Knowledge Partner SEBI Registered Merchant Banker
PREFACE The existence of an efficient and smooth functioning market for takeover plays an important role in the economic development of a country. It is widely recognized fact that one of the key elements of a robust corporate governance regime in any country is the existence of an efficient and well administered set of Takeover Regulations. SEBI Takeover Regulations seeks to ensure that the takeover markets operate in a fair, equitable and transparent manner. In keeping with the forgoing, India also has seen a steady evolution of a set of capital market regulations in respect of substantial acquisition of shares and takeovers. SEBI Takeover regulations were earlier reviewed in the year 1997 and thereafter, there have been a sea change in view of the evolution that took place in the entire economic domain and Indian economy getting coupled with the globe. The recommendations of the Achutan Committee have since been placed in the public domain by SEBI for discussions and comments from the public. With a view to have a broad based discussions and deliberations for seeking answers to the various issues and concerns, I am glad that ASSOCHAM and Corporate Professionals Capitals Pvt Ltd., the Knowledge Partners for the Summit, have jointly brought out a Study Paper to bring forth the salient features of the SEBI -New Takeover Code as also a comparison with the existing one for better understanding and appreciation for the benefit of all the stake holders. This will give a clear and effective view of the recommendations/suggestions. The proposed Summit by ASSOCHAM, is an effort to converge the various views and interpretations for submission to SEBI for inclusion if deem fit. I and on behalf of ASSOCHAM, wish this Summit a success. It is the endeavor of ASSOCHAM to bring forth such knowledge based programmes for the benefit of the members and public at large for informed and valued participation. I once again thank all the persons who have contributed in bring out this study paper. (D.S.Rawat) Secretary General ASSOCHAM Knowledge Partner 26 th August, 2010 2 P a g e
INDEX S No. Particulars Page No. 1. An Insight of the TRAC recommendations and 2 draft takeover regulations, 2010 2. Table showing regulations of SEBI (SAST) 12 Regulations, 1997 and Proposed Corresponding provisions of TRAC Report 3. Table showing comparisons of the provisions of regulations of SEBI (SAST) Regulations, 1997 and Proposed Corresponding provisions of TRAC Report 17 3.1. Definitions 3.2. Open Offer Process 3.3. Exemptions 3.4. Disclosure Requirements 3.5. Investigation by Board 4. Compilation of articles 140 Disclaimer: This paper is a copyright of Corporate Professionals Capital Pvt. Ltd. The author and the company expressly disclaim all and any liability to any person who has read this paper, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this paper. 3 P a g e
AN INSIGHT OF THE TRAC RECOMMENDATIONS AND DRAFT TAKEOVER REGULATIONS, 2010 Mergers and Acquisitions (M&A) activity has always been recognized as one of the most important means of inorganic growth for corporate world. The swift globalization and increasing strength and importance of Indian Economy in the World have created huge interest of world in Indian corporate sector and the capital market. Last two financials years have seen tremendous increase in the M&As deals involving Indian companies, both in number and in value terms. Year 2008-09 recorded 600 deals with total value of USD 32 Billion whereas in the year 2009-10 it closed at 595 with a total disclosed value of US$31 billion. SEBI Takeover Regulations is the most important law which regulates and facilitates the M&A deals involving Indian Listed Companies. Considering increasing foreign investment in Indian capital market, growing investing capacities of Indians and dynamism of Indian Corporate World, a need was being felt to review the SEBI Takeover Regulations to make it comparable with the best Global Practices. Accordingly, in September 2009, market watchdog SEBI constituted a multi-disciplinary expert committee, Takeover Regulations Advisory Committee (or TRAC) with a terms of reference to examine the existing Takeover Regulations and to suggest suitable amendments, as deemed fit. It also invited the suggestions from the Indian corporate, professional bodies and public at large. After a detailed analysis and considering the views of regulators, corporate bodies and public comments for about 9 months, the Committee on July 19, 2010 has released its much awaited report suggesting changes in the rules of game of takeover with a draft of new Takeover Regulations for the public comments. The Report is comprehensive enough detailing the Key Recommendations; Deliberations and Rationale along with Draft text of the proposed Takeover Regulations. The Committee felt it is appropriate to rewritten the entire Regulations to incorporate all clarifications given in various orders and judgements and to remove all possible ambiguity and issues in the existing regulations which is already amended a number of times since 1997. The Committee has framed the Regulations keeping in view the interest of public shareholders on one side and that of the Strategic Investors, Private Equity Players, Target Company and Promoters on the other side. While some of the recommendations which are in favour of the general shareholders have become the concern for the Corporate and Strategic Investors, a few of them may be seen as no in the interest of small shareholders. In this Article, the recommendations of the Committee have been analyzed on the basis of 4 P a g e
major heads dealing with the Definitions, Triggering Limit for Open Offer and Open Offer Process, Exemptions and Disclosures Requirements with a focus of the major provisions. An analysis of Key Recommendations in comparison with the Existing SEBI Takeover Regulations I. 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; The definition of the acquirer as given in the Draft Regulations is more or less same with the one existing in the SEBI Takeover Regulations with an addition of the word through. In the existing regulations, a person is termed as acquirer when he acquirers or agrees to acquire the shares or voting rights or control over a target company whether by himself or with person acting in concert with him. Thus, to include a person within the ambit of the definition acquirer, the acquisition should have been made by him alone or in an association with the person acting in concert i.e. he should be a party to the transaction. On the other hand, the proposed regulations do also recognize a person as acquirer even where the acquisition whether of shares or voting rights or control has been made by him through person acting in concert with him i.e. through Special Purpose Vehicle or through the controlling entities. Control Control includes the right or the ability to appoint majority of the directors or to control the management or policy decisions of the target company, 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 Provided that a director or officer of a target company shall not be considered to be in control over such target company, merely by virtue of holding such position; 5 P a g e
The proposed regulations have widen the scope of term Control to include not only the right but also the situations where the persons have the ability to appoint majority of the directors or to exercise control in any other manner. The existing definition of Control covers within its ambit only the right to appoint majority of the directors or to exercise control in any other manner. However, the question whether the power to say No or to exercise negative control would constitute the Control within the meaning of the SEBI Takeover Regulations have not been addressed in the report. On the same line, the definition of the Shares has been broadened to include within its ambit even the depository receipts. Thus, in terms of the proposed regulations, the holder of the depository receipts is treated at par with the one who acquired the Equity Shares carrying voting rights. Instead of the definition of the Infrequently Traded Shares and Specified Date, the term Frequently Traded Shares and Identified Date have been introduced. The existing regulations state that for the purpose of checking the status of trading, the trading turnover in that share during the 6 months preceding the month in which PA is made has to be annualized. Whereas in the report, the Committee has recommended that trading turnover during the 12 months preceding the month in which the PA is made is to be considered. Further, the existing regulation provides a trading turnover of 5% to consider the shares as frequently traded whereas the committee has raised the level of 10%. As the purpose of Specified Date is to determine the names of the shareholders to whom the Letter of Offer would be sent and an exit opportunity would be provided, therefore, it is argued by the Committee that the same should not be much before the approval of Letter of Offer and initiation of offer period for tendering the shares. Accordingly, it is recommendation that the shareholders list should be finalized on a date falling on 10 th business day prior to the commencement of the tendering period. II. Increase in Threshold: The existing SEBI Takeover Regulations necessitate the acquirer to give an open offer to the shareholders of Target Company on the acquisition of shares/ voting rights entitling to exercise 15% or more voting rights in the Target Company. Prior to October 28, 1998, the threshold for Open Offer was at 10%. In the Report, the Committee has recommended to increase the threshold limit for Open Offer to 25%. The recommendation has been made considering the average promoters shareholding prevalent in the Listed Companies and the international practices. 6 P a g e
The recommendation seems to be beneficial from the point of Private Equity and Institutional investors who had to restrict themselves to 14.99% stake in every listed company in terms of existing regulations as otherwise it would necessitates the open offer to the shareholders of the Target Company for which they are in no way interested to do as their objective is not to acquire the control over the company. The increase in threshold would however, reduce the number of open offers and hence might be viewed negatively from the point of view small shareholders. III. IV. Offer Size: In accordance with the existing SEBI Takeover Regulations, an acquirer of shares or voting rights beyond the limit as prescribed under the regulations is required to make a statutory open offer to the shareholders of the Target Company for acquisition of a minimum 20% of the voting capital of that Company. The Proposed Regulations have increased the open offer size to as high to 100% of remaining shareholders. The recommendations has been made taking into consideration the interest of the shareholders so that an opportunity to exit from the Target Company can be provided to all the shareholders who desires to exit from the company in the event of substantial acquisition of shares/ change in control. Present provisions allow an offer of only 20% of the total paid-up capital. Thus, all the shareholders do not get the opportunity of selling their shares in the offer, whereas the controlling shareholders can get secured exit by entering into the share purchase agreement. In this way there is no equity for controlling shareholders and the public shareholders. However, the proposal will make the offer a costly affair for the acquirer as it will involve a larger cash outflow and can be a deterrent for takeover offers and might cause negative impact on M&A activities. To address this to some extent, the Committee has proposed lower size of offer, only 10%, in case of voluntary offers. Acquisition of Control: In the proposed Regulations, the exemption from open offer available in case of change in control without acquisition of substantial shares, through a special resolution by postal ballot process, has been withdrawn and now the only route available for change in management and control is through the Open Offer to the shareholders of the Target Company. 7 P a g e
V. Voluntary Open Offer: The concept of voluntary open offer has been separately dealt in the draft Regulations submitted by the Committee. In has been proposed in the regulations that an acquirer who, together with the PACs, is holding 25% or more shares would be eligible to make the voluntary open offer provided that their aggregate shareholding after completion of the open offer does not exceeds the maximum permissible non-public shareholding. In this case the offer size may be of 10% or more of the voting rights at will of the Acquirer. The rationale of this option of lower size offer is that the purpose of offer is just consolidation of holding and no one is being given preferred treatment as in case of transfer of shares or control. However, where the Acquirer or PACs has acquired any shares of the Target Company in the preceding fifty-two weeks without attracting the obligation to make a public announcement of an open offer, then he will become ineligible to make the voluntary open offer. The situation would be different where the acquisition made by him or PACs in the 52 weeks has resulted into triggering the obligation to make a public announcement. The most interesting point to be noted here is that the Voluntary Open Offer restricts the acquirer from acquiring any further shares in the Target Company for a period of six months after completion of the open offer except by way of another voluntary open offer or competing offer. The purpose of this restriction is to curb abuse of the option to give lower size of offer. VI. Freedom to complete the acquisition In the existing SEBI Takeover Regulations, the acquirer is not allowed to complete the acquisition of shares or voting rights in, or control over, the target company under any agreement attracting the obligation to make an open offer for acquiring shares until the completion of offer formalities. The proposed Regulations have removed this restriction and allowed the completion of acquisition under any agreement which has resulted into triggering the open offer obligations after a period of 21 days from the date of Public Announcement subject to the acquirer depositing 100% of the consideration payable under the open offer in the escrow account, assuming the full acceptance. The most important point to be noted here is that while allowing the freedom to execute the transaction, the proposed Regulations have also prescribed the maximum time within which the acquisition under the agreement must be completed which is 26 weeks from the expiry of the offer period. In other words, where the acquirer has not taken the advantage of the completion of the acquisition before the expiry of the offer period by not depositing 100% of the consideration payable under the offer, then the acquirer is 8 P a g e
allowed to do so after the expiry of offer period but not later than 26 weeks from the expiry of such period. VII. Option to withdraw the shares tendered in Offer is withdrawn In the report submitted by the Committee, the option available to the shareholders to withdraw the shares tendered in the Open Offer has been taken back. This has been done considering the point that in the proposed regulations, the last of upward revision by the acquirer is prior to the opening of Offer Period and thus, the shareholders were well aware of the particulars necessary for them to take an informed decision as to whether to tendered the shares in response to the Open Offer or not. Therefore, there is no need to permit withdrawal of shares tendered in response to the open offer. VIII. Offer Price: The Committee also recommended certain changes in the method of computation of offer price. It has proposed volume-weighted average market price of 60 trading days prior to the date of public announcement in place of average of weekly high low of closing price for 26 weeks and average of daily high-low of last two weeks. This is expected to make the market price more broad based and realistic. IX. Non-compete Fees One of the most debated issue relating open offers has been the Non-compete Fees aid to the existing promoters. Presently a Non-compete fees to the extent of 25% of the offer price is allowed to be paid to the controlling shareholders, if the SEBI is convince of their competing capability. The Committee, however, has recommended omission of this provision keeping with the spirit of equal treatment for all shareholders. Thus, under the Proposed Regulations any direct or indirect non-compete fees or control premium paid to the controlling shareholders would be added or made part of the offer price. X. Acquisition from the other competing acquirer In the draft Regulations, the Committee has made a provision allowing the competing acquirer to acquire either himself or through or with PACs with him, the shares acquired by the other competing acquirer in the open offer without attracting the obligation to make another Open Offer provided that the acquisition has been made at the price not exceeding the offer price governing the competing offer made by the acquirer acquiring the shares and the acquisition has been made within 21 business days from the expiry of the offer period for such competing offer. Keeping in view the increasing trend of competitive biddings in India this may be taken as an imperative step as compelling two 9 P a g e
warring groups to continue in a company may not be in the interest of the company and smooth passage to one of the competitive bidders is desirable. XI. No induction on the Board during the pendency of competing offer Regulation 24(3) of the proposed Regulations prohibit the induction of new director on the board of the Target Company during the pendency of the competing offer irrespective of the amount of consideration deposited in the escrow account by the acquirer. The most interesting point to be noted here is that the said sub-regulation prohibits the induction of new director on the board of the Target Company regardless of the fact whether the proposed to be appointed on the Board belongs to the acquirer or not. XII. Obligation on the Board of Target Company The proposed regulations have casted an obligations on the Board of the Target Company to constitute a committee of independent directors which shall provide its written reasoned recommendations on the open offer to the shareholders of the Target Company and such recommendations shall be published at least two business days before the commencement of the tendering period, in the same newspapers where the public announcement of the open offer was published. This is in contrast with the existing regulations which have left this requirement at the choice of the directors of the Target Company. XIII. Reduction in Time Line for Open Offer Process: Keeping in view the changing technologies and possibilities of faster execution and dissemination of information, the Committee has recommended substantial reduction of timeline of the whole open offer process. Sorter timeline will reduce the cost of process and will also make the acquisitions commercially more viable. XIV. Exemptions The exemptions under SEBI Takeover Regulations have been divided into two parts i.e. Automatic Route and Approval Route. Automatic route means the exemption is available to the acquirer subject to the compliance of the conditions as prescribed under the Regulations whereas under the Approval route, an application is to be made to the Board. In the Committee Report, some of automatic exemptions which have not been used frequently such as allotment of shares pursuant to an application made under a Public Issue, acquisition of shares in the ordinary course of business by a market maker 10 P a g e
have been removed. On the other hand, a few new categories of the automatic exemptions have been introduced. For instance, the increase in shareholding pursuant to the buy back by the Target Company has been covered under the automatic exemption route subject to certain conditions. The exemptions in respect of increase in shareholding pursuant to buy back have been categorized into two parts i.e. where pre holding of the acquirer before the buy back is less than 25% and other where the pre shareholding of the acquirer is between 25% to 75%. In case of pre holding less than 25%, the increase in shareholding pursuant to buy back beyond the limit of 25% is exempted from the Open Offer Obligations subject to the acquirer reducing its shareholding below the threshold that result in triggering the open offer within a period of ninety days from the date on which the voting rights so increase. In case of pre holding between 25-75%, the exemption is available without an obligation to reduce the shareholding provided the approval of shareholders has been obtained by way of postal ballot in case of buy back by shareholders resolutions and such shareholders has not voted in favour of the resolution authorising the buy-back of securities and where the buy back is by way of board resolution, then such shareholder, in his capacity as a director, or any other interested director has not voted in favour of the resolution of the board of directors of the target company authorising the buy-back of. Further, the exemption is available only if the increase in voting rights does not result in an acquisition of control by such shareholder over the target company. Another important exemption that has been introduced in the Committee Report is very much beneficial for the general public shareholders i.e. acquisition of shares of a target company not involving a change of control over such target company pursuant to a scheme of corporate debt restructuring provided such scheme has been authorized by shareholders by way of a special resolution passed by postal ballot. Similarly, increase in voting rights due to the voting rights on preference shares arising out of the operation of law has also been included in the automatic exemption category. Furthermore, at present, there is a lot of confusion about the requirement of reporting to SEBI in case of automatic exemption from offer. In the proposed Regulations, the Committee has considered this issue and removed the ambiguity by deleting the prepercentage of the acquirer. In other words, in the draft Regulations submitted by the Committee, the disclosure is required in every circumstance whenever the exemption under the categories as mentioned in the regulations have been sought irrespective of the pre shareholding of the acquirer seeking the exemptions. 11 P a g e
XV. Disclosure Requirements The Committee Report has proposed the more frequent and stringent disclosure requirements on the part of the acquirer. Present Regulations requires the disclosure of shareholding on the acquisition of more than 5%, 10%, 14%, 54% and 74% shares in the target company whereas the Committee has suggested the disclosure of shareholding on the acquisition of shares entitling them to exercise 5% or more shares or voting rights of the Target Company. Further, the proposed Regulations requires the disclosure of shareholding by a person already holding more than 5% shares in the Target Company whenever there is a change in his shareholding constituting 2% or more of the voting capital of the target company. Presently, this is required only by those who hold 15% or more shares or voting rights. It is also proposed that the obligations to give the disclosure will be only on the acquirer and not on the Target Company. Similarly, in the Continual Disclosure requirement, the limit of 15% has been enhanced to 25% and the time limit has been reduced from 21 days to 15 business days. In addition, the obligations of the promoters to give the continual disclosure at the time of record date in addition to the financial year end have been removed. The most important point to be noted here is that the acquisition and holding of any security or instrument that would entitle the acquirer to receive shares in the target company, including warrants and convertible debentures, shall also be regarded as shares for the purpose of making the disclosures whether continual disclosure or otherwise. This amendment is in line with well accepted international norms. XVI. Tax Regime In the draft regulations, the committee has also touched an important issue i.e. Tax treatment with respect to the shares tendered in the Open Offer. As the Open Offer is highly regulated and all the parties involved in the process are required to follow the provisions laid in the Takeover Regulations, therefore, according to the Committee, it would not be justified to treat the activity of tendering the shares in the open offer with the Off market deal for the taxation purpose as the off market deal is a private transaction between the parties. Based on these deliberations, it can be concluded that the Committee has tried to make takeover battles a level playing field for controlling as well as non-controlling shareholders. The increase in threshold would make listed companies more attractive to institutional investors. On the other hand it may reduce the number of offers as even 25% stake could be sufficient to control a company keeping in view the passive nature of small shareholders. The 100% offer requirement is good for the cause of equity but 12 P a g e
might also cause deterrent for acquisitions, which is a major concern. The Committee has also made attempts to address many of the unintentional confusions and nonclarities and make the takeover law less complicated in understanding and compliance. The India Inc. will look forward to an early implementation of these new Regulations with some further modifications as per the comments and suggestions of industry chambers, professional bodies and public at large. 13 P a g e
TABLE SHOWING REGULATIONS OF SEBI (SAST) REGULATIONS, 1997 AND PROPOSED CORRESPONDING PROVISIONS OF TRAC REPORT Existing Regulations & their Title Proposed Regulation & their title Regulation Title Regulation Title Chapter I- Preliminary 1 Short title and commencement. 1 Short title and commencement. 2 Definitions 2 Definitions 2(1)(a) Act 2(1)(a) Act 2(1) (b) Acquirer 2(1) (b) Acquirer 2(1) (c) Control 2(1)(g) Control 2(1)(CC) Disinvestment 2(1)(i) Disinvestment 2(1) (d) Investigation Officer - - 2(1) (e) Person Acting in Concert 2(1)(r) Person Acting in Concert 2(1) (f) Offer Period 2(1)(q) Offer Period 2(1) (g) Panel - - 2(1) (h) Promoter 2(1)(t) Promoter 2(1)(u) Promoter Group 2(1)(i) Public Financial Institution - - 2(1)(ii) Public Financial Undertaking 2(1)(v) Public Sector Undertaking 2(1) (j) Public Shareholding - - 2(1) (k) Shares 2(1)(w) Shares 2(1) (l) Sick Industrial Company - - 2(1) (m) State Level Financial Institution 2(1)(y) State Level Financial Institution 2(1) (n) Stock Exchange 2(1) (z) Stock Exchange 2(1) (o) Target Company 2(1)(aa) Target Company 2(1) (p) Working Days 2(1)(e) Business Day - - 2(1)( C) Acquisition - - 2(1)(d) Board - - 2(1)(f) Company - - 2(1)(h) Delisting Threshold - - 2(1)(j) Financial year - - 2(1)(k) Frequently traded shares - - 2(1)(l) Identified date - - 2(1)(m) Immediate relative - - 2(1)(n) Listing agreement 14 P a g e
- - 2(1)(o) Maximum Permissible non public shareholding - - 2(1)(p) Manager to open offer - - 2(1)(s) Postal Ballot 2(1)(x) Specified - - 2(1)(ab) Tendering Period 3 Applicability of the regulation 10 General Exemptions 4 Takeover Panel 11 Exemptions by the Board 5 Power of the Board 33 Power to remove difficulties Chapter II-Disclosures of shareholding and control in a Listed Company Chapter V- Disclosure of shareholding and Control 6 Transitional provision - - 7 Acquisition of 5 per cent and more shares or voting rights of a 28 Disclosure of acquisition and disposal company 8 Continual disclosures 29 Continual disclosures 8A Disclosure of pledged shares 30 Disclosure of encumbered shares - - 31 Disclosure related provisions 9 Power to call for information - - Chapter III- Substantial acquisition of shares or voting rights in and acquisition of control over a Chapter II- Substantial Acquisition of shares, voting rights or control; Listed Company Chapter III-Open Offer Process; and Chapter IV-Other Obligations 10 Acquisition of fifteen per cent or 3(1) Acquisition of Shares more of the shares or voting rights of any company 11 Consolidation of holdings 3(2) Acquisition of Shares 12 Acquisition of control over a 4 Acquisition of Control company 13 Appointment of a merchant banker 12 Manager to the Open Offer 14 Timing of the public announcement 13 Timing of offer 15 Public announcement of offer 14 Publication 16 Contents of the public announcement of offer 15 (1) and 15(2) Content 15 P a g e
17 Brochures, advertising material, etc. 15(3) Brochures, advertising material, etc. 18 Submission of letter of offer to the Board 16 Filing of letter of offer with the Board 19 Specified date 2(1)(I) Identified date 20 Offer price 8 Offer Price 9 Mode of Payment 20A Acquisition price under creeping 8(10) Offer Price acquisition 21 Minimum number of shares to be 7 Offer Size acquired 21A Offer conditional upon level of 19 Conditional Offer acceptance 22 General obligations of the acquirer 25 Obligations of the acquirer 23 General obligations of the board of directors of the target company 26 Obligations of the target company 24 General obligations of the merchant banker 27 Obligations of the Manager to the open offer 25 Competitive bid 20 Competing Offers 26 Upward revision of offer 18(4) and Other Procedure 18(5) 27 Withdrawal of offer 23 Withdrawal of open offer 28 Provision of escrow 17 Provision of Escrow 29 Payment of consideration 21 Payment of consideration 29A Relaxation from the strict 11(2) Exemptions by the Board compliance of provisions of Chapter III in certain cases - - 5 Indirect acquisition of shares or control - - 6 Voluntary Offer - - 22 Completion of acquisition - - 24 Directors of the Target Company Chapter IV- Bail Out Takeovers 30 Bail out takeovers - - 31 Manner of acquisition of shares - - 16 P a g e
32 Manner of evaluation of bids - - 33 Person acquiring shares to make - - an offer 34 Person acquiring shares to make - - public announcement 35 Competitive bid - - 36 Exemption from the operations of - - Chapter III 37 Acquisition of shares by a State level public financial institution - - Chapter V-Investigation and Action by the Board Chapter VI- Miscellaneous 38 Board s right to investigate - - 39 Notice before investigation - - 40 Obligations on investigation by the - - Board 41 Submission of report to the Board - - 42 Communication of findings - - 43 Appointment of auditor - - 44 Directions by the Board 32 Power to issue directions 44A Manner of service of summons and - - notices issued by the Board 45 Penalties for non-compliance - - 46 Appeal to the Central Government - - 47 Repeal and saving 34 Repeal and saving 17 P a g e
TABLE SHOWING COMPARISONS OF THE PROVISIONS OF REGULATIONS OF SEBI (SAST) REGULATIONS, 1997 AND PROPOSED CORRESPONDING PROVISIONS OF TRAC REPORT. Present Law i.e. SEBI (SAST) Regulations, 1997 Regulation 1 Short Title and Commencement (1) These regulations shall be called the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. (2) These regulations shall come into force on the date of their publication in the Official Gazette. Proposed Law i.e. TRAC Report (1) These regulations shall be called the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2010. (2) These regulations shall come into force on [ ] (3) These regulations shall apply to direct and indirect acquisition of shares or voting rights in, or control over any target company. Regulation 2 Definitions (1) In these regulations, unless the context otherwise requires: - (1) In these regulations, unless the context otherwise requires, the terms defined herein shall bear the meanings assigned to them below, and their cognate expressions and variations shall be construed accordingly, (a) Act means the Securities and Exchange Board of India Act, 1992 (15 of (a) Act means the Securities and Exchange Board of India Act, 1992 (15 of 1992); 1992); (b) Acquirer means any person who, directly or indirectly, acquires or agrees to acquire shares or voting rights in the target company, or acquires or agrees to acquire control over the target company, either by himself or with any person acting in concert with the acquirer; (b) 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; 18 P a g e
(c) Control shall include 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. (g) Control includes the right or the ability to appoint majority of the directors or to control the management or policy decisions of the target company, 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 Explanation: i. Where there are two or more persons in control over the target company, the cesser of any one of such persons from such control shall not be deemed to be a change in control of management nor shall any change in the nature and quantum of control amongst them constitute change in control of management: Provided that the transfer from joint control to sole control is effected in accordance with clause (e) of sub-regulation (1) of regulation 3. ii. If consequent upon change in control of the target company in accordance with regulation 3, the control acquired is equal to or less than the control exercised by person(s) prior to such acquisition of control, such control shall not be deemed to be a change in control; cc) Disinvestment means the sale by the Central Government or by the State Government as the case may be of its shares or voting rights and/or control, in a listed Public Sector Undertaking; (d) Investigating officer means any person appointed by the Board under regulation 38; (e) Person acting in concert comprises, Provided that a director or officer of a target company shall not be considered to be in control over such target company, merely by virtue of holding such position; (i) Disinvestment means the direct or indirect sale by the central government, any state government or by a government company, as the case may be, of shares or voting rights in, or control over, a target company, which is a public sector undertaking; (r) Persons acting in concert means, 1. Persons who, for a common objective or purpose of substantial acquisition of shares or voting rights or gaining control over the target company, 1. 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 19 P a g e
pursuant to an agreement or understanding (formal or informal), directly or indirectly co-operate by acquiring or agreeing to acquire shares or voting rights in the target company or control over the target company, 2. Without prejudice to the generality of this definition, the following persons will be deemed to be persons acting in concert with other persons in the same category, unless the contrary is established : i. a company, its holding company, or subsidiary or such company or company under the same management either individually or together with each other; ii. a company with any of its directors, or any person entrusted with the management of the funds of the company; iii. directors of companies referred to in sub-clause (i) of clause (2) and their associates; iv. mutual fund with sponsor or trustee or asset management company; v. foreign institutional investors with sub-account(s); vi. merchant bankers with their client(s) as acquirer; vii. portfolio managers with their client(s) as acquirer; viii. venture capital funds with sponsors; ix. banks with financial advisers, stock brokers of the acquirer, or any company which is a holding company, subsidiary or relative of the acquirer : Provided that sub-clause (ix) shall not apply to a bank whose sole relationship with the acquirer or with any company, which is a holding company or a subsidiary of the acquirer or with a relative of the acquirer, is by way of providing normal commercial banking services or such activities in connection with the offer such as confirming availability of funds, handling acceptances and other registration work; x. any investment company with any person who has an interest as director, 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. 2. Without prejudice to the generality of the foregoing, the persons falling within the following categories shall be deemed to be persons acting in concert with other persons within the same category, unless the contrary is established, i. a company, its holding company, subsidiary company and any company under the same management; ii. a company, its directors, and any person entrusted with the management of the company; iii. directors of companies referred to in sub-clause (i) of clause (2) and associates of such directors; iv. promoters and members of the promoter group. v. immediate relatives; vi. a mutual fund, its sponsor, trustees, trustee company, and asset management company; vii. a collective investment scheme and its collective investment management company, trustees and trustee company; viii. a venture capital fund and its sponsor, trustees, trustee company and asset management company; ix. a foreign institutional investor and its sub-accounts; x. a merchant banker and its client, who is an acquirer; xi. a portfolio manager and its client, who is an acquirer; xii. banks and stock brokers of the acquirer, or of any company which is a holding company or subsidiary of the acquirer, and where the acquirer is an individual, of the immediate relative of such individual: xiii. Provided that this sub-clause shall not apply to a bank whose sole role is that 20 P a g e
fund manager, trustee, or as a shareholder having not less than 2 per cent of the paid-up capital of that company or with any other investment company in which such person or his associate holds not less than 2 per cent of the paid-up capital of the latter company. Note : For the purposes of this clause associate means, a) any relative of that person within the meaning of section 6 of the Companies Act, 1956 (1 of 1956); and b) family trusts and Hindu undivided families of providing normal commercial banking services or activities in relation to an open offer under these regulations; xiv. an investment company or fund and any person who has an interest in such investment company or fund as a shareholder or unit holder having not less than 10 per cent of the paid-up capital of the investment company or unit capital of the fund, and any other investment company or fund in which such person or his associate holds not less than 10 per cent of the paid-up capital of that investment company or unit capital of that fund: (f) Offer Period means the period between the date of entering into Memorandum of Understanding or the public announcement, as the case may be and the date of completion of offer formalities relating to the offer made under these regulations; (g) Panel means a panel constituted by the Board for the purpose of regulation 4; (h) Promoter means a) any person who is in control of the target company; Provided that nothing contained in this sub-clause shall apply to holding of units of mutual funds registered with the Board; Explanation. For the purposes of this clause associate of a person means, (a) any immediate relative of such person; (b) trusts of which such person or his immediate relative is a trustee; (c) partnership firm in which such person or his immediate relative is a partner; and (d) members of Hindu undivided families of which such person is a coparcener; (q) Offer Period means the period between the date of entering into an agreement to acquire shares, voting rights in, or control over a target company requiring a public announcement, or the date of the public announcement, whichever is earlier, and the date on which the payment of consideration to shareholders who have accepted the open offer is made; (t) Promoter has the same meaning as in the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 and includes a member of the promoter group; 21 P a g e
b) any person named as promoter in any offer document of the target company or any shareholding pattern filed by the target company with the stock exchanges pursuant to the Listing Agreement, whichever is later; and includes any person belonging to the promoter group as mentioned in Explanation I : Provided that a director or officer of the target company or any other person shall not be a promoter, if he is acting as such merely in his professional capacity. Explanation I : For the purpose of this clause, promoter groups shall include : a. in case promoter is a body corporate i. a subsidiary or holding company of that body corporate; ii. any company in which the promoter holds 10% or more of the equity capital or which holds 10% or more of the equity capital of the promoter; iii. any company in which a group of individuals or companies or combinations thereof who holds 20% or more of the equity capital in that company also holds 20% or more of the equity capital of the target company; and b. in case the promoter is an individual i. the spouse of that person, or any parent, brother, sister or child of that person of his spouse; ii. any company in which 10% or more of the share capital is held by the promoter or an immediate relative of the promoter or a firm or HUF in which the promoter or any one or more of his immediate relative is a member; iii. any company in which a company specified in (i) above, holds (u) Promoter group has the same meaning as in the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009; 22 P a g e
10% or more, of the share capital; and any HUF or firm in which the aggregate share of the promoter and his immediate relatives is equal to or more than 10 per cent of the total. Explanation II : Financial Institutions, Scheduled Banks, Foreign Institutional Investors (FIIs) and Mutual Funds shall not be deemed to be a promoter or promoter group merely by virtue of their shareholding. Provided that the Financial Institutions, Scheduled Banks and Foreign Institutional Investors (FIIs) shall be treated as promoters or promoter group for the subsidiaries or companies promoted by them or mutual funds sponsored by them. (i) Public financial institution means a public financial institution as defined in section 4A of the Companies Act, 1956; (ii) Public Sector Undertaking means a company in which the Central Government or a State Government holds 50% or more of its equity capital or is in control of the company; (j) Public shareholding means shareholding held by persons other than promoters as defined under clause (h); (k) Shares means shares in the share capital of a company carrying voting rights and includes any security which would entitle the holder to receive shares with voting rights but shall not include preference shares; (l) Sick Industrial Company shall have the same meaning assigned to it in clause (o) of sub-section (1) of section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986), or any statutory re-enactment thereof; v) Public sector undertaking means a target company in which, directly or indirectly, majority of shares or voting rights or control is held by the central government or any state government or governments, or partly by the central government and partly by one or more state governments; (w) Shares means shares in the equity share capital of a target company carrying voting rights, and includes any security which entitles the holder thereof to exercise voting rights; Provided that all depository receipts entitling the holder thereof to exercise voting rights in the target company shall be regarded as shares. 23 P a g e
(m) State level financial institution means a State Financial Corporation established under section 3 of the State Financial Institutions Act, 1951, and includes a development corporation established as a company by a State Government with the object of development of industries or agricultural activities in the State; (n) Stock Exchange means a stock exchange which has been granted recognition under section 4 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956); (o) Target Company means a listed company whose shares or voting rights or control is directly or indirectly acquired or is being acquired; (y) State-level financial institution means a Financial Corporation established under section 3 or section 3A and institutions notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951), and includes a development corporation established as a company by a state government with the object of development of industries or agricultural activities in the state; (z) Stock Exchange means a stock exchange which has been granted recognition under section 4 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956); (aa) Target Company means a company incorporated in India whose shares are listed on a stock exchange; (p) Working days shall mean the working days of the Board. (e) Business day means any day excluding Saturday and Sunday and any other day declared by the Board as a holiday. (c) Acquisition means, directly or indirectly, acquiring or agreeing to acquire shares or voting rights in, or control over, a target company; (d) Board means the Securities and Exchange Board of India established under section 3 of the Act; (f) Company includes a body corporate; (h) Delisting threshold means a shareholding entitling exercise of ninety per cent of the voting rights in a target company, excluding voting rights on shares held by a custodian and against which depository receipts have been issued overseas, with reference to the share capital of the target company as of the last day of the tendering period; (j) Financial Year means the period of twelve months commencing on the first day of April; (k) 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 24 P a g e
(2) All other expressions unless defined herein shall have the same meaning as have been assigned to them under the Act or the Securities Contracts (Regulation) Act, 1956, or the Companies Act, 1956, or any statutory modification or re-enactment thereto, as the case may be. calendar month in which the public announcement is made, is at least ten per cent of the total number of shares of such class of such target company: Provided that where the total share capital of the target company is not identical throughout such period, the weighted average number of total shares of the target company shall represent the total number of shares. (l) Identified date means the date falling on the tenth business 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; (m) Immediate relative means any spouse of a person, and includes parent, sibling or child of such person or of the spouse; (n) Listing agreement means the agreement with the stock exchange governing the conditions of listing of shares of the target company; (o) Maximum permissible non-public shareholding means such percentage shareholding in the target company excluding the minimum public shareholding required under the listing agreement; (p) Manager to the open offer means the merchant banker referred to in regulation 12; (s) Postal ballot means a postal ballot as provided for under the Companies (Passing of the Resolution by Postal Ballot) Rules, 2001 made under the Companies Act, 1956 (1 of 1956); (x) Specified means specified by the Board under these regulations; (ab) Tendering period means the period within which shareholders may tender their shares in acceptance of an open offer to acquire shares made under these regulations. (2) All other expressions unless defined herein shall have the same meaning as have been assigned to them under the Act or the Securities Contracts (Regulation) Act, 1956, (42 of 1956) or the Companies Act, 1956 (1 of 1956), or any statutory modification or re-enactment thereto, as the case may be. 25 P a g e