The Securities and Exchange Board of India (“SEBI”) had been mulling over reviewing and amending the existing SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (“Takeover Code of 1997”) for quite some time now. A Takeover Regulations Advisory Committee was constituted under the chairmanship of Mr. C. Achuthan (“Achuthan Committee”) in September 2009 to review the Takeover Code of 1997 and give its suggestions. The Achuthan Committee provided its suggestions in its report which was submitted to SEBI in July 2010. After taking into account the suggestions of the Achuthan Committee and feedback from the interest groups and general public on such suggestions, the SEBI finally notified the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Code of 2011”) on 23 September 2011. The Takeover Code of 2011 will be effective from 22 October 2011.
The Takeover Code of 2011 adheres to the framework and principles of the Takeover Code of 1997 but the changes it brings about are significant. Some of the most important amendments are discussed below:
- Initial threshold limit for triggering of an open offer
Under the Takeover Code of 1997, an acquirer was mandated to make an open offer if he, alone or through persons acting in concert, were acquiring 15% or more of voting right in the target company. This threshold of 15% has been increased to 25% under the Takeover Code of 2011.
Therefore, now the strategic investors, including private equity funds and minority foreign investors, will be able to increase their shareholding in listed companies up to 24.99% and will have greater say in the management of the company. An acquirer holding 24.99% shares will have a better chance to block any decision of the company which requires a special resolution to be passed. The promoters of listed companies with low shareholding will undoubtedly be concerned about any acquirer misutilising it.
However, at the same time, this will help the listed companies to get more investments without triggering the open offer requirement as early as 15%, therefore making the process more attractive and cost effective.
2. Creeping acquisition
The Takeover Code of 1997 recognised creeping acquisition at two levels – from 15% to 55% and from 55% to the maximum permissible limit of 75%. Acquirers holding from 15% to 55% shares were allowed to purchase additional shares or voting rights of up to 5% per financial year without making a public announcement of an open offer. Acquirers holding from 55% to 75% shares were required to make such public announcement for any additional purchase of shares. However, in the latter case, up to 5% additional shares could be purchased without making a public announcement if the acquisition was made through open market purchase on stock exchanges or due to buyback of shares by the listed company.
The Takeover Code of 2011 makes the position simpler. Now, any acquirer, holding more 25% or more but less than the maximum permissible limit, can purchase additional shares or voting rights of up to 5% every financial year, without requiring to make a public announcement for open offer. The Takeover Code of 2011 also lays down the manner of determination of the quantum of acquisition of such additional voting rights.
This would be beneficial for the investors as well as the promoters, and more so for the latter, who can increase their shareholding in the company without necessarily purchasing shares from the stock market.
3. Indirect acquisition
The Takeover Code of 2011 clearly lays down a structure to deal with indirect acquisition, an issue which was not adequately dealt with in the earlier version of the Takeover Code. Simplistically put, it states that any acquisition of share or control over a company that would enable a person and persons acting in concert with him to exercise such percentage of voting rights or control over the company which would have otherwise necessitated a public announcement for open offer, shall be considered an indirect acquisition of voting rights or control of the company.
It also states that wherever,
a) the proportionate net asset value of the target company as a percentage of the consolidated net asset value of the entity or business being acquired;
b) the proportionate sales turnover of the target company as a percentage of the consolidated sales turnover of the entity or business being acquired; or
c) the proportionate market capitalisation of the target company as a percentage of the enterprise value for the entity or business being acquired;
is more than 80% on the basis of the latest audited annual financial statements, such indirect acquisition shall be regarded as a direct acquisition of the target company and all the obligations relating to timing, pricing and other compliance requirements for the open offer would be same as that of a direct acquisition.
4. Voluntary offer
A concept of voluntary offer has been introduced in the Takeover Code of 2011, by which an acquirer who holds more than 25% but less than the maximum permissible limit, shall be entitled to voluntarily make a public announcement of an open offer for acquiring additional shares subject to their aggregate shareholding after completion of the open offer not exceeding the maximum permissible non-public shareholding. Such voluntary offer would be for acquisition of at least such number of shares as would entitle the acquirer to exercise an additional 10% of the total shares of the target company.
This would facilitate the substantial shareholders and promoters to consolidate their shareholding in a company.
5. Size of the open offer
The Takeover Code of 1997 required an acquirer, obligated to make an open offer, to offer for a minimum of 20% of the ‘voting capital of the target company’ as on ‘expiration of 15 days after the closure of the public offer’. The Takeover Code of 2011 now mandates an acquirer to place an offer for at least 26% of the ‘total shares of the target company’, as on the ‘10th working day from the closure of the tendering period’.
The increase in the size of the open offer from 20% to 26%, along with increase in the initial threshold from 15% to 25%, creates a unique situation under the Takeover Code of 2011. An acquirer with 15% shareholding and increasing it by another 20% through an open offer would have only got a 35% shareholding in the target company under the Takeover Code of 1997. However, now an acquirer with a 25% shareholding and increasing it by another 26% through the open offer under the Takeover Code of 2011, can accrue 51% shareholding and thereby attain simple majority in the target company.
These well thought out figures clearly shows the intention of the regulator to incentivize investors acquiring stakes in a company by giving them an opportunity of attaining simple majority in a company.
6. Important exemptions from the requirement of open offer
Inter-se transfer – The Takeover Code of 1997 used to recognize inter-se transfer of shares amongst the following groups –
a) group coming within the definition of group as defined in the Monopolies and Restrictive Trade Practices Act, 1969
b) relatives within the meaning of section 6 of the Companies Act, 1956
c) Qualifying Indian promoters and foreign collaborators who are shareholders, etc.
The catagorisation of such groups have been amended in the Takeover Code of 2011 and transfer between the following qualifying persons has been termed as inter-se transfer:
a) Immediate relatives
b) Promoters, as evidenced by the shareholding pattern filed by the target company not less than 3 years prior to the proposed acquisition;
c) a company, its subsidiaries, its holding company, other subsidiaries of such holding company, persons holding not less than 50% of the equity shares of such company, etc.
d) persons acting in concert for not less than 3 years prior to the proposed acquisition, and disclosed as such pursuant to filings under the listing agreement.
To avail exemption from the requirements of open offer under the Takeover Code of 2011, the following conditions will have to be fulfilled with respect to an inter-se transfer:
- If the shares of the target company are frequently traded – the acquisition price per share shall not be higher by more than 25% of the volume-weighted average market price for a period of 60 trading days preceding the date of issuance of notice for such inter-se transfer
- If the shares of the target company are infrequently traded, the acquisition price shall not be higher by more than 25% of the price determined by taking into account valuation parameters including, book value, comparable trading multiples, etc.
Rights issue – The Takeover Code of 2011 continues to provide exemption from the requirement of open offer to increase in shareholding due to rights issue, but subject to fulfillment of two conditions:
(a) The acquirer cannot renounce its entitlements under such rights issue; and
(b) The price at which rights issue is made cannot be higher than the price of the target company prior to such rights issue.
Scheme of arrangement – The Takeover Code of 1997 had a blanket exemption on the requirement of making an open offer during acquisition of shares or control through a scheme of arrangement or reconstruction. However, the Takeover Code of 2011 makes a distinction between where the target company itself is a transferor or a transferee company in such a scheme and where the target company itself is not a party to the scheme but is getting affected nevertheless due to involvement of the parent shareholders of the target company. In the latter case, exemption from the requirement of making an open offer would only be provided if
(a) the cash component is 25% or less of the total consideration paid under the scheme, and
(b) post restructuring, the persons holding the entire voting rights before the scheme will have to continue to hold 33% or more voting rights of the combined entity.
Buyback of shares – The Takeover Code of 1997 did not provide for any exemption for increase in voting rights of a shareholder due to buybacks. The Takeover Code of 2011 however provides for exemption for such increase.
In a situation where the acquirer’s initial shareholding was less than 25% and exceeded the 25% threshold, thereby necessitating an open offer, as a consequence of the buyback, The Takeover Code of 2011 provides a period of 90 days during which the acquirer may dilute his stake below 25% without requiring an open offer.
Whereas, an acquirer’s initial shareholding was more than 25% and the increase in shareholding due to buyback is beyond the permissible creeping acquisition limit of 5% per financial year, the acquirer can still get an exemption from making an open offer, subject to the following:
(a) such acquirer had not voted in favour of the resolution authorising the buy-back of securities under section 77A of the Companies Act, 1956;
(b) in the case of a shareholder resolution, voting was by way of postal ballot;
(c) the increase in voting rights did not result in an acquisition of control by such acquirer over the target company
In case the above conditions are not fulfilled, the acquirer may, within 90 days from the date of increase, dilute his stake so that his voting rights fall below the threshold which would require an open offer.
7. Other important changes
Following are few other important amendments that have been brought about in the Takeover Code of 2011:
Definition of ‘share’ – The Takeover Code of 1997 excluded ‘preference shares’ from the definition of ‘shares’ vide an amendment of 2002. However, this exclusion has been removed in the Takeover Code of 2011 and therefore now ‘shares’ would include, without any restriction, any security which entitles the holder to voting rights.
Non-compete fees – As per the Takeover Code of 1997, any payment made to the promoters of a target company up to a maximum limit of 25% of the offer price was exempted from being taken into account while calculating the offer price. However, as per the Takeover Code of 2011, price paid for shares of a company shall include any price for the shares / voting rights / control over the company, whether stated in the agreement or any incidental agreement, and includes ‘control premium’, ‘non-compete fees’, etc.
Responsibility of the board of directors and independent directors – The general obligations of the board of directors of a target company under the Takeover Code of 1997 had given a discretionary option to the board to send their recommendations on the open offer to the shareholders and for the purpose the board could seek the opinion of an independent merchant banker or a committee of independent directors.
The Takeover Code of 2011, however, makes it mandatory for the board of directors of the target company to constitute a committee of independent directors (who are entitled to seek external professional advice on the same) to provide written reasoned recommendations on such open offer, which the target company is required to publish.
The Takeover Code of 2011 is a timely and progressive regulation that would facilitate investments and attract investors. Even though SEBI has not implemented all the suggestions of the Achuthan Committee, it has still taken into consideration some of the major issues that had been plaguing the industry till now. It has tried to maintain a balance between the concerns of the investors as well as that of the promoters.