SEBI (Acquisition of shares & Takeover)

Report and Summary (Discussion paper)

The Securities and Exchange Board of India (SEBI) on 3rd February, 2020 released a Discussion paper proposing the changes in SEBI (Substantial acquisition of shares & Takeover) Regulation, 2011 for availing various mode of acquisitions of the target company and proposing other changes for making the procedure more transparent and simpler for the acquisitions.

OBJECTIVES :

The three objectives were of the discussion paper are proposed as follows :

1) The completion of the acquisition of the target company through Block deals & Bulk deals during the Open Offer Period.

2) Depositing 100% Escrow in case of Open Offer made pursuant to Indirect acquisitions.

3) Payment of interest in case of delay in Open offers.

The term Open Offer means the offer that the Acquirer is required to provide, when they hit the trigger point or event, to the shareholders of the target company to provide them exit opportunity.

The term 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, as the case may be, 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payment of consideration to shareholders who have accepted the open offer is made, or the date on which open offer is withdrawn, as the case may be.

Detailed Discussion of the Objectives :

1) Completion of acquisitions through bulk and block deals during the open offer period

Background :

According to the regulation 22(1), till all the regulations are followed and complied with for the acquisitions, the acquirer is prohibited for completion of acquisition process which triggers the open offer obligations. Further, the observation in the regulation 22(1) & 22(2) together explains that the acquirer cannot complete the process of Acquisition that triggers to open offer till the expiry of the open offer period ; Provided that ,

1) The acquirer deposits 100% of the consideration payable in the Escrow Account; and

2) The acquirer can further proceeds into the transaction only after the expiry of 21 days from the detailed public statement given the newspaper.

NOTE : The applicability of regulation 22(1) applies only on acquisition of the target company pursuant to an agreement and is not applicable to the cases of transaction that involves direct market purchases. Therefore, the acquisitions of the company made through stock exchange is allowed to be completed in accordance with the normal settlement process that is applicable to the stock exchange mechanism.

Thereafter , new regulation 22(2A) was introduced march 26, 2013 stating that an acquirer can acquire shares and control over the target company through the process stated above and in the regulation 22(1) & 22(2) other than through bulk deals or block deals, Provided that;

1) Such shares acquired shall be kept separately in the Escrow account; and

2) Acquirer shall not exercise any voting rights upon the shares kept in the Escrow account provided if acquirer complies with requirements specified in regulation 22(2).

Observation of SEBI  :

1) In the board meeting, 2013 the completion of acquisition process was permitted through stock exchange and there was no adequate explanation and justification provided for the exclusion of the acquisition process through bulk deals & block deals.

2) Further, process of block deals & bulk deals provides more transparency as compared to the off market transactions.

Therefore, the SEBI board proposes that Block deals & bulk deals might be allowed for the completion of acquisition process.

Advantages of allowing Block deals & Bulk deals

1. The Acquirer will be able to directly acquire significant stake in the target company through stock exchanges instead of negotiating through the off-market route.

2. The Acquirer will be able to complete the acquisition quickly instead of placing small orders for a longer period of time, provided that the acquirer shall comply with the regulation 22(2A) (as stated above).

2)  Depositing 100% escrow in case of open offers made pursuant to Indirect acquisitions  

Background

According to regulation 17 the Escrow account shall be created within 2 days and requisite amount to be deposited prior to the date of  making Detailed Public Statement.

NOTE : The above stated regulation shall apply on all open offers triggering to Direct acquisitions and Indirect acquisitions.

In the case of open offer pursuant to the indirect acquisition where none of the parameters mentioned in regulation 5(2) are met, the public announcement shall be made within 4 working days prior to the date on which the primary acquisition was contracted ad from the date on which the intention or decision to make primary acquisition was made in the public domain. Further, the DPS shall be made within 5 working days after the completion of primary acquisition and when the acquirer acquires the indirect control the target company.

Observation of SEBI:

Regulation 17 follows the stricter compliances with respect to deposit of money in the escrow account. But, it is been observed that the requirement of depositing 100% consideration amount payable in the escrow account under an open offer in Indirect acquisition is not mandatory.

Therefore, TRAC interprets the different treatment between the process of Direct acquisitions and Indirect acquisitions while providing safeguards for shareholders.

Therefore, the SEBI proposes that 100% consideration amount must be deposited in the 2 working days prior to the intimation of detailed public statement in the case of public announcement of an open offer made under Indirect Acquisitions.

3) Payment of interest in case of delay in Open Offers

Background

In the case of Indirect acquisitions where the target company is not the significant part of the primary acquisition and when the open offer under such acquisition get triggered and where none of the parameters mentioned in regulations 5(2) are met then the public announcement shall be made within 4 working days from the date on which the primary acquisition was contracted and from the date on which the intention or decision to make primary acquisition was made in the public domain and the time period for making Detailed Public Statement is extended and to be made within 5 working days after the completion of primary acquisition. According to the regulation 8(12), the delay in providing intimation the Detailed Public Statement, the offer price under such delay shall be enhanced by 10% additionally to the amount.

Reasons for causing delay for announcement of Open Offers

There are several reasons for the occurrence of delay for making the open offer. For instances, Valuation disputes, Investor complaints, various stages of litigation (not limited to only these reasons).

A very significant question was introduced before Supreme Court in the matter of Clariant International Limited and another vs. SEBI that whether the payment of interest shall be made to original shareholders only (by original shareholders means shareholders who have purchased the shares before making the initial step, Public Announcement) or also to the shareholders who purchases shares between the period between the period of the process of acquisition. It was held that the all the shareholders are entitled to revised open offer with the addition of interest of 10% on the amount (irrespective of the date of purchase of shares).

Therefore, SEBI proposes that Indirect acquisitions and delay of statutory approval shall only be considered as the genuine reason for delay in the payment of open offer and that shall be compensated to all the shareholders (irrespective of the date of purchase of shares) with the additional 10% to the amount of open offer.   

For simpler understanding of the regulations and proposed changes, refer below table;

Sr. No. Current Provisions Proposed Changes Objectives for proposed changes My Remarks
1. Regulation 22(1) explains that the acquirer shall not complete the process of acquisition of shares or voting rights or control over the target company until the offer period expires.

Regulation 22(2) explains that if the acquirer deposits entire consideration to be payable under open offer then the parties can after 21 days of filing of DPS can complete the acquisition process.

Regulation 22(A) explains that the acquirer may acquire the shares of the company through preferential issue of normal settlement process  except through Block deals and Bulk deals provided

That the acquirer complies with the provision mentioned in regulation 22(2).

Regulation 22(1) shall remain same as per the current  regulation.

Regulation 22(2) shall remain same as per the current regulation.

Regulation 22(2A) may be changed by allowing an acquirer to acquire the shares through Block deals and Bulk deals and other things shall remain the same.  

It was observed that there were confusions regarding the ways of completion of acquisition process.

Whether Block deals and Bulk deals were allowed or not allowed.

The SEBI panel observed that allowing Block deals and Bulk deals for the completion of acquisition will be much easier and less procedural and quicker  instead of the current process where multiple  multiple transactions are involved through off-market.

Therefore, SEBI panel may allow the completion of process of acquisition through Block deals and Bulk deals.

2. Regulation 17 explains that the  Escrow account shall be created prior to the two working days to the date of DPS.

Regulation 13(2)(e) explains that in the case of indirect acquisition where none of the parameters are referred to regulation 5(2) then the public announcement shall be made within 4 working days prior to the intention to make primary acquisition and is announced in public domain. Further, the DPS shall be made within the 5 working days after the completion of primary acquisition and when the acquirer acquires the indirect control over the target company.

Regulation 17 shall may have a minor change that the provision of escrow explaining 100%  consideration payable shall be deposited into the account, may become mandatory including in the case of indirect acquisitions.

Regulation 13(2)(e) shall remain the same as per the current regulation.

The SEBI panel observes that there is a difference in the process of Direct acquisitions and Indirect acquisitions.

The SEBI panel has proposed such change to put an end to such a difference.

3. Regulation 8(12) explains that in the case of Indirect acquisitions, other than Indirect acquisitions referred in regulation 5(2), the offer price shall stand enhanced by 10% P.A  to the amount that was proposed to be paid under open offer for the period between the date on which the primary acquisition is contracted or the date on which the intention or decision to make the primary acquisition is announced in public domain and the date of DPS but that period shall be more than 5 working days. The regulation shall remain the same as the current regulation. But, regulation is proposed to be made more clear and unambiguous stating that the 10% additional interest shall be paid to all the shareholders irrespective of their date of purchase. In one of the case of supreme court the question was raised upon the same and it was held that in case of delays other the  than statutory approval, the amount proposed to be paid shall be enhanced by 10% interest to be payable to the shareholders irrespective of their date of purchase.
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