SEBI Takeover Code: Key Concepts, Process, Obligations & Disclosures

Takeover Code – Key Concepts, Process, Obligations & Disclosures | SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011

SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 also known as Takeover Code is a comprehensive regulation governing the acquisition of publicly listed company. Takeover means the acquisition of shares, voting rights or control over target company. In order to protect the interest of investors in such takeover scenario, SEBI carefully lays down and monitors provisions regarding disclosure requirement, offer pricing, and compliance with this regulation.

The takeover code applies to:

• takeover of listed companies,
• directly or indirectly,
• by acquirer along with Person Acting in Concert (PAC),
• by acquiring or agreeing to acquire share, voting rights or control
• not applicable to a company listed without making a public issue, on the Innovators Growth Platform of a recognised stock exchange, 

Contents

A) Key Concepts

1. Important definitions

2. Types of Acquisitions/ offer,

a. Mandatory open offer

b. Creeping acquisition

c. Acquisition of control

d. Indirect Acquisition

e. Deemed Direct Acquisition

f. Voluntary Open offer

g. Conditional offer

h. Competing offer

3. Delisting offer

4. Offer size

5. Offer price

6. Modes of payment of consideration

7. Exemption

B) Process and timeline

*The timelines mentioned in table above are based on general rule. Any exception cases are mentioned at relevant places in the article.

C) Obligations of acquirer, target company and manager to open offer

D) Disclosures

1. Disclosure of acquisition and disposal

2. Disclosure of encumbered shares

A) Key Concepts

Important definitions

1. Acquirer means,

• • any person who, directly or indirectly,
  • acquires or agrees to acquire whether by himself, or through, or with persons acting in concert with him,
  • shares or voting rights in, or control over a target company;

2. Control,

• • includes the right to appoint majority of the directors or to control the management or policy decisions
  • exercisable by a person or persons acting individually or in concert, directly or indirectly,
  • including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner
  • Except director or officer of a target company, will not be considered to be in control, merely by virtue of holding such position

3. Identified date- means date falling on the 10th working day prior to the commencement of the tendering period, for the purposes of determining the shareholders to whom the letter of offer shall be sent (like a record date).

4. Tendering period – means the period within which shareholders may tender their shares in acceptance of an open offer to acquire shares made under Takeover regulations.

5. Enterprise value- means the value calculated as

• • Addition of market capitalization of a company plus debt, minority interest and preferred shares,
  • minus total cash and cash equivalents

6. Frequently traded shares of a target company mean,

• • shares in which the traded turnover on any stock exchange during the twelve calendar months preceding the calendar month in which the public announcement is required to be made under Takeover regulations
  • is at least 10% of the total number of shares or the weighted average number of total shares of such class of the target company where the share capital of a particular class of shares is not identical throughout such period.

7. Offer period means the period between

• • the date of entering into an agreement, formal or informal, to acquire shares, voting rights in, or control over a target company requiring a public announcement, or the date of the public announcement and
  • the date on which the payment of consideration to shareholders who have accepted the open offer is made, or the date on which open offer is withdrawn

8. Person acting in concert (PAC) means,

• • persons who, with a common objective or purpose of acquisition of shares or voting rights in, or exercising control over a target company,
  • pursuant to an agreement or understanding, formal or informal, directly or indirectly co-operate for acquisition of shares or voting rights in, or exercise of control over the target company.
  • And such categories of persons deemed to be acting in concert as defined in the Takeover Code.

9. Target company- means a company and includes a body corporate or corporation established under a Central legislation, State legislation or Provincial legislation for the time being in force, whose shares are listed on a stock exchange.

10. VWAMP means,

• • the product of the number of equity shares traded on a stock exchange and the price of each equity share
  • divided by the total number of equity shares traded on the stock exchange;

11. VWAP means,
    • the product of the number of equity shares bought and price of each such equity share
    • divided by the total number of equity shares bought

Types of Acquisitions

 Mandatory open offer

• Mandatory open offer is required to be given when
  • Any acquirer, along with PAC,
  • Wants to acquire shares or voting rights in target company, together with shares and voting rights already held, if any,
  • Entitling them to exercise 25% or more upto maximum permissible non-public shareholding in target company,
  • Such acquisition can only be done by way of a public announcement of open offer.
• Individual shareholding of PAC exceeding the stipulated threshold, will also attract open offer obligation, irrespective whether there is a change in the aggregate shareholding of PAC.
• Not applicable to acquisition of shares or voting rights by shareholders or promoter for giving exit opportunity to dissenting shareholders.
• 25% means 49% in case of entities listed on Innovators Growth Platform.

Creeping Acquisition

• Creeping acquisition is when
  • Any acquirer along with PAC, holding 25% or more voting rights, but less than maximum permissible non-public shareholding, in target company.
  • acquires additional shares or voting rights in target company
  • of more than 5% in one financial year
  • only by way or public announcement for open offer
• Gross acquisition shall be considered for determining additional voting rights.
• Disposal or dilution due to fresh issue shall not be taken into consideration
• When acquisition is by way of new issue or tc has issue new shares, the the additional quantum of acquisition shall be the difference between preallotment and post allotment % of holding of acquirer.
• Individual shareholding of PAC exceeding the stipulated threshold, will also attract open offer obligation, irrespective whether there is a change in the aggregate shareholding of PAC.
• Not applicable to acquisition of shares or voting rights by shareholders or promoter for giving exit opportunity to dissenting shareholders.
• 25% means 49% in case of entities listed on Innovators Growth Platform.

Acquisition of control

• Acquisition of control over target company, whether directly or indirectly,
• Irrespective of acquisition or holding of shares or voting rights in a target company,
• Shall be done only by way of public announcement of open offer.

Indirect acquisition

• Where the acquirer or PAC by acquiring shares or voting rights in another entity,
• becomes entitled to exercise such voting rights or control in target company,
• that would otherwise attract obligation to make Public Announcement of open offer under takeover code,
• such acquisition is termed as indirect acquisition.

Deemed Direct acquisition

• Indirect acquisition where,
  • the proportionate net asset value of target company > 80% of consolidated net asset value of the entity or business being acquired,
  • the proportionate sales turnover of the target company > 80% of the consolidated sales turnover of the entity or business being acquired,
  • the proportionate market capitalisation of the target company > 80% of the enterprise value for the entity or business being acquired,
• Then such acquisition shall be deemed direct acquisition.

Voluntary open offer

• Any person, along with PAC, holding shares or voting rights in a target company entitling them to exercise 25% or more but less than the maximum permissible non-public shareholding in the target company,
• May make a public announcement of open offer,
• Irrespective of occurring of any trigger event,
• Such that post acquisition, their holding does not exceed the maximum permissible non-public shareholding.
• Such acquirer and PAC cannot acquire any shares:
  • Otherwise than under the open offer, during open offer period.
  • For period of six months after completion of the open offer, except pursuant to another voluntary open offer
  • Such restriction shall not apply to:
    • Making of competing offer
    • Shares acquired through bonus issue or stock splits
• Ineligible to make voluntary open offer:
  • wilful defaulter
  • fugitive economic offender
  • acquirer or PAC who acquired shares of the target company in the preceding 52 weeks without attracting the obligation of an open offer
• 25% means 49% in case of entities listed on Innovators Growth Platform

 Conditional offer

• The offer is made conditional as to the minimum level of acceptance, where in the event the desired level of acceptance is not received the acquirer shall not acquire any shares under the open offer and the agreement attracting the obligation.
• The acquirer and PAC shall not acquire during the offer period, any shares in the target company except under the open offer and any underlying agreement for the sale of shares pursuant to which the open offer is made.

Competing Offer

• Competing offer can be made by any person other that acquirer, within 15 working days of DPS.
• Post expiry of the said 15 working days until expiry of the offer period of existing open offer, no person shall be allowed to make PA or enter into any transaction attracting obligation under the Takeover Code.
• The competing offer shall not be regarded as voluntary offer under Reg 6.
• The competing offer can be conditional as to the minimum level of acceptances only if the original offer is conditional as to the minimum level of acceptances
• The existing acquirer may revise terms of offer to make it more favourable to shareholders, upon announcement of competing offer.
• The acquirer making competing offer may revise offer price upward any time before 1 working day of opening of tendering period.
• The schedule activities shall be same for all competing offers (including existing offer)
• Offer size of competing offer + existing holding of acquirer making competing offer shall be atleast equal to existing holding of acquired making the existing offer + shares to be acquired in the open offer + shares to be acquired under any agreement attracting the open offer.
• No person shall make PA or agreement attracting open offer until expiry of open offer made pursuant to disinvestment or pursuant to a relaxation from strict compliance granted by the SEBI under Regulation 11.
• A wilful defaulter can make a competing offer.

 Delisting Offer

• A delisting offer along with PA of open offer under takeover code can be given in case of mandatory open offer, acquisitor of control, indirect and deemed direct acquisition.
• Intention to delist to be disclosed in public announcement & DPS.
• The acquirer should not, in the target company, in last 2 years preceding PA:
  • have been a promoter/ promoter group / person(s) in control,
  • directly / indirectly associated with the promoter or any person(s) in control,
  • a person(s) holding more than 25% shares or voting rights.
• The acquirer shall not acquire joint control along with an existing promoter / person in control of the company.
• The PA, DPS and letter of offer shall include
  • two prices, one offer price under takeover code and an indicative price under delisting regulation and
  • shall disclose the premium the acquirer is willing to pay for delisting and
  • the rationale for such pricing.
• In case of indirect acquisition, the intention to delist, the offer and indicative price shall be disclosed directly in DPS and letter of offer.
• The indicative price can be revised upwards before the start of the tendering period.
• Where delisting threshold is met, all shareholders who tender their shares shall be paid the indicative price and if not met, the open offer price will be paid.
• Where delisting offer is not successful, the acquirer shall, within 2 working days in respect of such failure, make an announcement in all the newspapers in which the DPS was made. Post which the shareholders who have accepted the open offer, can withdraw such tendered shares within 5 working days from date of such announcement by acquirer.
• Where a competing offer is made:
  • the acquirer shall not be entitled to delist the target company;
  • the acquirer shall not be liable to pay interest to the shareholders on account of delay due to the competing offer; and
  • the acquirer shall comply with all the applicable provisions of these regulations and make an announcement in this regard, within two working days from the date of public announcement made in terms of sub-regulation (1) of regulation 20, in all the newspapers where the detailed public statement was made.
• Where the delisting offer has failed however, the acquired has acquired more than 75% of shareholding,
  • the acquirer may undertake a further attempt to delist the target company under delisting regulation
  • during the period of 12 months from the date of completion of the open offer
  • such further delisting attempt shall be successful once the delisting threshold is met and 50% of the residual public shareholding is acquired.
  • the floor price for a further delisting attempt shall be higher of the following:
    • the indicative price offered under the first delisting attempt;
    • the floor price determined under the Delisting Regulations as on the relevant date of the subsequent attempt; and
    • the book value of the company.
  • upon failure of the further delisting attempt, the acquirer shall ensure compliance of the minimum public shareholding requirement.

 Exemption from open offer

A) Inter se Transfer between-

• Immediate relatives
• Promoters
• PAC
• Holding, subsidiary or sister concern

B) Pursuant to regulations like-

• SICA
• Scheme of Arrangement
• IBC
• SARFAESI
• Delisting regulation

C) Increase in voting rights due to-

• Further issue
• Buyback
• Conversion of SR equity shares into ordinary equity shares
• Right issue
• Another open offer

D) In ordinary course of business by-

• Underwriter under underwriting agreement
• Stock broker on behalf of client in exercise of lien over the shares purchased on behalf of the client
• Merchant Banker in the process of market making or subscription to the unsubscribed portion under ICDR
• Merchant Banker acting as stabilising agent
• registered market-maker of a stock exchange
• Scheduled Commercial Bank, acting as an escrow agent
• invocation of pledge by Scheduled Commercial Banks or Public Financial Institutions as a pledgee

E) Others

• Transmission
• Succession
• Inheritance

F)  Exemption Granted by SEBI

• SEBI may grant exemption from the obligation to make an open offer subject to conditions as it deems fit in the interests of investors.
• SEBI may grant a relaxation from strict compliance with any procedural requirement as it deems fit in the interests of investors.

 Offer Size

• The offer size
  • in case of mandatory open offer, creeping acquisition and acquisition of control,
  • shall be atleast 26% of total shares of target company,
  • as on 10^th working day from closing of tendering period,
  • taking into account all the potential increase in outstanding
• In case of voluntary open offer
  • Offer size shall be atleast 10% of additional shares upto maximum permissible non-public shareholding
  • can be increased if competing offer is made within 15 days of PA of such competing offer
  • Such increase in offer size will make the open offer deemed to be made under provisions of Reg 3(2) i.e. creeping acquisition.
• Open offer shall only be made to public shareholders.

Offer Price

For other than indirect acquisition:

The minimum offer price shall be the highest of the following,

• Highest negotiated price per share under the agreement attracting the obligation of an open offer,
• volume-weighted average price (VWAP) paid or payable by the acquirer or PAC in last 52 weeks immediately preceding PA,
• Highest price paid by acquirer or PAC in the last 26 weeks immediately preceding PA
• Where shares are frequently traded, volume-weighted average market price (VWAMP) of last 60 trading days immediately preceding PA
• Where shares are not frequently traded, the price determined by the acquirer and the manager to the open offer taking into account valuation parameters. SEBI may require valuation of the shares by an independent merchant banker other than the manager to the open offer or an independent chartered accountant in practice having a minimum experience of ten years.

For indirect acquisition:

The minimum offer price shall be the highest of the following,

• Highest negotiated price per share under the agreement attracting the obligation of an open offer, if any,
• volume-weighted average price (VWAP) paid or payable by the acquirer or PAC in last 52 weeks immediately preceding earlier of the date agreement for primary acquisition and the date on which the intention or the decision to make the primary acquisition is announced in the public domain,
• Highest price paid by acquirer or PAC in the last 26 weeks immediately preceding earlier of the date agreement for primary acquisition and the date on which the intention or the decision to make the primary acquisition is announced in the public domain,
• Where shares are frequently traded, volume-weighted average market price (VWAMP) of last 60 trading days immediately preceding earlier of the date agreement for primary acquisition and the date on which the intention or the decision to make the primary acquisition is announced in the public domain,
• Highest price paid or payable for any acquisition by the acquirer or PAC, between:
  • earlier of the date agreement for primary acquisition and the date on which the intention or the decision to make the primary acquisition is announced in the public domain, and
  • the date of the PA of the open offer for shares of the target company.
• In case the offer price is incapable of being determined using above parameters, the offer price shall be the fair price of shares of the target company determined by the acquirer and the manager to the open offer taking into account valuation parameters.
• Where the gap between
  • earlier of the date agreement for primary acquisition and the date on which the intention or the decision to make the primary acquisition is announced in the public domain, and
  • date of DPS
  • is more than 5 working days,
  • the offer price shall stand enhanced by 10% p.a. for such period.

Other points regarding offer price:

• In case of deemed direct acquisition, where the proportionate net asset value, sales turnover, market price of target company is more than 15% of consolidated net asset value, sales turnover, enterprise value for the entity or business being acquired, the acquirer shall disclose, in the letter of offer, the per share value of the target company taken into account for the acquisition and methodology adopted for such computation.
• The conversion price of the outstanding convertible securities held by acquirer and PAC in target company will also be considered as a parameter for determining offer price.
• Any control premium or non-compete fees or price in any other form whatsoever, stated in the agreement for acquisition of shares or in any incidental, contemporaneous or collateral agreement shall also be considered as a parameter for determining offer price.
• If any acquisition is made by the acquirer or PAC during the offer period at a price higher than the offer price determined, the offer price shall be revised to such higher price. However, no such acquisition shall be made after the 3^rd working day prior to the commencement of the tendering period and until the expiry of the tendering period.
• Offer price may be adjusted for corporate actions where the record date falls prior to 3 working days before the commencement of the tendering period.
• If any acquisition is made by the acquirer or PAC within 26 weeks after the tendering period at a price higher than the offer price determined, the acquirer and PAC shall pay the difference to the accepting shareholders with 60 days of such acquisition. Except under:
  • another open offer
  • Delisting regulation
  • open market purchases on stock exchange
  • not being negotiated acquisition by way of bulk deals, block deals or in any other form.
• In case of conditional offer, the acquirer may indicate a lower price, not lower than the minimum offer price determined under this regulation, for acquiring all the acceptances received, in the event that the minimum acceptance is not received.
• In case of partly paid shares, the offer price will be adjusted towards calls-in-arrears and interest thereon, if any.
• The offer price for equity shares carrying differential voting rights shall be determined by the acquirer and the manager to the open offer and disclosed in the DPS and the letter of offer.
• In case any pricing parameter not being available or denominated in Indian rupees, the conversion of such amount shall be done at the rate prevailing on the date preceding the PA.
• The effect on the price of the listed equity shares, which are offered as consideration, due to material price movement and confirmation of reported event or information may be excluded as per Regulation 30(11) of LODR.

Process

Appointment of Manager to Open Offer

• Shall be appointed by acquirer
• Prior to public announcement
• Should not be an associate of the acquirer
• Should be a merchant banker registered with the SEBI

Public Announcement (PA) Timeline

General Rule – on the date of agreeing to acquire shares or voting rights in, or control over the target company.

Exceptions –

• in the case of market purchases- prior to placement of the purchase order with the stockbroker
• takeover pursuant to conversion of convertible securities without a fixed date of conversion – same day as the date of exercise of the option to convert
• takeover pursuant to conversion of convertible securities with a fixed date of conversion – 2^nd working day preceding the scheduled date of conversion
• takeover pursuant to disinvestment- same day of execution of the agreement for acquisition of shares/ VR or control of target company
• indirect acquisition- within 4 working days from the earlier of,
  • the date on which the primary acquisition is contracted
  • the date on which the intention or the decision to make the primary acquisition is announced in the public domain
• deemed direct acquisition – on the date of the earlier of,
  • the date on which the primary acquisition is contracted
  • the date on which the intention or the decision to make the primary acquisition is announced in the public domain
• pursuant to preferential issue- on the date of Board Meeting of the target company authorizing preferential allotment
• pursuant to buy back- within 19 day from the date of closure of the buy-back offer by the target company
• Other cases where date of acquisition is not in control of acquirer- within 2 working days of date of receipt of intimation of having acquisition

Publication and Contents of PA

• All stock exchanges where shares of target company are listed
• To SEBI and target company within 1 day of PA
• The PA shall not omit any relevant information or contain any misleading information.
• The PA shall contain details as below:
  • Name and identity of acquirer, PAC, selling shareholder, if any
  • nature of the proposed acquisition
  • the consideration for the proposed acquisition
  • the offer price, and mode of payment of consideration
  • offer size, and conditions as to minimum level of acceptances, if any
  • intention of the acquirer to delist the target company or retain the listing

Escrow account

• Deposit in escrow account to be made atleast 2 working days prior to the Detailed Public Statement (DPS) as security for performance of his obligations pursuant to open offer.
• Forms of deposit-
  • Cash deposited in scheduled commercial bank (can interest bearing account)
  • Unconditional and irrevocable Bank Guarantee in favour of the manager to the open offer by any scheduled commercial bank and shall be valid for additional period of 30 days after completion of payment of consideration. However, atleast 1% of total consideration should be in cash.
  • Frequently traded and freely transferable shares or other securities (except in case of indirect acquisition)
• Amount to be deposited:
  • For consideration upto 500 cr- Deposit 25% of consideration in escrow
  • Balance – Deposit additional 10% of consideration above 500 cr
• In case of offer conditional upon minimum level of acceptance, deposit, whichever is higher-
  • 100% of minimum level of acceptance, or
  • 50% of total consideration
• In case of indirect acquisition, 100% of purchase consideration to be deposited.
• In case of an upward revision of the offer price or of the offer size, the additional amount shall be brought into the escrow account prior to effecting such revision.
• Escrow created in any form, cash BG or securities, shall be under the control of the manager to open offer.
• Release of cash deposited in escrow:
  • On withdrawal of offer, to acquirer
  • Only post confirmation from SEBI, in case of withdrawal pursuant to condition stipulated in the agreement for acquisition not being met for reasons outside control of acquirer
  • for transfer of an amount not exceeding 90% of the escrow account, to the special escrow account
  • balance 10% to acquirer post expiry of 30 days from the completion of payment of consideration to shareholders
  • where open offer is for exchange of shares or other securities, 100% of amount to acquirer upon the expiry of 30 days from the completion of payment of consideration to shareholders
  • in the event of forfeiture for non-fulfilment of any of the obligations under these regulations, to manager to issue to distribute in following manner
    • deduction of expenses, if any, of registered market intermediaries associated with the open offer
    • 1/3^rd of the escrow account to the target company
    • 1/3^rd to the Investor Protection and Education Fund (IPEF)
    • 1/3^rd to be distributed on pro-rata among the shareholders who have accepted the open offer

 Detailed Public Statement (DPS)

• 5 working days from public announcement
• Shall be published in
  • 1 English newspaper
  • 1 Hindi newspaper
  • 1 Regional newspaper in wide circulation at the place of registered office of TC
  • 1 Regional newspaper at the place of the stock exchange where the maximum volume of trading in the shares of the target company are recorded during the 60 trading days preceding the date of the public announcement
• Simultaneously, a copy of DPS shall be shared with
  • SEBI
  • Target Company
  • All Stock Exchanges where shares of TC are listed
• The DSP shall not omit any relevant information or contain any misleading information.

Filing of letter of offer with the Board

• Letter of Offer shall be filed with SEBI within 5 working days of DPS along with fees
  • Consideration upto 10 cr- Rs. 5 lac,
  • Consideration more than 10 cr and less than and equal to 1000 cr- 0.5 per cent of the offer size,
  • Consideration more than 1000 cr- Rs. 5 cr plus 0.125% of offer size exceeding 1000 cr.
• SEBI shall give its comments on the draft letter of offer within 15 working days of the receipt of the draft letter of offer or date of receipt of satisfactory reply to the clarification or additional information sought. If not, it shall be deemed that SEBI does not have comments to offer
• The manager to the open offer and the acquirer shall carry out such changes as may be specified by SEBI in the letter of offer before it is dispatched to the shareholders.
• Simultaneously share the draft letter of offer to target company & all stock exchanges where its shares are listed.

Identified date & Sending Letter of Offer

• Letter of offer shall be dispatched to shareholders who are members of Target Company as on the identified date within 7 working days of receipt of comments from the SEBI or where no comments are offered by the Board, within 7 working days expiry of period for providing such comments.
• Can also be dispatched through electronic mode.
• The acquirer shall send the letter of offer to the custodian of shares underlying depository receipts, if any, of the target company.

Revision of open offer

• The acquirer may revise offer price or offer size upward any time before 1 working day of opening of tendering period.
• Post such revision, the acquirer shall:
  • Increase escrow amount
  • Make announcement in respect of such revisions in all the newspapers in which the detailed public statement was made
  • Inform SEBI, target company and all stock exchanges
• Additional fees in case of revision of offer size or price shall be paid within 5 working days from the date of such revision to SEBI.
• Additional amount in escrow account as per revised price

Other obligations of Acquirer

• The acquirer shall disclose all shares acquired during offer period in target company within 24 hrs of such acquisition to target company and all stock exchanges where its shares are listed.
• The acquirer and PAC shall not acquire or sell shares of target company from 3 working days prior to commencement of tendering period till the end of tendering period.
• The acquirer shall be responsible to pursue all statutory approvals required by the acquirer in order to complete the open offer without any default, neglect or delay.
• SEBI may grant extension of time for making payments to shareholders, where non-receipt of approvals was not attributable to any wilful default, failure or neglect on the part of the acquirer. Such extension shall be subject to payment of interest of 10% p.a. by acquirer on the delayed period. SEBI may waive such interest.
• The acquirer shall have the option to make payment to shareholders in respect of whom no statutory approvals are required in order to complete the open offer.

Advertisement

• Acquirer shall issue advertisement 1 working day prior to commencement of tendering period
• It shall contain the schedule of activities for the open offer, the status of statutory and other approvals, unfulfilled conditions, if any, and their status, the procedure for tendering acceptances, etc.
• Such advertisement shall be published in the newspapers in which the detailed public statement was made.
• Simultaneously send to SEBI, target company and all stock exchanges

Tendering period

• Shall start not later than 12 working days from date of receipt of comments from the SEBI on Letter of Offer.
• Shall remain open for 10 working days.
• Shares once tendered in acceptance of the open offer shall not be withdraw during the tendering period.

Payment of consideration

• The acquirer shall complete payment of consideration, in cash or securities, within 10 working days of closure of tendering period.
• The consideration payable shall be calculated as at the offer price, assuming full acceptance of the open offer.
• In case of differential pricing, consideration shall be computed at the highest offer price, irrespective of manner of payment of the consideration.

Special Escrow Account

• For cash consideration, a special escrow account to be opened with banker to an issue registered with the SEBI.
• Funds from escrow account being 90% of the amount available in escrow in cash along with balance funds aggregating to 100% of the consideration payable to be deposited in the special escrow account.
• The special escrow account shall be operated by manager to open offer on behalf of acquirer.
• Unclaimed balances lying in special escrow account at the end of 7 years from the date of deposit, shall be transferred to the Investor Protection and Education Fund (IPEF).

Post offer advertisement

• The acquirer shall give a post offer advertisement within 5 working days from close of open offer i.e. post payment of consideration is made.
• It shall contain details like aggregate number of shares tendered, accepted, date of payment of consideration, etc.
• The said ad shall be published in all newspapers where DPS was published.
• The same shall also be sent to SEBI, target company and stock exchange.

Modes of payment

• The offer price may be paid:
  • Cash
  • issue, exchange or transfer of listed shares of acquirer or PAC
  • issue, exchange or transfer of listed secured debentures of acquirer or PAC with investment grade rating
  • issue, exchange or transfer of convertible debt securities
  • Any combination of above
• Where the shares acquired or agreed to be acquired by acquirer and PAC during 52 weeks preceding PA constitute more than 10% of voting rights in target company and has been paid in cash, then option shall be given to the shareholders to require payment of the offer price in cash. Where no option is exercised, then the default mode of payment in this case will be in cash.
• The cash component of offer price shall not be reduced even when the mode of payment is changed due to revision in offer price.
• The different prices under different modes of payment mentioned above shall be disclosed in DPS and letter of offer, subject to minimum offer price under Reg 8.
• In case of shares to be issued, exchanged, transferred towards payment of consideration, such shares shall be:
  • Listed for atleast 2 years preceding PA
  • frequently traded at the time of the PA
  • issuer of such class of shares has redressed atleast 95% of investor complaints by the end of the calendar quarter immediately preceding the calendar month in which the PA is made
  • the issuer of such class of shares is in compliance with the listing regulations for a period of atleast 2 years immediately preceding the PA or else SEBI will require the consideration to be paid in cash
  • the impact of auditors’ qualifications, if any, shall not exceed 5% of the Net Profit/ Loss after tax of the issuer in 3 immediately preceding financial years
  • SEBI has not directed the issuer to not access the capital market or to issue fresh shares
• The effect on the price of the listed equity shares, which are offered as consideration, due to material price movement and confirmation of reported event or information may be excluded as per Regulation 30(11) of LODR.
• Valuation of listed securities offered as consideration,
  • the average of the weekly high and low of their closing prices – during the 6 months preceding the relevant date.
  • the average of the weekly high and low of their closing prices – during the 2 weeks preceding the relevant date.
  • the volume-weighted average market price for a period of 60 trading days preceding the date of the public announcement on the stock exchange with the maximum trading volume in last 6 months prior to relevant date.Where relevant date is 30th day prior which shareholder meeting is held for approving proposed issue of shares.
• The ratio of exchange of shares shall be duly certified by an independent merchant banker (other than the manager to the open offer) or an independent chartered accountant having a minimum experience of ten years.

Completion of acquisition

• The acquirer shall complete the acquisition of shares or control on target company only after the expiry of the offer period.
• In case of a delisting offer made under regulation 5A, only after making the public announcement regarding the success of the delisting proposal under Delisting Regulations.
• The parties may after the expiry of 21 working days from the date of DPS, act upon the agreement and the acquirer may complete the acquisition of shares or voting rights in, or control over the target company as contemplated, subject the acquirer depositing an amount equal to 100% consideration payable under the open offer assuming full acceptance of the open offer.
• However, shares can be acquired through preferential issue or through the stock exchange settlement process, provided,
  • such shares being kept in an escrow account
  • no voting rights on such shares is exercised by the acquirer
  • such shares may be transferred to acquirer’s account, if 100% consideration payable under the open offer is deposited in escrow account
• The acquirer shall complete the acquisitions contracted under any agreement attracting the obligation to make an open offer within 26 weeks from the expiry of the offer period. SEBI may grant an extension of time by such period as it may deem fit in the interests of investors.

Withdrawal of open offer

• Reasons for withdrawal
  • Statutory approvals, disclosed in LOO/ DPS, denied.
  • The acquirer, being a natural person, dies.
  • Condition stipulated in the agreement for acquisition not met for reasons outside control of acquirer.
  • SEBI approves withdrawal.
• Post withdrawal, manage to issue shall within 2 working days, make announcement in same newspapers and inform SEBI, target company and stock exchange.

Obligations

Obligation acquirer

• Firm arrangement of finance
• Not alienate any material asset for 2 years after open offer unless-
  • Intention disclosed in DPS
  • By Special Resolution of shareholders
• Contents true fair and not misleading
• Acquirer and PAC to not sell shares during open offer period
• Jointly and severally responsible to honour obligation

Obligation Manager to Open Offer

• Ensure that Acquirer implements open offer and has firm arrangement
• Contents are true
• Provide Due Diligence certificate
• Post offer report to SEBI with 15 working days from tendering period
• All intermediaries are registered with SEBI
• Exercise due diligence and professional care
• Not deal on own account during offer period

Obligation Target Company

• Carry on business in ordinary course during open offer
• TC shall not without shareholder approval,
  • Shall not alienate any material asset
  • Make any material borrowing
  • Issue or allot any authorized but unissued shares except on conversion of convertible securities, on public issue where RHP is already filed with ROC or right issue where record date is already announced
  • Buyback or change in capital structure
  • Enter, amend, terminate any material contracts
  • Accelerate any contingent vesting of rights
• From 3 working days before commencement of tendering period till the expiry of tendering period, the TC shall not fix any record date for corporate action.
• TC shall provide benpos within 2 working days of Identified date to acquirer
• TC shall constitute committee of Independent Directors, to provide reasoned recommendation on open offer and shall publish the same.
• The committee,
  • May seek professional advice
  • Shall disclose voting pattern
• Such recommendation shall be published in same newspapers as the PA atleast 2 working days before commencement of tendering period and share copy to SEBI, all stock exchanges and manager to issue
• Facilitate acquirer in verification of shares tendered in open offer
• Shall provide information and cooperation to acquirer
• Register, without any delay, the transfer of shares acquired by acquirer, upon fulfilment of conditions pursuant to takeover code.

Appointment of Directors in Target Company during open offer

• No representative of acquirer or PAC shall be appointed to board of TC except where 100% of consideration is deposited in escrow then such appointment can be done after 15 working days from DPS.
• Where the open offer is made with specific condition then such appoint can be done only if,
  • Such condition is waived or attained, and
  • Deposit of 100% cash in escrow
• Where open offer is made with minimum level of acceptance, no such appointment shall be made.
• Where there is any competing offer pending, then no such appointment shall be made. Except in case of death or incapacitation of any director, vacancy can be filled with shareholder resolution through postal ballot.
• Where acquirer’s represented is already appointed on board, such director shall not participate in deliberations and voting in relation to open offer.

Disclosure

Disclosure of acquisition and disposal

• Any acquirer together with PAC,
  • holding 5% or more of shares or voting rights in target company,
  • shall disclose aggregate shareholding and voting rights in target company
  • to stock exchange and target company,
  • within 2 working days of acquisition or allotment.
• Any person together with PAC
  • Already holding five per cent or more of the shares or voting rights in a target company,
  • shall disclose the number of shares or voting rights held and
  • change (whether increase or decrease) exceeding 2% of shareholding or voting rights in target company,
  • to stock exchange and target company,
  • within 2 working days of such acquisition, allotment or disposal.
• Except Schedule Commercial Bank, HFC, systemically important NBFC acting in capacity of pledgee,
  • in case of shares taken by way of encumbrance shall be treated as an acquisition
  • hares given upon release of encumbrance shall be treated as a disposal
  • same to be disclosed accordingly
• 5% means 10% and 2% means 5% in case of entities listed on Innovators Growth Platform.
• The acquisition and holding of any convertible security shall also be regarded as shares and disclosed accordingly.

Disclosure of encumbered shares

• Promoter of TC to disclose,
  • details of encumbrance on shares of such Target Company created by them along with PAC
  • Invocation or release of encumbrance
  • Within 7 working days of such creation, invocation, release
  • To every SE and such TC
• Declare yearly to all SE and TC within 7 working days from end of financial year that no other encumbrance is made other than already disclosed.

Conclusion

This comprehensive regulation aims at transparency, fairness and equal treatment for all shareholders during takeover. Further the code ensures that the investors are informed and are given an exit opportunity during major ownership changes.

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Disclaimer

The information provided is for educational purposes and should not be considered as professional advice. The author shall not be liable for any direct, indirect, special or incidental damage resulting from, arising out of or in connection with the use of the information.