The Takeover Advisory Committee has proposed to replace the Securities Exchange Board of India (“SEBI”) (Substantial acquisition of shares and takeovers) Regulations, 1997 (“Takeover Code”) in line with international standards and changing economic environment. The Committee constituted vide SEBI order dated 4 September, 2009, under the Chairmanship of Shri C. Achuthan (former Presiding Officer of Securities Appellate Tribunal) has comprehensively re-written the Takeover Code and submitted a report to SEBI. The salient features of the proposed Regulations are as under –

Threshold for trigger of open offer

It is proposed to increase the threshold limit for trigger of open offer from 15% of voting control to 25%.

Offer size:-Currently, an acquirer can make an offer for a minimum of 20% of voting capital (or lesser percentage to satisfy the minimum public shareholding requirement). As per the Committee recommendation, the mandatory open offer should be for 100% (i.e. to all other shareholders of the target company)

Voluntary offer : It is also proposed that acquirers collectively holding 25% or more voting rights in the target company can make a voluntary offer for a minimum size of 10% of voting capital and a maximum size of such number as would not result in breach of the maximum non-public shareholding.

Creeping acquisition :-Currently, an acquirer holding 15% or more but less than 55% of the shares or voting rights in the target company can acquire up to 5% of voting control in a financial year without an open offer (i.e. ‘Creeping Acquisition’). Further, in case of holding of 55% or above but less than 75%, one time increase by 5% through market purchases is permitted provided the acquirer does not go beyond the threshold of 75%.

It is proposed that the creeping acquisition of 5% per financial year be permitted for shareholders holding 25% or more, up to the maximum permissible non-public shareholding limit.

Minimum public shareholding requirements

As per the extant Takeover Code, if the open offer results in the public shareholding falling below the minimum threshold, the acquirer is required to reduce its shareholding within the time limit specified.

As per the Committee’s recommendation, the acquirer may opt to delist as part of the open offer process where the intention to delist is stated upfront and the holding in the target company crosses the delisting threshold. The acquirer, in such a case, would not be required to comply with the delisting regulations.

Further, when the intention to delist is not disclosed, or when the response is such that the resultant shareholding is below the delisting threshold but above the maximum non public shareholding threshold, then the acquirer shall –

  • bring down the non-public shareholding to ensure compliance with listing agreement; or
  • proportionately reduce both acquisition under open offer and under agreement that triggered the open offer

Exemption from open offer obligations

New exemptions are proposed covering –

  • increase in shareholding pursuant to buyback;
  • acquisition of voting rights on preference shares on account of non-payment of dividends;
  • acquisition of shares of a target company pursuant to a corporate debt restructuring scheme, not involving change in control

Specific conditions are proposed to be inserted for exemption of acquisition pursuant to a scheme of arrangement not directly involving the target company.

Existing exemption available for inter se group transfers are proposed to be done away with.

Definition of control

It is recommended to include `ability’ in definition of control in addition to `right’ to appoint majority of directors or to control the management or policy decisions, thus making the definition of `control’ wider.

Indirect acquisition

It is proposed that the ability to indirectly exercise voting rights beyond the trigger threshold limits, or exercise control over a target company, would attract the obligation to make an open offer, regardless of whether such target company is a predominant part of the business or entity being acquired.

The Committee has further proposed that if the indirectly acquired target company is a predominant part of the business or entity being acquired (i.e. more than 80% of sales turnover, net asset value or market cap of the entity being acquired), the same would be treated as a direct acquisition for all purposes.

Offer price

Under the extant Takeover Code, non-compete fee only in excess of 25% of offer price is required to be added to the offer price. It is proposed that the entire non-compete fee should form part of the negotiated price.

The minimum offer price is proposed to be higher of:

  • Negotiated price
  • Volume weighted average price (“VWAP”) during preceding 52 weeks

Highest price paid or payable by the acquirer or by Person Acting in concert during the preceding 26 weeks

  • 60 days VWAP (in case of frequently traded shares)

Further, in case of indirect acquisition, it is proposed to factor in, besides the above, the higher price paid between the primary transaction and the public announcement and to increase the minimum offer price by 10% p.a. for the interim period.

Activities and timelines

It is proposed that a short public announcement should be made on the same date as the date of transaction triggering open offer, through notice to stock exchange, followed by a detailed public statement within 5 business days.

Further, the timelines for various activities in the open offer process are proposed to be revised and accordingly a standard open offer process is proposed to be completed in 57 business days as against 95 calendar days as at present.

Competing offers

Proposed changes include —

  • change in the time period for making a competitive bid;
  • prohibition on representation by the acquirer on the board of the target company; and
  • permitting competitive acquirer to negotiate and acquire shares tendered by competing acquirers at a price not exceeding the offer price governing the competing offer made by the acquirer who buys shares in such a transaction.

Others

Certain other recommendations include

  • mandatory recommendation on the open offer by a committee of independent directors of the target company;
  • restriction on material transactions by subsidiaries of the target company during the open offer;
  • completion of the execution of the agreement that triggered the open offer obligation during the pendency of the open offer subject to 100% of the consideration payable under the open offer being deposited in escrow

Conclusion

The Committee has proposed a new draft of the Takeover Regulations to replace more than a decade old Takeover Code keeping in pace with the market dynamics. The recommendations are open for public comments till 31 August, 2010.

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