What is a Takeover?
A takeover occurs when one company, known as the acquirer makes a successful bid to assume control of or acquire another company, also known as the target. A takeover can be done by purchasing majority share in target firm or commonly through the process of mergers and acquisitions.[1]
Evolution of the Takeover Code
The concept of takeover had emerged in some countries in the late 19th century. Countries such as the US and the UK were among the first countries where mergers and acquisitions had started. The code was principally designed to ensure that shareholders in a company are treated fairly and are not denied the opportunity to decide on the merits of a takeover,[2] thereby maintaining stability in the securities market. The primary objective also was to ensure that the shareholders of a company were offered an exit opportunity at time of a substantial acquisition or change in control of a listed company.
The concept of takeover in India emerged in the late 20th century when Lord Swaraj Paul had made efforts towards a hostile takeover of Escorts Ltd. and DCM Ltd.[3] which was unsuccessful. However, with the liberalization of the Indian economy in 1992, the need for Takeover regulation was highlighted even more. Therefore, SEBI enacted the SEBI (Substantial Acquisition of Share and Takeover) Regulations, 1994 to regulate takeovers in India. This was further amended in 1997, when SEBI enacted SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997. This was further amended, when the Takeover Regulations Advisory Committee (TRAC) was formed under the chairmanship of C. Achuthan. The Committee examined and reviewed the existing legislation and recommended some amendments on multiple fronts and thereafter submitted the TRAC report in 2010.[4] Thereafter, after considering the Report from the Committee the SEBI enacted the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011.
Applicability of the Takeover Code
The Code is applicable on
1. Listed Companies
2. Any person controlling the Listed Company
3. Any person holding substantial stake in the Listed Company
The following research article will look into the following obligations that have been redefined under the new takeover code such as the open offer obligations, mandatory open offer, competing offers, disclosure obligations and other obligations.
Open Offer Obligations
The most crucial obligation under the Code is the requirement to make an ‘open offer’ to the shareholders. The present code has redefined the threshold under the Code whereby the initial trigger is at the acquisition of 25% or more of the voting rights of the Target Company[5] or acquisition of additional shares or voting rights of 5% enlisting the acquirer and the PAC already holding 25% or more of the voting rights but less than 75% of the voting rights in any financial year[6] or acquisition or control over the Target company,[7] or the indirect acquisition of shares or voting rights or the control over other entity that enable the acquirer to exercise of such percentage of voting or control over the target company,[8] or any revision made by the acquirer towards any voluntary offer within fifteen working days from the public announcement of the competing offer.[9]
Minimum Open Offer Size
The minimum open offer size shall be 26% of the total shares of the target company as of the 10th working day from the closure of the tendering period. In case of a voluntary open offer the post acquisition holding shall not exceed the maximum permissible non-public shareholding.[10]
Open Offer Process
Chapter III of the Code deals with the process of open offer. The process comprises of several stages which is discussed herein:
1. A public announcement for acquiring shares of the target company has to be made through SEBI registered merchant banker. The public announcement has to be sent to all stock exchanges where the target company is listed. (Regulation 12)
2. Thereafter, the timing under which such public announcement be made, has been tabulated hereunder.[11] (Regulation 13)
| Regulations | Particulars | Time of making PA |
| Reg 13(1) | Agreement to acquire Shares or Voting Rights or Control Over The Target Company | On the same day of entering into agreement to acquire share, voting rights or control over the Target Company. |
| Reg 13(2)(a) | Market Purchase of shares | Prior to the placement of purchase order with the stock broker. |
| Reg 13(2)(b) | Acquisition pursuant to conversion of Convertible Securities without a fixed date of conversion or upon conversion of depository receipts for the underlying shares | On the same day when the option to convert such securities into shares is exercised.
|
| Reg 13(2)(c) | Acquiring shares or voting rights or control pursuant to conversion of Convertible Securities with a fixed date of conversion | On the second working day preceding the scheduled date of conversion of such securities into shares. |
| Reg 13(2)(d) | In case of disinvestment | On the date of execution of agreement for acquisition of shares or voting rights or control over the Target Company. |
| Reg 13(2)(e) | In case of Indirect Acquisition where the parameters mentioned in Regulation 5(2) are not met | Within four working days of the following dates, whichever is earlier:
a. When the primary acquisition is contracted; And b. Date on which the intention or decision to make the primary acquisition is announced in the public domain. |
| Reg 13(2)(f) | In case of Indirect Acquisition where the parameters mentioned in Regulation 5(2) are met | On the same day of the following dates, whichever is earlier:
a. When the primary acquisition is contracted; And b. Date on which the intention or decision to make the primary acquisition is announced in the public domain. |
| Reg 13(2)(g) | Acquisition of shares, voting rights or control over the Target Company pursuant to Preferential Issue | On the date when the Special Resolution is passed for allotment of shares under Section 81(1A) of Companies Act 1956. |
| Reg 13(2)(h) | Increase in voting rights pursuant to a buy-back not qualifying for exemption under Regulation 10 | Not later than 90th day from the date of increase in voting rights. |
| Reg 13(2)(i) | Acquisition of shares, voting rights or control over the Target Company where the such acquisition is beyond the control of acquirer | Not later than two working days from the date of receipt of such intimation. |
| Reg 13(3) | Voluntary Offer | On the same day when the Acquirer decides to make Voluntary Offer |
3. A Direct Public Statement has to be published by the acquirer within 5 working days from the public announcement. The requirements relating to publication of PA and Detailed Public Announcement is tabulated hereunder.[12] (Regulation 14)
| Regulation | Particulars | To Whom | Time |
| Reg 14(1) | Public Announcement | All the stock exchanges on which the shares of the target company are listed.
The stock exchanges shall forthwith disseminate such information to the public. |
On the same day |
| Reg 14(2) | Public Announcement | Board and to the target company at its registered office
|
One working day of the date of the public announcement |
| Reg 14(3) | Detailed Public Statement | Publication in the following newspaper:
(a) One Hindi national language daily with wide circulation (b) One English national language daily with wide circulation (c) One regional national language daily with wide circulation language at a place where registered office of the company is situated. (d) One regional language daily with wide circulation at the place of the stock exchange where the maximum volume of trading in the shares of the target company is recorded during the sixty trading days preceding the date of the public announcement. |
5 working days from the date of Public Announcement. |
| Reg 14(4) | Detailed Public Statement | A copy of ‘Detailed Public Statement shall be sent to followings:
(a) Board (b) All the stock exchanges in which the shares of the target company are listed (c) The target company at its registered office |
4. Thereafter, the acquirer has to file a draft Letter of Offer with SEBI, on completion of the process of PA and DPS and once it is approved by SEBI it has to be given to the shareholders. (Regulation 16)
5. An Escrow Account has to be created within 2 working days prior to the date of DPS. (Regulation 17)
6. Competing offer can be made within 15 working days from the date of the publishing the DPS, by the acquirer who made the first Public Announcement. (Regulation 20)
7. The acquisition of shares and voting rights of the target company shall not be completed by the acquirer until the expiry of the offer period. (Regulation 22)
Acquisition of control
As per Regulation 4 of the Code[14] the acquirer whether he acquires a share directly or indirectly, the control over such target company cannot be acquired unless a public announcement is made about the open offer.[15] The acquisition of shares or voting rights or control over any company would allow any person and PAC to exercise or direct the exercise of such percentage of voting rights or control over a target company,[16] the acquisition of which would trigger open offer obligation, shall be considered as an indirect acquisition of shares or voting rights or control over the target company. The Acquisition of control includes a) the right to appoint majority of the directors; b) the right to control the management; c) the right to control policy decisions, directly or indirectly by virtue of shareholding or management rights or agreements.[17]
Delisting Offer
Regulation 5A of the Code[18] deals with delisting offer through Takeover in some instances. The acquirer has to disclose his intent to delist a Target Company in a Detailed Public Statement within two working days.
Voluntary Offer
Regulation 6 of the Takeover Code permits an acquirer, who together with the PACs holds at least 25% or more of the voting rights in a target company but less than the maximum permissible non-public shareholding, to make public announcement of an open offer for acquiring shares of the target company. A voluntary offer for at least such number of shares has to be made by the acquirer to exercise an additional 10% of the total shares of the target company.[19] The acquirer during the voluntary offer period shall not be entitled to acquire any shares otherwise than under the open offer.[20] A voluntary offer cannot be made where an acquirer or PAC has acquired shares of the target company in the preceding 52 weeks without attracting the obligation to make an open offer.[21] The acquirer and the PAC who made the voluntary offer will not be entitled to acquire any shares of the target company for a period of 6 months after completion of the open offer except pursuant to another voluntary open offer or making a competing offer upon any other person making an open offer or bonus issue or stock splits.[22] An important fact to note here is that this regulation may not be applicable to persons holding less than 25% shares but other procedural compliances and price calculation will be applicable for shareholders holding less than 25%.
Mandatory Offer
Under Regulation 3(2) of the Code[23] a voluntary offer changes into a mandatory offer, when during the voluntary offer a competing offer is made and the acquirer thereby is entitled to increase the number of shares for which the open offer was originally made.[24] Another mandatory requirement is that the offer size must then be 26% of the shareholding of the target company.
Conditional Offer
Under Regulation 19,[25] of the Code an open offer can be made conditional and if the acquirer fails to fulfil his obligations wherein the desired level of acceptance is not met he shall not acquire any shares and further when the offer is made conditional then the acquirer and the PACs cannot acquire shares during the target period.
Competing offer
The Code permits any person other than the acquirer to make an offer to acquire shares of the company after the public announcement is made by such person. It allows 15 working days from the date of the detailed public announcement under the first open offer.[26]
There are certain pre-requisites for making a competing offer. They are
1. A subsisting public announcement of an open offer by an acquirer has to be made.[27]
2. The competing offer has to be made within 15 working days from the announcement of the original open offer.[28]
3. The Code allows any person other than the original acquirer to make a competing offer and even PACs of the acquirer can make a competing offer and it will be consolidated as a single offer with the original acquirer.[29]
4. The competing offer shall be the number of shares taken together with the shares held by the acquirer and the PACs and shall be equal to the aggregate holding of the acquirer who made the initial public announcement.[30]
5. A competing offer shall not constitute a voluntary offer and the condition applicable under voluntary offer shall not be applicable to a competing offer.[31]
6. There is no restriction on the number of competing offers provided.
7. A competing offer can be conditional; however it applies only if the original open offer is conditional.[32]
8. The subsisting mandatory offer size can be increased within 3 working days.[33]
9. The subsisting voluntary offer size can be increased within 15 working days.[34]
10. With respect to offer price only upward revisions are permitted and up to 3 working days.[35]
Other Obligations
It is enshrined under Chapter IV of the Code whereby, the target company, the acquirer and the intermediaries are burdened with other obligations as well under the Takeover Code. These obligations include:
- Directors of the target company[36]
1. The obligations include that no person can be appointed as director or additional director representing the acquirer or any person acting in concert with him during the offer period unless the acquirer has deposited one hundred percent consideration in cash in the escrow account.
2. In case of a conditional and competing offer the above obligations cannot be met even if cash amount has been paid in the escrow account. However, in during the pendency of a competing offer if there is a death of the director, then the vacancy may be filled by any person subject to approval from the shareholders.
3. The director representing the acquirer in the board of the target company shall not participate in any deliberations or any voting.
- Obligations of the acquirer[37]
1. The acquirer must ensure that prior to making the public announcement of an open offer he must have a firm financial arrangement.
2. In case the acquirer has failed to declare in his detailed public statement an intention to alienate any material assets of the target company by way of sale or lease, then the acquirer shall be debarred from such alienation for a period of two years after the offer period and such sale of assets during the two year period can only be permitted by the a special resolution passed by the shareholders.
3. The acquirer has to assure that the contents of the public announcement shared by him are true, fair and adequate.
4. The acquirer and PACs must ensure that they are not selling the shares of the target company during the offer period and must be jointly responsible for fulfilment of applicable obligations under these regulations.
- Obligations of the target company[38]
1. The Board of Directors must ensure that the business of the target company is conducted in the ordinary course during the offer period.
2. The Board of Directors without the approval of share-holders shall not alienate with any material assets of the company by sale, lease, etc., effect any borrowings which is outside the course of ordinary business, issue or allot unissued shares, effect any change in the capital structure of the target company or implement any buy back, enter or terminate any contract with any related party and accelerate the vesting of a right to any person whom the company may have an obligation.
3. The target company must vote in a consistent manner with the special resolution.
4. The target company must furnish the acquirer a list of shareholders within two working days from the identified date.
5. The board of directors must form a committee of independent directors upon the receipt of a detailed public statement to provide reasoned recommendations on such open offer. The recommendations must be written and published within two working days of the tendering period and a copy must be sent to the Board, all the stock exchanges and to the managers.
6. The board of directors shall make available all information to all acquirers making a competing offer.
7. The board of directors upon fulfilment of the conditions must without delay register the transfer of shares in physical form.
- Obligations of the manager to open offer[39]
1. The manager to the open offer has to ensure that the acquirer before making a public announcement is able to implement the open offer and that firm arrangements of payment of funds have been made. It is also the responsibility of the manager to ensure that all the information published under the PA and the DPS are true, fair and based on reliable sources.
2. The manager shall exercise diligence, care and professional judgement to ensure compliance to regulations and has to furnish the board with a due diligence certificate and ensure that market intermediaries engaged for the purpose of the open offer are registered with the Board.
3. The manager shall not deal with his own account in the shares of the target company during the offer period.
4. The manager has to file a report with the board within 15 days from the expiry of the tendering period.
- Disclosure Obligations
Chapter V of the Takeover Code deals with disclosure of Shareholding and Control. The following persons under Regulation 28(1)[40] of the Code can make disclosures: a) Any Acquirer of the Target Company; b) Promoter of the Target Company; c) Persons Acting in Concert of the Target Company.
The purpose of these disclosures is to bring about transparency and assist the Regulator to effectively monitor the transactions in the market.[41] There are 3 types of disclosure as per the Code:
1. Disclosure of Acquisition and Disposal (Regulation 29)
2. Continual Disclosures (Regulation 30)
3. Disclosure of Encumbered Shares (Regulation 31)
| Regulation | Intimated to | Intimation to | Duration |
| Reg 29(1) | Acquirer along with PAC | Stock Exchanges & Target Companies | Within 2 working days |
| Reg 29(2) | Acquirer along with PAC already holds 5% or more | Stock Exchanges & Target Companies | Within 2 working days |
| Reg 30(1) | Person along with PAC already holds more than 25% | Stock Exchanges & Target Companies | Within 7 working days |
| Reg 30(2) | Promoter along with PAC shall disclose aggregate shareholding | Stock Exchanges & Target Companies | Within 7 working days |
| Reg 31(1) | Promoter and PAC shall disclose details of shares in such target company | Stock Exchanges & Target Companies | Within 7 working days |
| Reg 31(2) | Promoter shall disclose details of invocation of such encumbrance or release of such encumbrance of shares | Stock Exchanges & Target Companies | Within 7 working days |
The present code has done away with the obligation of disclosure at various stages which was present under the 1997 code and implemented disclosure on any person holding 5% or more of the shares and a mandatory disclosure for acquisition and disposal of shares of 2% or more. Additionally, it has been clarified by SEBI in various decisions that the holdings of the acquirer and the PAC had to be aggregated for the purposes of disclosure[42] and the same jurisprudence has been laid down by the Takeover code. Further, disclosure of convertible shares was made mandatory under the new Code whereas disclosures by Target companies were not prescribed under the new code. Lastly, the time limit has been reduced to 7 working days from the financial year under the new financial code.[43]
Conclusion
The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 2011 clearly lays down several obligations on all the key parties involved in the process of a takeover. The idea of the takeover code was to ensure that a proper legislation was in place and that the acquirer can acquire his shares in a fair manner by triggering the thresholds put in place while the shareholders are also given a fair exit opportunity. The objective of this Code was to protect the interests of the investors and ensure transparency through disclosures and allow fair and effective competition among acquirers desirous of taking over the target company.
This regulation was very important at the time because when India opened its markets to the world and there was no legislation or governing body to look into the acquisition of these companies. India is a growing economy and with its larger youth population, it has enormous potential to be a global leader, however at the same time it can be source of exploitation from several Multinational Corporations who would monopolise the markets and thereby “bleed these companies” and eventually take control of them. At the same time for a company which was on the market to be acquired by an individual person, could also be cheated by inflated prices of shares. The need for an organisation or a governing body was very essential at that time and hence SEBI was formed by the Government of India to protect both the acquirers and the Companies. It was essential that SEBI came up with legislations for the different aspects of the corporate world in order to regulate it. The takeover code was one such very important legislation.
Businesses in the modern world are keen towards growth and expansion and the most common way of doing it, is through mergers and acquisition. The Code ensures that proper obligations are laid down on both parties and that a fair and transparent takeover process is executed. The Code has been amended several times to keep up with the latest global developments and as per the latest amendments several key changes were made with the acquisition, triggers for making an open offer, the change of timing for disclosure obligations, etc.
Thus, in conclusion it can be said that while the present takeover code is at par with any foreign code governing mergers and acquisitions, the business model is always evolving from time to time and with the change in the global scenario the present Code may have to go through another round of updates sooner or later.
[1] Will Kentin, ‘Takeover’ (Investopedia, 10 August, 2020 ) <https://www.investopedia.com/terms/t/takeover.asp> accessed 2 October 2020
[2] The City Code on Takeovers and Mergers, 2(a)
[3] Jayanta Roy Chowdhury, ‘Paul hostile to Takeovers’ (The Telegraph Online, 20 April 2020) <https://www.telegraphindia.com/business/paul-hostile-to-takeovers/cid/1451551> accessed 5 October 2020
[4] C. Achuthan, ‘Report of the Takeover Regulations Advisory Committee’ (Securities and Exchange Board of India, 19 July 2010) <https://www.sebi.gov.in/reports/reports/jul-2010/report-of-the-takeover-regulations-advisory-committee_717.html> accessed 29 September 2020
[5] Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 2011, s 3(1); Re: Jet Airways Ltd (2014) SCC OnLine SEBI 283
[6] Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 2011, s 3(2)
[7] Id. at s 4
[8] Id. at s 5
[9] Id. at s 7(3)
[10] Yogesh Gupta, ‘SEBI Takeover Code-Detailed Analysis’ (Tax Guru, 28 November 2018) <https://taxguru.in/sebi/sebi-takeover-code.html> accessed 4 October 2020
[11]Yogesh Gupta, ‘SEBI Takeover Code-Detailed Analysis’ (Tax Guru, 28 November 2018) <https://taxguru.in/sebi/sebi-takeover-code.html > accessed 4 October 2020
[12] Yogesh Gupta, ‘SEBI Takeover Code-Detailed Analysis’ (Tax Guru, 28 November 2018) <https://taxguru.in/sebi/sebi-takeover-code.html> accessed 4 October 2020
[13] Shilpee Haldar, ‘SEBI SAST Regulations’ (Slideshare, 13 October 2014) <https://www.slideshare.net/ShilpeeHaldar/sast-regulations> accessed 5 October 2020
[14] Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 2011, s 4
[15] K. Sreenivasa Rao v. SEBI (2002) 112 Comp Case 327 AP
[16] M/S Clearwater Capital Partners Ltd. v. SEBI (2014) SCC OnLine SAT 23
[17] Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 2011, s 2(1)(e)
[18] Id. at 5A
[19] Id. at 7(2)
[20] Id. at 6(1)
[21] Id. at 6(1)
[22] Id. at 6(2)
[23] Id. at s 3(2)
[24] Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 2011, s 7(2)
[25] Id. at 19
[26] Id. at 20(1)
[27] Id. at 20(1)
[28] Id. at 20(1)
[29] Id. at 20(1)
[30] Id. at 20(2)
[31] Id. at 20(3)
[32] Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 2011, s (6)
[33] Id. at 18(4)
[34] Id. at 7(2)
[35] Id. at 20(9)
[36] Id. at 24
[37] Id. at 25
[38] Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 2011, s 26
[39] Id. at 27
[40] Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 2011, s 28(1)
[41] Milan Mahendra Securities Pvt. Ltd. v SEBI (2008) SCC OnLine SEBI 39
[42] Radheyshyam Tulsian v. SEBI (SAT Order dated April 26, 2006); Re Money Matters India Pvt. Ltd. Adjudication Order No. VSS/ AO-33/ 2008; Mega Resourses Ltd.v SEBI (2006) 66 SCL 270 SAT
[43] Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 2011, s 30(3)
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