Introduction
The concept of takeover is quite old but in India it began in the 20th century. The first effort to takeover was a failed one in the country. The first take over was of the companies Escorts Ltd. and DCM Ltd. It was however a failed one because there were not any rules and regulations regarding it. The need of take over grew when in 1990s there was a phase of liberalization and globalization having a great impact upon the Indian Economy. The arrival of Multi-National Companies in the country resulted in the highly competitive business environment which had an effect on the other companies resulting in takeovers, mergers, etc.
Due to such changes in the business industry there was a need of rules and regulation in order to govern the takeover of the companies. Hence, the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1994 were formed. In this act, Section 30 described the procedure to be followed in order to acquire the company. The acquirer must have majority share holder of the company in order to take over the company in a fair and clear manner.
Relevant Chapters
- Recent changes in the takeover code
- Impact of takeover on the economy, shareholders etc.
- Exemptions under takeover code.
- Instances of takeover in India.
Content
Recent changes in the takeover code
The most recent changes in the takeover code were made in month of August in 2019. There were three topics which to which the changes were made.
1) Disclosure of Encumbrances
The amendments were made into the code by a way of notification in the month of July 29, 2019 which was approved by the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. Before the amendment “encumbrance” was defined under Regulation 28(3) of the Takeover Regulations where it said that “encumbrance is a pledge, lien or any such transaction, by whatever name called”. But post this amendment, the scope of the term “encumbrance” has now been widened as it includes:
1. Any restriction on the free and marketable title to shares, by whatever name called, whether executed directly or indirectly;
2. Pledge, lien, negative lien, non-disposal undertaking; or
3. Any covenant, transaction or condition or arrangement in the nature of encumbrance by whatever name called, whether executed directly or indirectly.
Also, this amendment added a new regulation 31 (4) to the code which made the promoters of the listed companies, to declare that they with the persons acting in the concert have not made any encumbrance other than the encumbrances which have been disclosed during the financial year, on a yearly basis.
While there was also a circular rotated, this circular added more disclosure requirements in the code. This circular is called Disclosure Circular. Due to this circular-
1. The Promoter along with the other persons of the company have to necessarily disclose the details any encumbrance which has been made by them, the combined encumbrance should not exceed 50% of their shareholding in the company or 20% of the total share capital of the company. Such disclosures are necessarily to be made every time in order to control the extent of the encumbrance as this is often misused by the promoter.
2. As there is an amendment in the code now, the existing encumbrances have to be necessarily disclosed on and before 4th October, 2019 as they have to be maintained by stock exchange.
These disclosures are now in addition to the disclosures to be made by the promoters. under Regulation 31(1) of the Takeover Regulations. The Disclosure Circular sets out the format for such disclosures, which includes providing details such as the type of encumbrance, the entity in whose favour the encumbrance is created and end-use of the money borrowed. The Disclosure Circular came into effect on 1st October, 2019.
2) Informant Mechanism
SEBI has been trying stop all the powers which are misused by the persons involved in the company. The next amendment which SEBI had planned was to adopt an informant mechanism in order spot the cases on the insider trading as it is a mal-practice. Since, there is very less scope of finding an evidence relating to it, the informant will now have an upper hand in these matters as he would directly deal with such cases. There are some key features of the mechanism such as-
1. The informant would be a person who would willingly submit a form which would contain the credible, complete and original information relating the activity of insider trading.
2. This regulation also says that the identity as well the information provided by the will be confidential that since information provided for the purpose of law enforcement is exempted from disclosure under Sections 8(1)(g) and 8(1)(h) of the Right to Information Act, 2005, information provided by the informant will be exempted from disclosure.
3. There would be establishment of separate office for investigation and inspection and the offices will be established by SEBI in order to gather the information which would be provided by the person regarding insider trading.
4. The regulation also mentions a reward to be given to the informant if information given by him leads to discouragement of at least 1 crore.
5. The original information may be shared with an appropriate agency or law enforcement authority within or outside India or a self-regulatory organisation, subject to confidentiality of the informant being maintained
6. If SEBI finds that the information submitted by an informant is frivolous or vexatious, SEBI may initiate appropriate action against the informant under the securities laws or any other applicable law.
3) Structured Digital Database
In April 2019, SEBI amended the PIT Regulations and introduced a requirement for the ‘Board of Directors’ to maintain a structured digital database containing details of persons with whom information is shared under the PIT Regulations. By way of an amendment to the Guidance Note dated August 24, 2015 issued by SEBI on the PIT Regulations, SEBI has clarified that the requirement to maintain a structured digital database applies not only to listed companies, but also to intermediaries and fiduciaries who handle unpublished price sensitive information for listed companies in the course of business operations.
But there were also major changes done in the code in year 2011 which are follows-
1) Increase in Initial Threshold Limit from 15% to 25%
The Initial Threshold limit provided for Open Offer obligations is increased from 15% to 25% of the voting rights of the Target Company. Since SEBI (SAST) Regulations, 2011 will be applicable from October 22, 2011, thus it’s a last opportunity for all the Promoters holding less than 25% but more than 20% to come within bracket of Creeping Acquisition. Otherwise even the existing Promoters of these Companies have to give offer
2) New Provisions in case of increase in shareholding beyond the maximum permissible non-public shareholding due to Open Offer:
Obligation on the acquirer to bring down the non-public shareholding to the level specified and within the time permitted under Securities Contract (Regulation) Rules, 1957; Ineligibility to make a voluntary delisting offer under SEBI (Delisting of Equity Shares) Regulations, 2009, unless a period of twelve months has elapsed from the date of the completion of the offer period.
3) Abolition of Non-compete fees:
SEBI has accepted the TRAC Recommendation of scrapping the non-compete fee or control premium. Any amount paid to the Promoters/Sellers whether as consideration, non-compete fee or control premium or otherwise, shall be added in Offer Price and hence public shareholders shall be given offer at the highest of such prices. to consolidate their holding.
4) Creeping Acquisition Limit raised from 15%-55% to 25%-75%
Now there will be single and clear creeping acquisition bracket. This will ne available to all persons holding 25% or more but upto 75% i.e. maximum permissible non-public holding shall be eligible for creeping acquisition of 5% each financial year.
Impact of takeover on the economy, shareholders
1) Impacts on Employees
Acquisitions may have great economic impact on the employees of the organization. In fact, mergers and acquisitions could be pretty difficult for the employees as there could always be the possibility of layoffs after any merger or acquisition. If the merged company is pretty sufficient in terms of business capabilities, it doesn’t need the same amount of employees that it previously had to do the same amount of business. As a result, layoffs are quite inevitable. Besides, those who are working, would also see some changes in the corporate culture. Due to the changes in the operating environment and business procedures, employees may also suffer from emotional and physical problems.
2) Impact on Management
The percentage of job loss may be higher in the management level than the general employees. The reason behind this is the corporate culture clash. Due to change in corporate culture of the organization, many managerial level professionals, on behalf of their superiors, need to implement the corporate policies that they might not agree with. It involves high level of stress.
3) Impact on Shareholders
Impact of acquisitions also include some economic impact on the shareholders. If it is a purchase, the shareholders of the acquired company get highly benefited from the acquisition as the acquiring company pays a hefty amount for the acquisition. On the other hand, the shareholders of the acquiring company suffer some losses after the acquisition due to the acquisition premium and augmented debt load.
4) Impact on Competition
Acquisitions have different impact as far as market competitions are concerned. Different industry has different level of competitions after the mergers and acquisitions. For example, the competition in the financial services industry is relatively constant. On the other hand, change of powers can also be observed among the market players.
Exemptions under takeover code
The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Regulations”) govern the transaction relating to acquisition of shares of a target company (listed company in India), where undertaken by an existing shareholder of the company or any other independent acquirer company. The purpose of the Regulations is to regulate the acquisition of shares or voting rights (directly or indirectly) or takeover of the ‘control’ of the target company and ensure that the said acquisition is done in a fair and transparent manner.
Basically, there are three types of acquisitions regulated under the Regulations. First, initial trigger acquisitions; where an acquirer acquires 25% or more of the shares or voting rights in the target company. Second, creeping acquisitions; where an acquirer (who already holds 25% of the shares or voting rights in the target company) acquires another percentage of shares in excess of 5% of the total shares during the financial year. Third, acquisition of control; where an acquirer acquires (directly or indirectly) the control of the target company. For such acquisitions, the Regulations mandate the acquirer to make a public announcement of an open offer to the existing shareholders of the target company. However, the Regulations regulate the same through particular exemptions.
Categorization of Exemptions:
| Type of Acquisition | Initial Trigger Acquisitions (Regulation 3(1)) | Creeping Acquisitions (Regulation 3(2)) | Acquisitions of Control (Regulation 4) |
| Exemptions | (i) Reg. 10(1)
(ii) Reg.10(3) (iii) Reg. 11 |
(i) Reg. 10(1)
(ii) Reg. 10(4) (iii) Reg. 11 |
(i) Reg. 10(1)
(ii) Reg. 10(2) (iii) Reg. 11 |
It is must be reiterated that the Regulations were introduced to ensure that acquisitions were undertaken in a fair and transparent manner. For example, Regulations 3 and 4 of the Code provides a strict obligation to make an open offer, when a certain percentage of acquisition in the target company is made. However, if such Regulations were to apply to all acquirer companies in all circumstances, then there would have been both, restriction in the overall business of companies, and an overlap of obligations within other laws. As seen, the above Regulations have either provided for general exemptions (i.e. Regulations 10(1) and 11 which apply to all acquisitions) or exemptions within specific situations (i.e. Regulations 10(3), 10(4) and 10(2) which apply to initial trigger acquisitions, creeping acquisitions, and acquisitions of control, respectively). Hence, we may certainly conclude that the ultimate objective of the TRAC has been well met under the Regulations, i.e. to categorize, streamline, and specify unambiguous exemptions.
Instances of takeover in India
1. FLIPKART-WALMART: Walmart acquired 77% Flipkart for $16 billion, making it the largest acquisition involving an Indian company, in 2018.
2. TATA STEEL- CORUS: In 2007, Tata Steel took over European steel major Corus for the price of $12 Billion , making Indian company, the world’s fifth largest steel producer.
3. VODAFONE-HUTCHISON ESSAR: In 2007, the worlds’s largest telecom company in terms of revenue, Vodafone, made an entered the Indian Telecom market by acquiring a 52% stake in Hutchison Essar Ltd. Vodafone purchased 52% stake in Hutchison Essar for about $10 billion.
4. HINDALCO-NOVELIS: Hindalco Industries Ltd. is a subsidiary of the Aditya Birla Group and Novelis is a world leader in the production of flat rolled aluminium products. The HIndlaco Company acquired the Canadian Company Novelis for $6 billion making the combined entity the world’s largest producer in rolled aluminium.
5. ONGC-IMPERIAL ENERGY: In early 2009, OIL and Natural GAS Corp. Ltd. (ONGC) took control of Imperial Energy, a UK Based firm operating in Russia for the price of $1.9 billion.
Conclusion
The new regulation is indeed a path breaking legislation which is likely to change the landscape of corporate India in the near future. With the increased threshold limit, the level of activity in listed companies by PE’s/ strategic investors will increase to more material stakes (up to 24.99%). Also, “head room” for foreign technical collaborators / minority foreign partners to increase their shareholding without triggering cumbersome and costly takeover regulations will increase. Companies would be able to raise expansion capital in a more cost effective manner (i.e. without triggering open offer till 25% stake);
For the economy, more investment from PE/foreign partners should be expected in the coming months, which should give a fillip to FDI numbers which have been languishing in the recent past.
With a 24.99% threshold limit, the acquirers would be able to block special resolutions in target companies with relative ease. Let us assume a promoter who holds 45% stake in the target company. If a hostile acquirer were to reach 24.99%, such acquirer can effectively have ~ 35% voting right (24.99/(24.99+45)) and therefore can easily block special resolutions (assuming that the participation by minority public shareholders either in physical meeting or postal ballot is negligible (which is invariably the case)).
Thus, the revised norms will change the dynamics of acquisitions in India. Although, the revisions are not as dynamic as proposed by Takeover Committee, which proposed an open offer size of 100 per cent after the trigger was hit. However, even under the current norms the cost of acquisitions goes up substantially. Because earlier after the 15 per cent trigger, the acquirer had to seek another 20 per cent and hold a cumulative 35 per cent in the target company. The cost would now be higher as the acquirer needs to hold 51 per cent subsequent to the open offer.
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