SEBI has, on 19 July 2010, released the report of Takeover Regulations Advisory Committee (TRAC) constituted under the Chairmanship of Mr. C. Achuthan on the proposed changes to the existing SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. TRAC has given their recommendations and also issued a draft of proposed takeover regulations which would replace the existing takeover regulations. The report is open for public comments upto 31 August 2010.
Following summarizes the salient features of the draft of proposed takeover regulations submitted by TRAC.
Acquisitions triggering mandatory open offer – an expensive proposition
Direct acquisition
- Acquisition of 25% or more of shares or voting rights in a Indian listed company (target company) (existing threshold limit is 15%)
- Acquisition of direct or indirect “control” of the target company
Indirect acquisition
- Acquisition of shares or voting rights or “control” of any entity by virtue of which acquirer exercises 25% or more of shares or voting rights or “control” of target company
- If the net assets value or sales or market capitalization of the target company is in excess of 80% of the net assets value or sales or the enterprise value of the entity or business being acquired respectively such acquisition would be in the nature of direct acquisition
Acquisition in excess of permissible creeping limits
- If acquirer together with person acting in concert (PAC) holding 25% to 75% (maximum permissible non-public shareholding) of shares or voting rights in a target company, acquires more than 5% voting rights in a financial year (April – March)
Voluntary open offer – window for consolidation
Eligibility
- If acquirer together with PAC holding 25% to 75% of shares or voting rights in a target company can make voluntary open offer to acquire shares
Restrictions
- An acquirer together with PAC who has acquired shares of the target company in the preceding 52 weeks would not be eligible to make a voluntary open offer
- An acquirer cannot acquire shares otherwise than under open offer during the offer period
- An acquirer together with PAC who has made a public announcement for voluntary open offer cannot acquire shares for a period of 6 months after completion of the open offer except as below:
- acquisition pursuant to another voluntary open offer
- acquisition pursuant to competing open offer
Open offer size
Mandatory open offer
- Open offer would be for entire shares held by all other shareholders of a target company i.e. offer for 100% of shares (existing minimum 20% open offer)
Voluntary open offer
- Open offer would be for minimum 10% and maximum upto 75% of voting rights (maximum permissible non-public shareholding).
- Upon competing offer being made by any person, such an acquirer would be permitted to increase his offer size to a normal full-sized open offer within 15 business days.
Open offer price
In case of direct acquisition and beyond creeping acquisition, minimum open offer price shall be the highest of following:
- highest negotiated price under the agreement that attracted the open offer
- volume-weighted average price paid or payable by the acquirer / PAC in preceding 52 weeks
- highest price paid or payable by the acquirer or PAC in preceding 26 weeks
- volume weighted average market price (for frequently traded shares) during past 60 trading day.
In case of indirect acquisition, minimum open offer price shall be the highest of following:
- highest negotiated price under the agreement that attracted the open offer
- volume-weighted average price paid or payable by the acquirer / PAC in preceding 52 weeks immediately preceding the earlier of the date on which the primary acquisition is contracted and intention / decision to make primary acquisition is announced in public domain
- highest price paid or payable by the acquirer / PAC during 26 weeks immediately preceding the earlier of the date on which the primary acquisition is contracted and intention / decision to make primary acquisition is announced in public domain
- highest price paid or payable by the acquirer / PAC during the period between contracting of the primary transaction and the public announcement
- volume weighted average market price (for frequently traded shares) during past 60 trading day immediately preceding the earlier of the date on which the primary acquisition is contracted and intention / decision to make primary acquisition is announced in public domain
In case of indirect acquisitions of the target company, the offer price would increased by 10% p.a. for the period from the date of the primary transaction being announced in the public domain until the date of actual detailed public statement in respect of the target company. Such revised offer price shall be payable to all shareholders who tender their shares in the open offer.
If offer price cannot be computed under above parameters, the same shall be determined taking into account valuation parameters including, book value, comparable trading multiples, and such other parameters as are customary for valuation of shares of such companies.
Price paid for shares of the target company shall include the following:
- actual price paid for acquisition of shares / voting rights / control
- control premium
- non-compete fees or otherwise
Delisting of Target Company
If pursuant to a mandatory open offer, the shares / voting rights of the acquirer / PAC exceeds 90% i.e. delisting threshold, the company may be automatically delisted. There will be no need to comply SEBI (Delisting of Securities) Regulations, 2009.
Exemptions from open offer
- Exemption of inter se transfer of shares amongst group as defined under Monopolies and Restrictive Trade Practices Act, 1969 removed
- For inter se transfer of shares amongst qualifying parties, persons named as promoter / persons acting in concert in the shareholding pattern filed with the stock exchange should be so named in such filing for minimum 3 years prior to the proposed acquisition.
- Scheme of arrangement or reconstruction not involving target company pursuant to an order of a court / competent authority need to fulfill specified conditions
- Acquisition of voting rights or of preference shares carrying voting rights where dividend due has remained unpaid beyond specified period in terms of Section 87(2) of the Companies Act
- Increase in voting rights in a target company consequent to buyback of shares, subject to prescribed conditions.
Competing offers
- Acquirer who has made a voluntary offer (minimum 10%) is permitted to make full-sized offer when a competing offer is made.
- Competing acquirer can negotiate and acquire shares tendered to the other competing acquirer at the same price that was offered by him to the public within 21 business days from the expiry of the offer period.
The above are the recommendations of the TRAC. The actual changes would depend upon the view SEBI may take considering the feedback of the stakeholders while re-writing the takeover regulations.
Source: Press release no. PR No.164/2010 and report of TRAC dated 19 July 2010.
