www.pwc.com/in Sharing insights News Alert 26 September, 2011 New Takeover Regulations Notified The Securities and Exchange Board of India ( SEBI ) has notified the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 ( the new Takeover Regulations ) on 23 September, 2011, to be effective on and from the 30 th day from the date of notification, i.e. on and from 22 October, 2011. Earlier on 4 September, 2009, the Takeover Regulations Advisory Committee ( TRAC ) constituted under the Chairmanship of Late Mr. C. Achuthan (former Presiding Officer of Securities Appellate Tribunal), had re-written the Takeover Code comprehensively and released its report on 19 July, 2010. Subsequently, on 28 July, 2011 the SEBI Board considered this report and accepted most of its recommendations. Key highlights of the new Takeover Regulations are captured as under 1. Threshold limits for open offer trigger 1.1 Initial threshold : The initial threshold for trigger of open offer is increased from 15% of voting control to 25%. 1.2 Creeping acquisition limit : Maximum 5% allowed per financial year to acquirers holding 25% or more, up to the maximum permissible non-public shareholding. 1
2. Acquisition of control direct and indirect 2.1 Indirect acquisition : In an acquisition situation, the ability to indirectly exercise voting rights beyond the trigger threshold limits (as referred to in para 1 above), or exercise control over a target company would trigger open offer. 2.2 Control : The definition of the term control is substantively adopted from the extant Regulations, without including the wider parameter of ability to Sl. Type of Indirect Acquisition or business being acquired ( Value of target company ) is up to 15% Offer Timing (b) the date on which the intention or the decision to make the primary acquisition is announced in public domain. Offer Price (Refer para 5 below for the offer price parameters). control as recommended by TRAC. 2.3 No whitewash provision : The new Takeover Regulations do not contain whitewash provision in case of change in control of the target company. Under the extant Regulations, an open offer was not required if the shareholders of the target company passed a special resolution waiving the open offer in case of change in control. 2.4 Types of Indirect Acquisitions : SEBI has classified indirect acquisitions 2 Value of Target Company acquired is more than 15% and up to 80% Same as above Same as above. Additionally, acquirer to disclose in the letter of offer the said value alongwith detailed description of the methodology adopted therefor. based on value of the target company being acquired, as briefed below - Sl. Type of Indirect Acquisition 1 Proportionate net asset value, sales turnover or market capitalisation of the target company in India as a percentage of the enterprise value for the entity Offer Timing Public announcement ( PA ) to be made within 4 working days from the earlier of : (a) the date on which the primary acquisition is contracted, and Offer Price Acquirer to specifically compute per share value of the target company and the said value is one of the parameters to determine offer price 3 Value of Target Company acquired is more than 80% PA to be made on the earlier of : (a) the date on which the primary acquisition is contracted, and (b) the date on which the intention or the decision to make the primary acquisition is announced in public domain. Similar to that for direct acquisitions. 2
3. Exemptions from open offer obligation 3.1 Inter se group transfers : The extant exemption available for inter se group transfers is dispensed with and brought on par with the inter se promoter transfers. Moreover, the definition of group, earlier linked to the Monopolies and Restrictive Trade Practices Act, 1969, is now removed and restricted specifically to co-subsidiaries and parents. 3.2 Acquisition pursuant to a scheme of arrangement not involving target company: Exempt only if (a) cash or cash equivalent consideration to be offered is less than 25% of the total consideration paid under the scheme, and (b) existing body of shareholders retains at least 33% of the voting rights in the combined entity directly or indirectly. 3.3 Increase in voting rights pursuant to buy-back, (A) of a shareholder holding less than 25% : Increase beyond initial threshold of 25% to be exempt if the shareholder reduces his voting rights below 25% within 90 days. (B) of a shareholder holding more than 25% : Increase by more than 5% in any financial year to be exempt if the specified conditions are met; else, requirement to reduce additional voting rights below 5% within 90 days. 3.4 Acquisition of shares pursuant to Corporate Debt Restructuring scheme : Exempt, if the same does not entail change in control and approved by the shareholders by a special resolution passed through postal ballot. 4. Offer size 4.1 Mandatory offer : Offer of minimum 26% of the total shares of the target company. 4.2 Voluntary offer : Acquirers collectively holding 25% or more voting rights in the target company can make a voluntary offer for a minimum size of 10% or such other number of voting capital as would not result in breach of the maximum non-public shareholding. 5. Minimum public shareholding requirements 5.1 If post open offer shareholding of the acquirer exceeds the maximum permissible non-public shareholding, the acquirer shall be required to bring down his shareholding to the permissible level within the time permitted under the Securities Contracts (Regulation) Rules, 1957. 5.2 Further, the acquirer shall not be eligible to make a voluntary delisting offer under the SEBI (Delisting of Equity Shares) Regulations, 2009 for a period of 12 months from the date of the completion of the open offer period. 6. Offer price 6.1 The minimum offer price shall be higher of: Negotiated price per share of the target company for any acquisition under the agreement attracting open offer requirement; 3
Volume weighted average price paid or payable for acquisitions by the acquirer or any person acting in concert with him during preceding 52 weeks 1 ; Highest price paid or payable for any acquisition by the acquirer or any person acting in concert with him during the preceding 26 weeks 1 ; Volume weighted average market price for a period of 60 days 1 in case of frequently traded shares, or the price determined by the acquirer and the manager to the offer taking into account valuation parameters in case the shares are not frequently traded; and The per share value of Target Company, if applicable. Furthermore, the Regulations also provide for various adjustments that should be made to offer price in different situations of corporate actions affecting the price, partly paid shares, equity shares carrying differential voting rights etc. In cases of indirect acquisition, besides the above, the higher price paid during the date of contracting of primary acquisition and the date of announcing the intention or decision to make primary transaction shall also be one of the parameters to determine the offer price. If detailed public statement is made after 5 working days from the earlier of these dates, the offer price shall be increased by an amount calculated @ 10% p.a. for such period. 6.2 Non-compete fees / control premium : The entire non-compete fees/control premium payment to form part of the negotiated price. 6.3 Additional payment : In case the acquirer acquires shares of the target company in a negotiated deal during 26 weeks after the tendering period at a price higher than the offer price, such excess shall be paid within 60 days from the date of further acquisition to all the shareholders whose shares were acquired in the open offer. 7. Activities and timelines 7.1 A short PA shall be made on the date of the transaction triggering open offer, through notice to stock exchange, followed by a detailed public statement within 5 working days, in case of direct acquisitions. (For indirect acquisitions, refer para 2.4) 7.2 The timelines for various activities in the open offer process are reduced and accordingly a standard open offer process shall be completed in 57 working days as against 95 calendar days under the extant Regulations. 8. Competing Offers 8.1 Competing offer can be made within 15 working days from the date of detailed public statement made by the acquirer who makes the first PA. 8.2 Unless the first open offer is conditional as to the minimum level of acceptance, the competing offer cannot be made conditional as to the minimum level of acceptance. 1 Prior to the date of PA, in a direct acquisition; or prior to a date which is earlier of (a) the date on which the primary acquisition is contracted and (b) the date on which the intention or the decision to make the primary acquisition is announced, in an indirect acquisition 4
8.3 A competing offer shall not be regarded as a voluntary open offer and therefore all the provisions of the new Takeover Regulations, including that of offer size, shall apply accordingly. 9. Some others changes 9.1 A committee of independent directors of the target company shall provide reasoned recommendation on an open offer and such recommendation be published by the target company. 9.2 Acquirer shall be debarred from alienating any material assets of the target company and its subsidiaries for 2 years post open offer unless (a) the acquirer has declared such an intention in the detailed public statement and letter of offer, or, (b) a special resolution of the shareholders of the target company is passed through postal ballot. Such a restriction did exist under the extant Regulations but only in respect of the material assets of the target company and not for subsidiaries. 9.3 An open offer may be withdrawn where any condition stipulated in the agreement for acquisition attracting open offer is not met for reasons outside the control of the acquirer and such agreement is rescinded. Concluding remarks SEBI has adopted most of the recommendations of TRAC. The new Takeover Regulations replaces more than a decade old Takeover Code keeping pace with the market dynamics. It also addresses many contentious issues by incorporating provisions drawn from various rulings and informal guidance. 5
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