) asset

reconstruction companies; and (m) single brand retail;

ii. i FDI is in excess o 24 per cent in a company engaged in the

small scale sector;

iii. licensed Industries i.e. (a) distillation and brewing o alcoholic

drinks; (b) cigars and cigarettes; (c) electronic aerospace and

deence equipment; (d) industrial explosives; (e) hazardouschemicals; and () i the proposed location o the industrial

undertaking attracts locational restrictions;

iv. proposals alling outside the notied sectoral policy and/or

caps (Please reer to Schedule 1); and

v. i the oreign investor has an existing venture (as explained on

page 10).

Sectoral guidelines must be complied with inter alia in the

ollowing cases (which may also require a specic approval

rom the relevant regulator): (i) private banking; (ii) insurance;(iii) telecoms; (iv) petroleum; (v) airports; (vi) mining; and (vii)

broadcasting (Regulated Sectors). Please reer to Schedule 1,

which sets out the details o these sectoral guidelines.

Are there any restrictions on the oreign ownership o

shares in an Indian company?

Outside the Prohibited Sectors, FDI o up to 100 per cent is

permitted in most sectors without any requirement or prior

approval under the Automatic Route. However, in certain sectors,

FDI is subject to sectoral caps and can only be undertaken within

these ceilings either through the Automatic Route, or with the prior

approval o the FIPB, depending on the applicable guidelines.

Sectoral caps are usually in the range o 26 per cent, 49 per cent,51 per cent and 74 per cent. Schedule 1 sets out such sectors

and the applicable oreign investment limits.

Some sectors also carry minimum capitalisation norms, linked

to the percentage o oreign ownership. For instance, in the

real estate sector, i the investee company is a wholly owned

subsidiary o the oreign entity, it must be capitalised or a

minimum amount o USD10 million. I it sets up as a joint venture

company with an Indian partner, it must be capitalised or a

minimum amount o USD5 million by the oreign partner within

six months o commencement o business. In und-based non-

banking nancial services, 100 per cent FDI is allowed, subject to

a minimum capitalisation o USD50 million.

Are there any oreign exchange and investment controls?

Subject to compliance with the FEMA, an Indian company is

permitted to remit unds outside India and an oshore entity

is permitted to remit unds into India through normal banking

channels.

Is there any merger control?

Merger control is handled under the Companies Act and the

Competition Act, 2002 (Competition Act).

Companies Act: Sections 108 A to 108 I o the Companies

Act deal with GoI approval and notication requirements rom

a competition perspective and provide that, without the prior

consent o the GoI, a person may not acquire any equity shares in

a public limited company i the total nominal value o the shares so

acquired exceeds, or would together with the total nominal value

o the shares already held exceed, 25 per cent o the equity share

capital o such a company. No GoI approval is required in the case

o a private limited company that is not a subsidiary o a public

limited company.


14/14012

I the GoI is o the view that, as a result o the transer, a change

in the composition o the board o the company is likely to take

place and such a change would be prejudicial to the interests o

the company or to the public interest, the GoI may prohibit the

transer o the shares (and in certain exceptional cases, require the

shares to be transerred to the GoI).

Section 108 G o the Companies Act states that Sections 108 A

to 108 F o the Companies Act would apply only i the acquirer

would, as a result o the acquisition, become the owner o a

dominant undertaking. The term dominant undertaking isdened in Section 2(d) o the Monopolies and Restrictive Trade

Practices Act, 1969 (MRTP Act) to include an undertaking which,

by itsel or as a group produces, supplies, distributes or otherwise

controls not less than one-quarter o the goods produced,

supplied or distributed, or controls not less than one-quarter o

any services rendered in India or any substantial part thereo.

The MRTP Act has been repealed with eect rom 1 September

2009; however, the term dominant undertaking as dened in the

MRTP Act, should continue to apply to selective provisions o the

Companies Act unless the Companies Act is amended otherwise.

Competition Act: The Competition Act is not entirely notied. In

particular, the sections relating to combinations (i.e. the merger

control sections) have not yet been notied. Section 6 o the

Competition Act provides or the regulation o combinations and

prohibits anyone rom entering into a combination that causes, or

is likely to cause, an appreciable adverse eect on competition

within the relevant market in India.

Section 5 o the Competition Act provides the assets/turnover

thresholds applicable to acquisitions, mergers and amalgamations

used to determine whether a transaction would be regarded as

a combination or the purposes o the Competition Act. The

thresholds or the combined assets/turnover o the combining

party are:

Individual thresholds: the combined assets o the enterprises

are valued at more than INR10 billion or the combined turnover is

more than INR30 billion. In case either or both o the enterprises

have assets/turnover outside India, then the combined assets

o the enterprises must be valued at more than USD500 million,

including at least INR15 billion in India.

Group thresholds: the combined assets o the enterprises

valued at more than INR40 billion or a joint turnover o more

than INR120 billion, i the party being acquired or remaining ater

the merger or created as a result o amalgamation belongs to a

group. Where such a party has assets/turnover outside India, the

combined assets o the group must be valued at more than USD2

billion, including at least INR15 billion in India.

The Competition Commission o India is the competent authority

or evaluating the eect o combinations on competition in

markets in India.

What are the employee issues?

Are works councils/consultation common?

Under the provisions o the Industrial Disputes Act, 1947 (IDA), the

GoI may direct by order the ormation o work councils in certain

industries. However, in practice, such work councils have notbeen constituted so ar. Under the IDA, such work councils may

only make recommendations and an approval is not required

rom work councils or an acquisition.

Are any actions required prior to or upon an acquisition for

employees?

There are no specic actions required prior to or upon an

acquisition. However, under Section 25FF o the IDA, a transer

o the ownership or management o an undertaking rom

the employer to a new employer would result in a deemed

retrenchment o every workman who has been in continuous

service or not less than one year, unless the ollowing conditions

are ullled (the Section 25FF Conditions):

nthe service o the workman is not interrupted by such a

transer;

nthe workmans terms and conditions o service are no less

avourable to the workman post transer, in comparison with

the terms and conditions prevailing prior to the transer; and

nthe transeree is, under the terms o such transer or otherwise,

legally liable to compensate the workman in the event o his

(uture) retrenchment, on the basis that the workmans service

has been continuous and uninterrupted by the transer i.e.,

seniority benets or the past period o employment o theworkman are preserved post transer.

Are there any notication obligations for employees prior to or

upon an acquisition?

I any o the Section 25FF Conditions noted above are not ullled,

every workman in employment immediately beore the transer o

the undertaking will be entitled to notice and compensation under

the provisions o Section 25F o the IDA as set out below:

none months prior notice in writing is to be given to the

workman or one months salary in lieu o such prior notice;

npayment o retrenchment compensation which will be

equivalent to 15 days average pay or every completed year o

continuous service or any part thereo in excess o six months;

and


15/14013

ni there is any change in the conditions o service to the

detriment o a workman ollowing an acquisition, notice o 21

days must be given to all workmen whose conditions o service

are being altered.

Timing

There is no time limit specied under Indian laws.

With which stock exchange requirements must listed

companies comply?

What rules generally govern listed companies?

In addition to the Indian Companies Act and other sector specic

legislation, listed companies are governed by the provisions o:

nthe Listing Agreement, which includes various rules, regulations

and by-laws o the exchanges including mandatory and non-

mandatory compliances to be met with by a listed company

with the stock exchanges on a periodic basis and urther

mandates a level o corporate governance to be ollowed by

such listed companies;

nthe Takeover Code; and

nthe SEBI (Prohibition o Insider Trading) Regulations, 1992

(Insider Trading Regulations).

How does a company delist its share capital?

The SEBI (Delisting o Equity Shares) Regulations, 2009 (Delisting

Guidelines) govern the manner in which securities o a listed

company may be delisted rom the stock exchanges.

A company whose securities have been listed or a minimum period

o three years on any stock exchange may delist its securities

rom the stock exchanges by providing a delisting oer an exitopportunity to the public shareholders (i.e. shareholders other than

the promoters and parties acting in concert with the promoters). This

exit opportunity involves a price discovery process known as the

book building process (discussed in detail below).

A delisting oer can be launched by any promoter or acquirer

that wants to delist the companys securities. This process is

undertaken by a registered merchant banker (i.e. investment

banker) on behal o the promoters. The appointment o a

merchant banker is a mandatory requirement under the Delisting

Guidelines.

The delisting oer, however, must be supported by a resolution

passed by the board. Further, a special resolution must be

approved by three-quarters o the shareholders o the listed

company. However, the special resolution should be acted upon i,

and only i, the votes cast by the public shareholders in avour o

the proposal amount, are at least twice the number o votes cast

by public shareholders against it. The concerned promoters or

acquirer can also vote on the delisting oer.

The listed company must obtain an in-principle approval rom the

stock exchange to delist its securities once shareholder approval

has been obtained.

The promoter or acquirer must issue a public announcement

o the delisting oer. At this stage, the acquirer/promoter must

deposit 100 per cent o the consideration (determined based onthe foor price as discussed below) into an escrow account with a

bank in India.

A delisting oer must ollow a price discovery mechanism. For

this purpose, the Delisting Guidelines prescribe a foor price,

which orms the minimum price or the price discovery process as

ollows:

nwhere the equity shares are requently traded in all the

recognised stock exchanges where they are listed, the average

o the weekly high and low o the closing prices o the equity

shares o the company during the 26 weeks or two weeks

preceding the date on which the recognised stock exchanges

were notied o the board meeting in which the delisting

proposal was considered, whichever is higher;

nor inrequently traded shares, the foor price will be determined

by taking into account the ollowing actors:

i. the highest price paid or the equity shares o the class

sought to be delisted, including by way o allotment in a

public or rights issue or preerential allotment, during the 26-

week period prior to the date on which the recognised stock

exchanges were notied o the board meeting in which the

delisting proposal was considered and ater that date, up to

the date o the public announcement; and

ii. other parameters including return on net worth, book value

o the shares o the company, earnings per share, and the

price earning multiple vis--vis the industry average; and

nwhere the equity shares are requently traded in some stock

exchanges and inrequently traded in other stock exchanges,

the highest prices arrived at in accordance with the rst two

bullet points above.

The nal delisting price at which the public shareholding is to

be acquired would be a price determined based on the bookbuilding process. Under the book building process, the nal oer

price would be determined as the price at which the maximum

number o shares has been oered by the public shareholders (the

discovered price).


16/14014

Once the discovered price is determined, the promoter or acquirer

has the discretion to accept or reject it. I accepted, the promoter

or acquirer is required to purchase all the shares tendered by all

the shareholders at or below the discovered price.

For the delisting oer to be successul, the shareholding o the

promoter, along with the persons acting in concert, taken together with

the shares accepted at the nal price, must reach the higher o:

n90 per cent o the total issued shares o that class, excluding

the shares that are held by a custodian and against whichdepository receipts have been issued overseas; or

nthe aggregate percentage o pre-oer promoter shareholdings,

along with persons acting in concert with him and 50 per cent

o the oer size.

I the delisting oer is successul (i.e. the discovered price is

accepted by the promoter or acquirer and the number o shares

acquired results in the public shareholding alling below the

applicable level), the promoter or acquirer and the company must

make an application to the stock exchanges to delist the shares.

Following the delisting, the promoter or acquirer must allow

a urther one-year period or any o the remaining public

shareholders to tender their shares to the promoter or acquirer at

the above mentioned discovered price.

Generally, the entire delisting process takes approximately three to

our months to complete.

Is fnancial assistance prohibited?

What is the nature of the prohibition?

The Companies Act prohibits a public company, or a private company

that is a subsidiary o a public company, rom directly or indirectly,granting any loan, guarantee or security or any orm o nancial

assistance to any person or the purposes o, or in connection with, the

purchase o shares in the company or its holding company.

In light o this, a public company is not permitted to provide a

loan or guarantee or oer its assets as security or any loan being

raised by an acquirer or the purpose o, or in connection with, a

purchase or subscription made or to be made by such person or

any shares in such public company or in its holding company.

A public company cannot, without the prior approval o the GoI,

give any guarantee or security to its directors in connection with a

loan made by any person to them or in respect o a loan given to

any person by its director.

Private companies are not subject to similar nancial assistance

prohibitions, unless the private company is a subsidiary o a public

company.

What are the sanctions?

The Companies Act provides or stipulated penalty amounts to be

paid or the contravention o the provisions governing the nancial

assistance rules. Such transactions may be construed to be void

and unenorceable.

Are there any exceptions to the prohibition and is there any

procedure that can be followed to make nancial assistance

possible (i.e. a whitewash procedure)?

There are no exceptions to the prohibitions against nancial

assistance.

6. Public takeover

What are the orms o a public oer?

A public oer under the Takeover Code can be structured either

as a mandatory public oer or a voluntary public oer.

A mandatory public oer under the Takeover Code would be

triggered in the event o a direct or indirect acquisition o shares

and/or voting rights and/or control, beyond certain prescribed

thresholds, in a listed company (the target company). The

acquirer would be required to make a public oer to acquire a

urther 20 per cent o the shares or voting rights o the target

company.

In the case o a voluntary public oer, the public oer must be

or a minimum o 20 per cent o the voting capital o the target

company. However, in the event that the acquirer holds between

55 per cent and 75 per cent o the shares or voting rights in a

target company, and wants to consolidate his holding in the target

company, he may do so by making a public announcement as

long as he does not breach the minimum public shareholdingrequirement.

What is the regulatory ramework or a public oer?

The Takeover Code

The regulatory ramework or a public oer in India is governed

by the provisions o the Takeover Code. The Takeover Code

deals primarily with acquisitions, the consolidation o holdings,

conditional oers, a change in control, competitive oers, and

investor protection. The Takeover Code inter alia provides or

disclosures o shareholdings and control in a listed company, thesubstantial acquisition o shares or voting rights in, and acquisition

o control over, a listed company, requirements in respect o a

public oer, and the procedure or calculation o the oer price o

the shares sought to be acquired under the Takeover Code.


17/14015

Application of the rules

The Takeover Code is triggered in the event o a direct or indirect

acquisition o shares and/or voting rights and/or control, beyond certain

prescribed thresholds, in a target company. The acquirer is required

to make a public oer to acquire a urther 20 per cent o the shares or

voting rights o the target company. The thresholds or the acquisition

o shares and/or voting rights are enumerated below:

nan acquirer who, along with persons acting in concert, acquires

15 per cent or more o the shares or voting rights in the targetcompany, would be required to make a public announcement

to acquire a urther 20 per cent o the shares or voting rights o

the target company;

nan acquirer who, along with persons acting in concert, holds

15 per cent or more, but less than 55 per cent, o the shares or

voting rights in the target company, is required to make a public

announcement to acquire more than 5 per cent o the shares

or voting rights in the target company in any nancial year; and

nan acquirer who, along with persons acting in concert, holds

55 per cent or more but less than 75 per cent o the shares or

voting rights in a target company, is required to make a public

announcement to acquire any additional shares or voting rights

o the target company2 . However the Takeover Code permits

such an acquirer, along with persons acting in concert with

him, to acquire up to 5 per cent o the shares or voting rights in

the target company provided that certain conditions are met.

Regardless o whether there has been any acquisition o shares

or voting rights in a target company, an acquirer cannot directly

or indirectly acquire control over a target company, unless the

acquirer makes a public announcement in accordance with the

Takeover Code. Further, such acquisitions would include a direct

or indirect acquisition o control o a target company by virtue

o the acquisition o companies, whether listed or unlisted, and

whether in India or abroad.

What are the main oer terms?

Minimum price requirements

The Takeover Code mandates that the oer price, with respect to

a public oer, should be the highest o the ollowing:

nthe negotiated price decided upon as per the provisions o the

agreement entered into or the acquisition o shares or voting

rights or agreeing to acquire the shares or voting rights;

nthe price paid by the acquirer or persons acting in concert withhim or acquisitions, including by way o allotment in a public or

rights or preerential issue during the 26-week period prior to

the date o the public announcement, whichever is higher; and

nthe average o the weekly high and low o the closing prices

o the shares o the target company as quoted on the

stock exchange where the shares o the company are most

requently traded during the 26-week period prior to the public

announcement or the average o the daily high and low o the

prices o the shares as quoted on the stock exchange where

the shares o the company are most requently traded during

the two weeks preceding the date o the public announcement,

whichever is higher.

Where the shares o the target company are inrequently traded,

the acquirer and the merchant banker must determine the oer

price.

Cash/non-cash terms

The oer price specied above can be paid by any o the ollowing

means:

nin cash;

nby issue, exchange and/or transer o shares (other than

preerence shares) o the acquirer company, i the person

seeking to acquire the shares is a listed body corporate;

nby issue, exchange and/or transer o secured instruments o

the acquirer company with a minimum A grade rating rom a

credit rating agency registered with SEBI; or

na combination o all three options.

In the event that a payment has been made in cash by the

acquirer or acquisition o shares under any agreement or

pursuant to any acquisition in the open market or in any other

manner during the 12 months immediately preceding the date

o the public announcement, the letter o oer must provide

an option to the shareholders o the target company to accept

payment either in cash or by exchange o shares or other securedinstruments reerred to above.

Conditions

No acquirer can add any conditions once the public oer is

made, except where the acquirer has made the oer conditional

as to the level o acceptance. Once the oer is launched, it is an

unconditional oer under the Takeover Code, unless withdrawn in

the ollowing manner:

nthe statutory approval(s) required has/have been reused;

n

the sole acquirer, being a natural person, has died; ornsuch circumstances as in the opinion o the SEBI merit

withdrawal.

2 The Listing Agreement prescribes a minimum public shareholding o 25 per cent or 10 per cent o the issued capital o a listed company and thereore, or the purposes

o this paragraph, in the event that the target company has an applicable minimum public shareholding o 10 per cent, the acquisition threshold o 75 per cent o the

shares or voting rights o the target company would be read as 90 per cent o the shares or voting rights o such a target company.


18/14016

Funding the acquisition

Subject to applicable oreign exchange regulations, the Takeover

Code does not speciy any requirements or the arrangement o unds

or an acquisition. However, the acquirer must satisy the merchant

banker that rm arrangements or unds and money or payment

through veriable means to ull the obligations under the public oer

are in place. Further, the public announcement is required to contain a

disclosure to the eect that rm arrangements or nancial resources

required to implement the oer are already in place, including detailsregarding the sources o the unds, whether domestic or oreign or

otherwise. Further, the Takeover Code species that the acquirer must,

as security, set up an escrow account.

What is the timing o a public oer and what is the

procedure to be ollowed?

Simplied offer timetable

The timetable below assumes that there are no competitive bids

or the acquisition o the shares o the target company.

In the table below, D is the date o the public announcement

o an oer to acquire shares. All timelines are discussed withreerence to this date.

Date/Time period Events

Beore D Acquirer to appoint a Category I merchant banker registered with SEBI. The merchant banker should not

be an associate or a group company o the acquirer or the target company.

Trigger date Date o execution o a memorandum o understanding, share purchase agreement or other document or

the acquisition o shares or voting rights in excess o prescribed thresholds or o the making o a decision

to acquire shares or control.

On or beore D On or beore the date o the public announcement, the acquirer has to place in an escrow account, a

specied percentage o the consideration payable under the public oer, as security or perormance o

the acquirers obligations in respect o the oer.

D The merchant banker has to make a public announcement within our working days o the trigger date.

D+14 The drat letter o oer proposed to be sent to the target companys shareholders has to be led with SEBI

by this date.

D+30 This date would be the specied date or the purpose o determining the names o the shareholders to

whom individual letters o oer should be sent by the acquirer.

D+35 or later The target company must urnish to the acquirer within seven days o request by the acquirer or within

seven days rom the specied date, whichever is later, a list o shareholders as o the specied date.

D+35 or later The letter o oer may be dispatched to shareholders i 21 days have elapsed ater submission o the drat

with SEBI and SEBI has not reverted with its comments. I SEBI reverts with its comments, any changes

suggested should be refected in the nal letter o oer sent to the shareholders o the target company.

D+45 or later By this date, the letter o oer has to reach all shareholders o the target company as on the specied

date.

D+55 or later This is the date on which the public oer has to open.

D+75 Date o closure o the public oer. The public oer has to remain open or a period o 20 days.

D+82 Acquirer to open a special account with a banker to an issue registered with SEBI, and deposit therein,

the amount o consideration as would, together with the amounts lying in the escrow account, make up

the sum payable to the shareholders who tender their shares. The amounts in the escrow account are to

be transerred to this account.

D+90 The acquirer must complete all procedures relating to the public oer including the payment o

consideration. I the acquirer is unable to make payments to the shareholders within 15 days rom the date

o closure o the oer, SEBI may grant an extension i satised that the delay was not due to the acquirers

deault3. In case o delay beyond 15 days, SEBI may prescribe the interest payable to shareholders.

D+91 Merchant banker to issue a certicate to the acquirer o the completion by the acquirer o all its obligations

towards the public oer4.

D+120 The merchant banker has to send a nal report on the public oer to SEBI by this date.


19/14017

Announcements

A public announcement o an oer (excluding the case o an indirect

acquisition or change in control) is required to be made by the

acquirer within our working days o entering into an agreement or

acquisition o shares or voting rights or deciding to acquire shares or

voting rights exceeding the specied thresholds5.

With respect to an acquisition o control over a company, the

public announcement is required to be made not later than our

working days ater any such change or changes are decided to bemade.

In the case o an indirect acquisition or change in control, a public

announcement must be made by the acquirer within three months

o the consummation o such an acquisition or change in control

or restructuring o the parent or the company holding shares o, or

control over, the target company in India.

The public announcement should be made in all editions o one

English national daily newspaper with wide circulation, one Hindi

national daily newspaper with wide circulation, and a regional

language daily newspaper with wide circulation at the place where

the registered oce o the target company is situated and at

the place o the stock exchange where the shares o the target

company are most requently traded.

A copy o the public announcement must be submitted to SEBI

through the merchant banker to all the stock exchanges on which

the shares o the company are listed, and to the target company

at its registered oce to be placed beore the board o the target

company.

The public oer will be deemed to have been made on the

date on which the public announcement has appeared in the

newspapers detailed above.

The acquirer is also required to make a post oer public

announcement ollowing the closure o the public oer.

Acceptance period

The public oer to acquire shares should remain open or a period

o 20 days. However, the shareholders must have the option to

withdraw any acceptances tendered up to three working days

prior to the date o closure o the public oer.

Satisfying offer conditions

Other oer conditions that must be satised are detailed under the

section on main oer terms on page 15.

Offer unconditional payment

The acquirer must pay the relevant consideration to the

shareholders by D+90 (as set out in the table on page 16).

Competing bids

The original bidder has the option to make an announcement

revising the public oer within 14 days o the public

announcement o a competitive bid. I the original bidder does

not make such an announcement, the date o closing o the public

oer will stand extended to the date o closure o the public oer

under the last subsisting competitive bid. Any competitive oer by

a competitor should be or such number o shares which, when

taken together with shares held by him along with persons acting

in concert with him, should be at least equal to the holding o the

rst bidder, including the number o shares or which the public

oer by the rst bidder has been made.

Further, both the original bidder and the competitor bidder must

have the option to make upward revisions to their public oers, in

respect o the price and the number o shares to be acquired, at

any time up to seven working days prior to the date o closure o

the public oer. However, the acquirer should not have the optionto change any other terms and conditions o their public oer,

except the mode o payment ollowing an upward revision in the

public oer.

3 Where the approvals are not obtained due to the acquirers deault, the escrow amount would be oreited and the acquirer would also be liable or penalties prescribed.

The reusal o statutory approvals is a ground or withdrawal o the public oer. Upon such a withdrawal, the sums lying in the escrow account would be returned to the

acquirer.

4 Transer o the shares in terms o any underlying agreement can only be consummated pursuant to this date.

5 The language o the Takeover Code and various decisions taken by SEBI and the Securities Appellate Tribunal indicate that the execution o an agreement or the making

o a decision to acquire shares or voting rights could trigger public oer requirements. Such agreements may be oral or written. However, the intention/decision to acquire

shares or voting rights has to be evident rom the document in question. With respect to a decision to acquire, the public oer requirements would be triggered i any

document executed between the parties evidences a decision by a party to acquire shares or voting rights. This would presuppose some kind o consensus between

parties or the sale and purchase o the shares or voting rights in question.


20/14018

Failed bids and further offers

The Takeover Code provides that no public oer, once made, can

be withdrawn except under the ollowing circumstances:

nthe statutory approval(s) required has/have been reused;

nthe sole acquirer, being a natural person, has died; and

nsuch circumstances as in the opinion o SEBI merit withdrawal.

In the event o withdrawal o the public oer under any o the

circumstances specied above, the acquirer or the merchantbanker should:

nmake a public announcement in the same newspapers

in which the public announcement o the public oer was

published, indicating reasons or withdrawal o the public oer;

and

nsimultaneously with the issue o such a public announcement,

inorm SEBI and all the stock exchanges on which the shares

o the target company are listed, and the target company at its

registered oce.

Upon the withdrawal o a public oer as specied above, the

acquirer should not make any public oer or the acquisition o

shares o the target company or a period o six months rom the

date o the public announcement o the withdrawal o the public

oer.

Furthermore, in the event o non-ullment o the prescribed

obligations under the Takeover Code, an acquirer should not

make any public oer or the acquisition o shares o any listed

company or a period o 12 months rom the date o closure o the

public oer.

What documentation is involved in the process?

Press announcement

The details o the public announcement under the Takeover Code

are explained under Announcements on page 17.

Offer document

The Takeover Code provides or the ling o a drat letter o oer

by the acquirer through the merchant banker, with SEBI within 14

days rom the date o the public announcement. The drat letter o

oer should contain disclosures specied by SEBI and should be

despatched to the shareholders not earlier than 21 days rom itssubmission with SEBI.

Target documentation

There are no specic provisions under the Takeover Code that

provide or the submission o documentation by the target

company or a public oer. However, certain disclosures with

respect to the target company are required to be made in the

public announcement and the letter o oer.

Responsibility statements

Where the acquirer is a company, the public announcement,brochure, circular, letter o oer, or any other advertisement or

publicity material issued to the shareholders in connection with the

public oer must state that the directors accept responsibility or

the inormation contained in such documents.

The acquirer should ensure that rm nancial arrangements have

been made or ullling the obligations under the public oer and

suitable disclosures in this regard must be made in the public

announcement o oer.

A due diligence certicate should be submitted by the merchant

banker to SEBI, along with the drat letter o oer.

Within 45 days rom the date o closure o the public oer, the

merchant banker must send a nal report to SEBI.

What are the practices relating to break ees and lock-out?

The Takeover Code does not envisage the concept o break ees

in relation to a public oer.

Further, with respect to lock-out, in the event o withdrawal o a

public oer, the acquirer should not make any public oer or the

acquisition o shares o the target company or a period o six

months rom the date o the public announcement or withdrawalo the public oer.

Furthermore, on non-ullment o the prescribed obligations under

the Takeover Code, an acquirer should not make any public oer

or the acquisition o shares o any listed company or a period o

12 months rom the date o closure o the public oer.

What are the rules on inormation gathering/provision?

The Takeover Code does not prescribe any rules in relation to the

gathering o inormation rom a public oer perspective, except or

the obligation o the directors o the target company to assist withand provide the inormation sought by the acquirer.

A bidder should ensure that any due diligence on a potential target

company does not all oul o the Insider Trading Regulations.

From a practical perspective, there are a number o measures


21/14019

that a bidder should take to ensure that the due diligence exercise

does not amount to insider trading or violate the provisions o the

Insider Trading Regulations. One such measure is to obtain a clear

undertaking rom the potential target company that the inormation

that has been made available or the due diligence exercise would

not amount to unpublished price sensitive inormation.

What is the position regarding insider trading?

The Insider Trading Regulations provide that no insider should on

his own behal or on behal o any other person, deal in securitieso a company listed on any stock exchange when in possession

o any unpublished price sensitive inormation. Further, no insider

should communicate, counsel or procure, directly or indirectly, any

unpublished price sensitive inormation to any person who, while

in possession o such unpublished price sensitive inormation,

should not deal in securities.

The penalties or insider trading are:

nimprisonment or a term that may extend to ten years;

nimposition o a penalty amounting to the higher o INR250

million, or three times the amount o prots made rom insider

trading; or

nboth.

Further, SEBI may also:

ndirect the insider not to deal in securities in any particular

manner;

nprohibit the insider rom disposing o any securities in violation

o the regulations;

nrestrain the insider rom communicating or counselling any

person dealing with securities and direct the person who

acquired securities in violation o the regulations to return them

orndirect the person who acquired these securities in violation o

the regulations to transer an amount equal to the cost price

or market price o the securities, whichever is higher, to the

investor protection und o a recognised stock exchange.

What are the public disclosure requirements in a takeover

scenario?

Bidder

Generally a bidder must disclose detailed inormation about his

interest in the target company (e.g. the object and purpose o theacquisition o the shares and uture plans, i any, o the acquirer

or the target company, including disclosing whether the acquirer

proposes to dispose o or encumber any assets o the target

company in the succeeding two years, except in the ordinary

course o business o the target company).

Target

There are no public disclosure requirements or the target

company. However, the target company is required to assist and

provide or the ollowing inormation to the acquirer:

nthe paid up share capital o the target company, the number o

ully paid up and partly paid up shares; and

nsuch other inormation as is essential or the shareholders to

make an inormed decision on the public oer.

Does a memorandum of understanding (MoU) need to be

disclosed?

The Takeover Code and various decisions taken by SEBI and

the Securities Appellate Tribunal indicate that the execution o

an agreement or the making o a decision to acquire shares or

voting rights could trigger public oer requirements, irrespective

o whether such agreements are oral or written. However,

the intention/decision to acquire shares or voting rights must

be evident rom the document in question. With respect to

a decision to acquire, the public oer requirements would

be triggered i any document executed between the parties

evidences a decision by a party to acquire shares or voting

rights. This would presuppose some kind o consensus between

parties or the sale and purchase o the shares or voting rights in

question.

A MoU, where the intention/decision to acquire shares or

voting rights is evident, operates as a trigger date or a public

announcement and the Takeover Code prescribes disclosures

o various aspects o such documentation in the public

announcement.

What are the limitations to stakebuilding?

The Takeover Code provides or the ollowing limitations to

stakebuilding while a public oer is pending:

nno acquisition should be made by the acquirer during the last

seven working days prior to the closure o the public oer; and

nwhere an oer is made conditional upon a minimum level o

acceptance, the acquirer or any person acting in concert with

him should not acquire, during the oer period, any shares in

the target company except by way o resh issue o shares o

the target company in accordance with the provisions o the

Takeover Code.

Is there a requirement to make a mandatory oer?

As a general rule, a public oer has to be made or a minimum o

20 per cent o the voting capital o the target company, where an

acquirer who, along with person acting in concert, has acquired


22/14020

15 per cent or more o the shares or voting rights o the target

company.

The only exception to this rule is when an acquirer who (together

with persons acting in concert with him), holds 55 per cent or

more, but less than 75 per cent, o the shares or voting rights

in a target company, wants to consolidate his holding without

the target company breaching the minimum public shareholding

requirement. Such an acquirer may make an open oer to the

shareholders o the target company to acquire their shares and

the size o such public oer should be the lesser o the ollowing:

n20 per cent o the voting capital o the target company; or

nsuch other lesser percentage o the voting capital o the target

company as would, assuming ull subscription to the public

oer, enable the acquirer, together with the persons acting in

concert with him, to increase his holding to the maximum level

possible which is consistent with the target company meeting

the minimum public shareholding requirements laid down in the

Listing Agreement.

What deences are available to a target company during the

stages o an oer?

The Takeover Code does not provide or any specic deences

that a target company can avail o in the case o a hostile

takeover. However, rom a practical perspective, as the Takeover

Code assumes a level o co-operation with the target company

with respect to provision o inormation etc., the target company

has the ability to delay the public oer process by reusing to

provide any necessary inormation.

What obligations are the directors o the bidder and target

under?

Bidder

Where the acquirer is a company, the public announcement,

brochure, circular, letter o oer or any other advertisement or

publicity material issued to the shareholders in connection with the

public oer must state that the directors accept responsibility or

the inormation contained in such documents.

Target company

The board o the target company has consideration obligations

under the Takeover Code. The board o the target company is

required to acilitate the acquirer in the verication o securities

tendered or acceptances.

What is the procedure or a squeeze-out o the minority?

There are no specic provisions or squeezing out the minority

under the Indian legal system, including under the Takeover Code.

However, there are various methods which can be implemented to

squeeze out or buy out minority or residual shareholders o an

Indian company pursuant to the conclusion o a voluntary delisting

process under the Companies Act. This is a challenging exercise

and there are limited precedents o this nature in India.

Section 395 o the Companies Act provides or the compulsoryacquisition o the shares o a shareholder in a company by

another company, pursuant to a scheme or contract approved

in accordance with the section. When a company incorporated

in India (transeree company) oers to purchase shares in a

company (transeror company) and such a public oer is accepted

by the shareholders on the basis that 90 per cent in value and

75 per cent in number o the shares are to be purchased within

our months o the oer, such an acceptance would amount to

approval o a contract to purchase shares under Section 395 o

the Companies Act. Within two months, i the transeree company

gives a notice to any dissenting shareholders, it will be entitled

to acquire the shares o such dissenting shareholders. Such

an acquisition may be subject to the courts order i any o the

dissenting shareholders through an application to the court object

to the acquisition.

7. Overview o a private company acquisition

Timing

Since there are a number o actors that would come into play in

various types o private company acquisitions, timing varies rom

transaction to transaction. However, i the target private company

operates in a regulated sector, the time taken in obtaining the requisite

approvals rom the FIPB or the RBI or relevant authority, as the casemay be, will also have to be actored in to the timing process.

Steps

The ollowing steps are involved in most transactions:

ntypically in any acquisition transaction, the rst step would be

to execute a non-disclosure agreement;

nthe next step would be to appoint the intermediaries, such as

lawyers and accountants, etc. Depending upon the nature o

the transaction, investment bankers may also be appointed;

nnegotiations commence soon ater and the parties execute

a heads o agreement or a term sheet or memorandum o

understanding;

nonce the term sheet has been executed by all involved parties,

a due diligence process begins, including legal, nancial and

technical diligence;


23/14021

nsometimes, simultaneously with the start o the due diligence

process, the parties proceed towards drating the transaction

documents such as the share purchase agreement or the

share subscription agreement depending upon the type

o acquisition, shareholders agreement and other ancillary

documents i required. These transaction documents contain

certain conditions that the investee company and/or the

promoters o the investee company are required to ull beore

completion o the transaction (the conditions precedent);

nonce the parties have reached an agreement on all the terms

o the transaction documents, they proceed to execute thetransaction documents;

non signing the transaction documents, the investee company

and/or the promoters proceed towards satisying the

conditions precedent; and

nater all the conditions precedent are ullled to the satisaction

o the investor and all regulatory approvals have been received

or the transaction, the parties proceed towards closing and

carry out all the closing actions stipulated in the transaction

documents. Once these are ullled, closing o the transaction

is achieved.

8. What tax issues should be considered?

Tax gains

Capital gains are calculated as sale consideration less the cost

o acquisition and expenses relating to transer. The rate o tax

depends on whether the capital gains are considered to be

long or short term. Long-term capital gains are gains arising

rom the sale o securities that have been held or more than 12

months. Short-term capital gains are gains arising rom the sale o

securities that have been

m&a guide to se asia and india cc 2009

Documents