SEBI (Substantial Acquisition of Shares and Takeovers) Regulation, 2011: Analysis

1. INTRODUCTION

The SEBI Takeover code prescribes a systematic framework for acquisition of stake in listed companies. By these laws the regulatory system ensures that the interests of the shareholders of listed companies are not compromised in case of an acquisition or takeover.
It also protects the interests of minority shareholders, which is also a fundamental attribute of corporate governance principle.

2. IMPORTANT DEFINITIONS

Acquirer

“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.

Frequently traded shares

Frequently traded shares means shares of a target company, in which the traded turnover on any stock exchange during the twelve calendar months preceding the calendar month in which the public announcement is made, is at least ten percent of the total number of shares of such class of the target company. However, where the share capital of a particular class of shares of the target company is not identical throughout such period, the weighted average number of total shares of such class of the target company shall represent the total number of shares.

Target company

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.

3. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011

These regulations shall apply to direct and indirect acquisition of shares or voting rights, in or control over Target Company. However, these regulations shall not apply to direct and indirect acquisition of shares or voting rights in, or control over a company listed without making a public issue, on the Innovators Growth Platform of a recognized stock exchange.

These regulations require the acquirer to give an open offer to the shareholders of the target company so as to give them an opportunity to sell their shares.

A. Mandatory Open Offer

TRIGGER POINT FOR MAKING AN OPEN OFFER BY AN ACQUIRER

An acquirer, along with Persons acting in concert (PAC), if any, who intends to acquire shares which along with his existing shareholding would entitle him to exercise 25% or more voting rights, can acquire such additional shares only after making a Public Announcement (PA) to acquire a minimum twenty-six percent shares of the Target Company from the shareholders through an Open Offer.

A person already holds 25% or more shares in target company, intends to acquire more than 5% shares in the target company in any financial year, also has to give an open offer.

CREEPING ACQUISITION

(Meaning any Acquirer who holds shares between 25%-75%, together with Person Acting in Concert can acquire further 5% shares as creeping acquisition without giving an Open Offer to the shareholders of the Target Company up to a maximum of 75%).

What is the basis of computation of the creeping acquisitions limit under Takeover Regulations 2011?

For computing acquisition limits for creeping acquisition specified under regulation 3(2), gross acquisitions/purchases shall be taken into account, ignoring any intermittent fall in shareholding or voting rights whether owing to disposal of shares or dilution of voting rights on account of fresh issue of shares by the target company.

B. Voluntary Open Offer

Voluntary Open Offer means the Open Offer given by the Acquirer voluntarily without triggering the mandatory Open Offer obligations as envisaged under the regulations.

Conditions for voluntary open offer:

Eligibility – Prior holding of at least 25% shares

To be eligible for making a Voluntary Open Offer, the regulations mandate the prior holding of at least 25% stake in the Target Company by the Acquirer along with the Person Acting in Concert.

Further for the purpose of this regulation, any reference to “25%” in case of entity listed on Innovators Growth Platform shall be read as “49%”.

Prohibition on the acquisition of shares during the Offer Period

SEBI Takeover Regulations, 2011 prohibits the acquirer who has made a Voluntary Open Offer from further acquiring the shares during the Offer Period otherwise than under the Open Offer.

Restriction of the acquisition of shares post completion of Voluntary Open Offer

An acquirer and Person Acting in Concerts who have made a Voluntary Open Offer shall not be entitled to further acquire shares for a period of 6 months after completion of the Open Offer except pursuant to:

(a) To another Voluntary Open Offer.

(b) To Competing Open Offer to the Open Offer made by any other person for acquiring shares of the Target Company.

Offer size

The Voluntary Open Offer shall be made for the acquisition of at least ten percent (10%) of the voting rights in the Target Company and shall not exceed such number of shares as would result in the post-acquisition holding of the acquirer and PACs with him exceeding the maximum permissible non-public shareholding applicable to such Target Company.

4. Other important concepts under Takeover Code:

1. CONDITIONAL OFFER

An offer in which the acquirer has stipulated a minimum level of acceptance is known as a conditional offer.
Minimum level of acceptance implies minimum number of shares which the acquirer desires under the said conditional offer.
In a conditional offer, if the minimum level of acceptance is not reached, the acquirer shall not acquire any shares in the target company under the open offer or the Share Purchase Agreement which has triggered the open offer.

III. Publication of Public Announcement and Detailed Public Statement

2. Escrow Account

Not later than two working days prior to the date of the detailed public statement of the open offer for acquiring shares, the acquirer shall create an escrow account towards security for performance of his obligations under these regulations, and deposit in escrow account such aggregate amount as per the following scale:

5. Procedure under Takeover code

SUBMISSION OF DRAFT LETTER OF OFFER

The Acquirer shall submit a draft letter of offer to SEBI within 5 working days from the date of detailed public announcement along with a non-refundable fee as applicable.
Simultaneously, a copy of the draft letter of offer shall be sent to the Target Company at its registered office and to all the Stock Exchanges where the shares of the Company are listed.

DISPATCH OF LETTER OF OFFER

The Acquirer shall ensure that the letter of offer is dispatched to the shareholders whose names appear on the register of members of the Target Company as of the identified date, not later than 7 working days from the date of receipt of communication of comments from SEBI or where no comments are offered by SEBI, within 7 working days from the expiry of 15 working days from the date of receipt of draft letter of offer by SEBI.

OPENING OF THE OFFER

Shall remain open for 10 working days.

COMPLETION OF REQUIREMENTS

Within 10 working days from the last date of the tendering period, the acquirer shall complete all requirements as prescribed under these regulations and other applicable law relating to the Open Offer including payment of consideration to the shareholders who have accepted the open offer.

6. Disclosures under Takeover code

EVENT BASED DISCLOSURES

CONTINUAL DISCLOSURES

DISCLOSURES OF PLEDGED/ENCUMBERED SHARES