India is one among the fastest developing countries with a highly impressive increase story. But to support this level of increase there needs to be a favourable environment conducive to development. Subsequently Indian regulators are these days sitting on the edge, recreating and revamping the legal framework for Indian incorporations. Indispensable alterations have been due from long time. However, owing to the rigidity of Indian legal system, the processes have been outstretched. The enterprise and amount of corporate organisations have increased manifold over the years. In this dynamic era, one cannot think of sticking to age-old legal regime. A legislation which is too old will lose its relevance and jeopardise the objective for which it was enacted.
Therefore, one such law relating to India's mergers and acquisitions ('M&A') are finally set to experience a unblemished makeover as the Takeover Regulations Advisory Committee ('Trac') under the chairmanship of Mr C Achutan in a 139 page description to the Securities and exchange Board of India ('Sebi') has proposed sweeping changes to the gigantic Acquisition of Shares and Takeover Regulations, 1997 ('Takeover Code'/'Takeover Regulation') which were introduced to regulate the takeovers happening in our country and to facilitate the orderly development of the associated activities which would have an impact on the M&A market.
Free Permit Practice Test
Brief preview on the genesis of the Takeover Code
2. It would be worthwhile to delineate genesis of the Takeover Code starting from 1990. Briefly, it may be stated as follows:
• In 1990 the Government amends clause 40 of the Listing deal according to which threshold acquisition level reduced from 25 per cent to 10 per cent; convert in supervision control to trigger group offer; minimum mandatory group offer of 20 per cent; disclosure requirement straight through mandatory group announcement.
• In 1992 Sebi (Substantial Acquisition of Shares and Takeovers) Regulations, 1992 was notified.
• In 1994 Sebi (Substantial Acquisition of Shares and Takeovers) Regulations, 1994 was notified replacing 1992 Regulations introducing new provisions to enable both negotiated and open market acquisitions and allowing competitive bids.
• In 1995 Sebi sets up committee under old Chief Justice of India P N Bhagwati to delineate the 1994 Takeover Regulations in order to frame thorough regulations.
• In 1997 Bhagwati Committee submits its description on the Takeover Regulations to Sebi.
• In 1997 Sebi accepts Bhagwati Committee description and notified Sebi (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 after which it has been time and again being amended to suit the prevailing market conditions in order to facilitate an investor cordial market.
Rationale behind codifying the Takeover Code
3. With the announcement of the procedure of globalisation, the doors of Indian cheaper were opened for the overseas investors. But to compete at the world platform, the scale of enterprise was needed to be increased. In this changed scenario, mergers and acquisitions were the best selection available for the corporate inspecting the time factor involved in capturing the opportunities made available by the globalisation. But soon the predators with huge disposable wealth started exploiting this opportunity to the prejudice of retail investor. This created a need for some regulations to safe the interest of investors which were done straight through enactment of the Takeover Code and discrete other ancillary rules and regulations. The major objectives of the Takeover Code can summarised as follows:
Investors having the selection of selecting to exit from the company
Tougher requirements for disclosure of material information with respect to the open offer enabling the investor to make an informed decision
Effective and efficacious completion of takeover formalities in a timely manner
Key recommendations of the Trac
4. Key recommendations of the Trac can be summarized as follows:
4.1 Trigger of the Takeover Code
(i) The threshold for triggering of the Takeover Code has been increased from 15 per cent to 25 per cent.
(ii) The creeping acquisition limit of 5 per cent in one financial year increased from 15 per cent-55 per cent to 25 per cent-75 per cent. Such acquisition can be made in any manner (including straight through open market purchases, negotiated deals, bulk or block deals, preferential allotment, etc.).
(iii) Acquisition of control over a target enterprise would require the acquirer to make an open offer.
4.2 Size of open offer
The size of open offer has been increased from 20 per cent to 100 per cent of the shares of the company.
4.3 Offer price
(i) For direct acquisition - Volume-weighted average market price ('Vwap') for 60 trading days prior to the group announcement to replace average of the weekly high and low of the windup prices of shares for past 26 weeks or 2 weeks. Further, in increasing to highest negotiated price in the middle of parties and highest price paid by acquirer and Pac during 26 weeks prior to group announcement, Vwap for shares acquired by acquirer and Pac during past 52 weeks also to be carefully for determining open offer price.
(ii) For indirect acquisition - New price indicator introduced in the form of highest price paid by acquirer or Pac in the middle of date of original acquisition and date of group announcement for indirectly acquired target company, in increasing to the existing price indicators. Further, offer price shall stand enhanced by added 10 per cent per annum for the period in the middle of date of original acquisition and date of detailed group statement.
4.4 Definition of 'control'
The definition of 'control' to comprise not only the right but also the ability to appoint majority of the directors on the Board of the target company.
4.5 Deemed direct acquisition - view of deemed direct acquisition introduced if the proportionate net asset value/sales turnover/market capitalisation of the indirectly acquired target enterprise as a ration of the consolidated net asset value/sales turnover/market capitalisation of the directly acquired entity is in excess of 80 per cent, on the basis of the most modern audited annual financial statements.
4.6 Delisting
An acquirer would be required to state upfront in group announcement its intention to delist the target company. If the shareholding of the acquirer is in the middle of 75 per cent to 90 per cent after the open offer, the acquirer would be required to whether bring his keeping down to ensure compliance with the Listing Agreement, or proportionately cut both his acquisitions under the deal that triggered the open offer and the acquisitions under the open offer. No requirement to make a cut off delisting offer under Delisting Regulations if gather crosses 90 per cent delisting threshold straight through the open offer under the Takeover Code.
4.7 competitive offers
The period for production competitive offer changed to 15 enterprise days from the date of detailed group statement of open offer. Further, within 21 enterprise days from expiry of the offer period, any competitive acquirer would be free to negotiate and gather the shares tendered to the other competitive acquirer, at the same price that was offered by him to the public.
4.8 Non-compete fees
Omitted. Promoters to be paid the same price per share as the group shareholders.
4.9 Open offer process - (i) Timing of group announcement - A summary group announcement on the same day of according to gather shares or voting ownership in, or control over the target company. A detailed group statement within 5 enterprise days from production of the summary group announcement. (ii) Timeline for open offer - 57 enterprise days.
4.10 Obligations of the manager
The owner is free to deal with the shares of the target enterprise after the offer period.The owner shall file a description with the Board within 15 enterprise days from the expiry of tendering period.
Analysis of the recommendations
6. On basis of the recommendations given by the Trac, an effort is being made to analyse the impact of the recommendations that would have on each of the stakeholder in the succeeding paras:
6.1 Promoters of the target company
Rise in hostile takeovers of fellowships in which the promoters have a lower shareholding will be simple. This consulation is augmented by the new threshold limits from 15 per cent to 25 per cent.
• gigantic shareholders to advantage from the exemption that is provided in the case of increase in voting ownership due to buy-back of shares that happens but this rule is subject to inescapable conditions. This rule also benefits those who do not participate in any buy-back but end up crossing the threshold for open offer.
• The gift Takeover Code permits creeping acquisition only up to 55 per cent but the recommendations permits creeping acquisition of 5 per cent per annum up till 75 per cent for any acquirer who holds 25 per cent or more voting ownership in the target company.
• Promoters will now be paid at the same rate for their stake as is paid to other group shareholders of the target enterprise due the abolishment of non-compete fees. This move could severely impact the stake sale done by many promoters in listed companies.
6.2 group shareholders
• One of the original intention for creating a Takeover Code is to safe the interest of all the stakeholders and this includes group shareholders as well. Trac has recommended that the open offer size be increased from the gift 20 per cent to 100 per cent. This could be viewed as path breaking because it gives exit opportunity to all the shareholders and not just a handful.
• Trac urged the Central Board of Direct Taxes to put proposal to the Government for an amendment in the Income-tax Act to exempt capital gains resulting from sale of shares tendered in an open offer.
• By deletion of the view of non-compete fee, all sort of difference in the middle of promoters and group shareholders have been removed. A uniform price is offered to one and all, thus, introducing an equitable treatment to every stakeholders.
• Risk associated with the vaporing market conditions will be minimised as the timeline has been shortened for the open offer. Largely the price carefully for the open offer at times ends up to be substantially lower than the market prices when the shares are finally tendered.
• One major convert envisages is with respect to the accountability of the independent directors. The independent directors have to compulsorily make reasoned recommendations on the open offer. For the group shareholders this is a welcome move as they stand to gain from the taste and wisdom of the independent directors.
6.3 Strategic acquirers
• increase in the cost for acquiring a listed enterprise on the account of increased open offer size from 20 per cent to 100 per cent.
• Due to the increase in the cost of acquisition the domestic acquirers would find it difficult as the banks would have limitations in providing the finance. Moreover, at the same time foreign entity, wanting to gather Indian company, would be located at an advantage as there would be easy passage to money exterior India.
• Delisting becomes easier as the acquirer can bypass the requirements of the Delisting Regulations and delist the enterprise directly if the acquirer's stake in the target enterprise exceeds the delisting threshold.
• There are newer alternatives to the acquisition as it now also includes their own liquid shares or convertible securities.
6.4 private equity investors
• The higher trigger selection of 25 per cent should see an increment in the volume of private equity speculation as now they can increase their stake in listed fellowships upto 24.99 per cent without having to worry about triggering the open offer requirements
• There is still a lack of clarity on the definition of 'control'. Instances such as when a private equity investor does not have a inescapable control over the affairs of the enterprise by only getting minority rights. 'Defacto control' provides a better solution here than 'dejure control'.
6.5 Target company
• As mentioned earlier, there is an increase with respect to the
accountability of the independent directors as from now on they have to give compulsorily reasoned recommendations to their shareholders with respect to the open offer explaining whether they are in favour of the open offer or not.
• There is a new requirement for passing a special resolution by
the shareholders of the target enterprise if they wish to arrange off an asset/undertaking within a period of two years from the end of the offer period.
Conclusion
7. Trac has attempted to simplify the Takeover Code and align it with the international best practices. The description of Trac sets a benchmark to emulate before any new legislation is introduced since some of the important system followed by Trac such as sound statistical analysis, relying on past court rulings, analysing international Takeover Codes, plugging the loopholes based on some of the modern cases, etc., are highly important for developing a robust legislation which can stand the test of time. If Sebi stamps the recommendations of Trac with force of law, replacing the extant Takeover Code, then the description of Trac will be guiding light for takeover regime in India in the next decade to come as was Bhagwati Committee description in the old decade.
look what I found Merger and Acquisitions - time to come in the Light of Impending Changes in the Takeover Code
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