Keywords: M&A, takeover, PAC, Creeping acquisition, open offer,
public announcement
[Anjana Ravikumar is a III Year B.B.A.LL.B student at Gujarat National
Law University (GNLU)]
INTRODUCTION
Since the advent of globalization, the
doors of the Indian economy have been open for overseas investors. To
compete on a global platform, companies have to continuously amplify the
scale of their business. Mergers and Acquisitions (“M&A”) pave the way
for a suitable option to capture the opportunities created by such
policies.
BACKGROUND
One of the earliest takeovers in India can be traced back to the
acquisition of Pukhuri Tea Co. Ltd. by Bishnauth Tea in 1965. However, the
waves of corporate deal-making swept the Indian landscape during the
1980s, which witnessed tentative reforms under the Rajiv Gandhi
administration. The first hostile takeover attempt was made out by the
London based industrialist,
Swaraj Paul in 1983.
A
takeover is an acquisition of control of a registered company through the
purchase or exchange of shares. A
Merger on the other hand involves
the amalgamation of two or more companies either through the exchange of
shares or the formation of a new company. Thus, while mergers involve an
amalgamation through mutual consent of the companies, acquisitions or
takeovers may either be friendly or hostile. Further, in an acquisition,
the target company is engulfed by the acquirer and hence ceases to exist,
while in a merger it is the fusion of two or more companies into one new
entity.
Takeovers have been associated with
propelling economic efficiency.
However, it has a tendency for being exploited as a weapon, at the
disposal of corporate raiders with massive capital resources, often
prejudicial to the interests of retail investors. To prevent such
exploitation and encourage the growth of the securities market, SEBI was
established in 1992 as a regulatory body.
Subsequently, the
SEBI (Substantial Acquisition of Shares and Takeover [SAST]) Regulations,
1997 were formulated; incorporating the suggestions of the PN Bhagwati
Committee. These were substituted by the SEBI (Substantial Acquisition of
Shares and Takeover) Regulations in 2011 (hereinafter “Takeover Code”).
based on the recommendations of the Takeover Regulations Advisory
Committee (“TRAC”) headed by Mr. C. Achuthan.
IMPORTANT TERMINOLOGIES:
Persons acting in concert (“PACs”):
According to Regulation 2(1)(q) of the Takeover Code,
PACs are persons who, in
furtherance of a common objective or purpose of substantial acquisition of
shares, voting rights, or gaining control over the target company. The
same is done pursuant to a formal or informal agreement or an
understanding which is pertaining to either directly or indirectly
co-operating in acquiring, agreeing to acquire shares, voting rights or
control of the target company. The question regarding whether two persons
constitute PACs is to be answered based on an analysis of the
facts and circumstances of the
case.
The
scope of PAC has been broadened to
include a new class known as deemed PACs under regulation 2(1)(q)(2) of
the latest Takeover Code. Deemed PACs include promoters, immediate
relatives, trustees, a collective investment scheme and its company,
venture capital fund, and its sponsor and asset management company.
However, deemed PACs will be considered after the abovementioned PACs as
acting in concert.
Acquirer
An
acquirer is defined under
regulation 2(1)(a) of the Takeover
Code. Any person who by himself or through or with PACs, directly or
indirectly acquires or agrees to acquire, shares, voting rights or control
of the target company is called an acquirer. An acquirer may be a natural
person, a corporate entity, or any other legal entity.
DISCLOSURE REQUIREMENTS:
To ensure that the price discovery of shares of the target company takes
place in an informed manner, several disclosures have been made mandatory
under Chapter V of the Takeover
Code. The disclosures required are:
- Disclosure of acquisition and
disposal: It is required for all acquirers to disclose acquisitions of 5%
or more voting rights of the target company within two working days after
such acquisition. The disclosure must be made to every stock exchange
where the shares of the company are listed and to the registered office of
the target company. The same does not apply to a scheduled commercial bank
or a public financial institution.
- Continual disclosures: If any
acquirer along with his PACs holds shares or voting rights entitling him
to exercise 25% or more of voting rights in the target company, he is
required to disclose the same. Further, every promoter along with his PACs
is required to disclose their aggregate shareholding and voting rights in
the form as specified in the Regulations.
- Disclosure of encumbered
shares: The promoter along with his PACs shall disclose details regarding
any shares encumbered by them or any release or invocation of such
encumbered shares to the stock exchange and the target company’s
registered office within seven working days.Disclosure requirements thus,
seek to protect the interest of the public stakeholders by ensuring
transparency.
OPEN OFFER:
An open offer under the
Takeover Code is an offer made by an acquirer to the shareholders of the
target company inviting them to tender their shares at a particular price.
It provides an exit option to the shareholders of the target company
during a change in control or substantial acquisition of shares in the
target company. Thus, open offer provides the public shareholders an
opportunity to withdraw their investment when there is a change in the
management or promoter shareholding.
The Takeover code
stipulates clearly that not just direct but even indirect acquisitions of
shares, voting rights or control will trigger an open offer. Indirect
acquisition is defined under
regulation 5(1) of the Takeover
Code. It includes any acquisition of shares, voting rights in or control
over any company which enables the acquirer and PACs, to exercise or
direct the exercise of control over or voting rights in the target
company. Such acquisition is made without attracting the obligation to
make an announcement of public offer.
To protect the economic
interests of the exiting shareholders of the target company, it has been
made mandatory for the offer to be at the best possible terms for the
shareholders. To ensure the same, the Takeover Code prescribes the timing,
minimum offer size, price discovery mechanisms, etc. An open offer may be:
Mandatory Open Offers: The Takeover Code prescribes
certain circumstances under which an acquirer is obliged to issue a
mandatory tender offer to the existing shareholders of the target company
to acquire at least a minimum of 26% of its shares. The triggers/
circumstances include:
-
Initial Trigger – When the acquirer along with his PACs plans
to acquire shares which allows them to exercise 25% or more of the
voting rights in the company.
-
Consolidation Trigger – When acquirer and PACs together hold
25% or more of shares or voting rights but it is less than the maximum
permissible limit of non-public shareholding in a target company.
-
Control Trigger – When an acquirer gains control over the
target company, irrespective of shares owned.
-
Trigger on Indirect Acquisition – When an acquirer indirectly
acquires the ability to exercise voting rights or control over target
company as specified in initial, consolidation, or control triggers.
Voluntary Open Offer: A voluntary offer is made by an existing
shareholder or an acquirer who holds no shares. Under
Regulation 6 of the Takeover Code,
a voluntary offer is to be made when the acquirer and PACs exercise a
minimum of 25% or more of voting rights but less than the maximum limit of
non-public shareholding in the target company. Voluntary offers have to be
made for a minimum of 10% of the total shareholding of the target company.
Competing Offer: The Takeover Code under
Regulation 20 permits third
parties to make offers to the shareholders providing exit opportunities
while the acquirer’s open offer subsists. This creates orderly competition
among acquirers.
PROCEDURE OF AN OPEN OFFER:
The major steps involved in the
open offer process are as follows:
CREEPING ACQUISITION:
· Covered under Regulation 3(2)
of the Takeover Code,
Creeping Acquisition is a means to
facilitate the consolidation of shares, voting rights, or control in the
company by persons already holding or controlling a substantial number of
shares.
· Under this provision, acquisition of voting shares
in a listed company; without public announcement; in excess of 25%, is
permissible provided that the acquisition is limited to 5% in one
financial year.
· Every financial year, an additional 5%
voting rights can be acquired by an acquirer with PACs. However, this
additional acquisition via creeping acquisition can only extend up to a
total shareholding of 75% of the share capital.
· Beyond this
75% limit, a public announcement is mandatory. The
5% limit is to be calculated by
aggregating all purchases, without including the aggregate sales.
EXEMPTIONS FROM OPEN OFFERS:
The exemptions
applicable to open offers are dealt with under
Regulation 10 and 11 of the
Takeover Code. Circumstances under which a company is exempt from the
issue of open offer include:
1. Inter se Transfers: Inter se transfers occur between immediate
relatives, between a company and its subsidiaries, holding company and
other subsidiaries of such holding company are exempt from the obligation
of issuing open offer. Transfer to PAC for three years or more, prior to
the proposed acquisition is also exempted.
Regulation 10(1)(a)(ii)
of the Takeover Code provides for inter se transfer amongst promoters
which can be exempted only if the said promoter holds shares for at least
three years, prior to such acquisition. Inter se transfers are exempt from
the obligation of open offer since there is no change in ownership per se.
2. Trusts: The transfer of shares to trusts are exempt
from the obligation of open offer under the following conditions:
-
Such transfer shall not affect the ownership or control of shares or
voting rights in the target company.
-
The trust is a mirror image of the promoter holding such shares.
-
Only individual promoters, immediate relatives, or lineal descendants
can be the beneficiaries of the trust.
-
The beneficial interest shall not be transferred, assigned, or
encumbered.
-
After dissolution, the assets can be transferred only to beneficiaries
or their legal heirs.
-
The trustees cannot transfer or delegate their powers.
3. Intermediaries: The transfer of shares in return for services
rendered are exempt from the obligation of open offer. Intermediaries
include underwriters, stockbrokers, merchant bankers, registered stock
marker, and scheduled commercial banks acting as an escrow agent.
4. Insolvency and Bankruptcy: The acquirers of
distressed companies are not obliged to make an open offer. The
acquisitions of
Bhushan Steel by Tata Steel is one
such acquisition under IBC which was exempted from open offer
obligation.
5. Disinvestment: Defined under
Regulation 2(g) of the Takeover
Code, disinvestment is the direct or indirect sale by the Central/State
Government or by a government company of shares, voting rights or control
over a target company, which is a public sector undertaking. Acquisition
of shares during disinvestment is exempt from the obligation of open
offer.
6. Investment Funds: Alternate Investment Funds
and Venture Capital Funds are exempted from making an open offer, when
their investments cross the threshold which triggers an open offer.
7. Buyback of shares: If the
buyback of shares results in an
increased shareholding of the promoter, it will not trigger an open offer.
8. Forfeiture of shares: Increase in voting rights of
existing shareholders due to forfeiture of partly paid shares and
non-payment by defaulting shareholders does not necessitate the issue of
an open offer.
9.
Acquisition under the SARFAESI Act, 2002: The Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 (SARFAESI) vests in banks the power to auction properties of
borrowers who default the loan payment.
Asset Reconstruction
Companies acquiring financial assets from banks and other financial
institutions are duty-bound to return them upon recovery of the amount.
Such acquisitions under SARFAESI Act, therefore, fall within the ambit of
exemption from open offers.
Acquisitions by way of
transmissions, inheritance, succession, rights issue, and exchange of
shares also fall within this exemption. When the company is unsure about
the exemption of a proposed transaction, it may seek informal guidance
from SEBI through an application. Further, SEBI also has the discretionary
power to grant exemptions for specific transactions, in the interest of
the stakeholders of the company though not provided for in the code.
PUBLIC ANNOUNCEMENT:
When the acquirer
acquires voting rights of the target company, in excess of limits
prescribed under
Regulation 3 and 4 of the Takeover
Code, the acquirer is required to give a Public Announcement of Open offer
to the shareholders of the target company.
It contains details
about the offer, the acquirer(s)/PAC, the transaction which triggered the
open offer or the underlying transaction details of selling shareholders
(if any), the target company, and the price and mode of payment. It is the
first announcement made by the acquirer disclosing details of the
intention to acquire the shares of the target company from existing
shareholders through an open offer.
Public Announcement is
issued on behalf of the acquirer, by the Manager to the offer, in the
format as provided under
Regulation 15(1)
of the Takeover Code. The Takeover Code also prescribes a specific
timeline for Public Announcement. Public announcements are essential to
safeguard the interests of the shareholders.
DETAILED PUBLIC STATEMENT (DPS):
The DPS is the second announcement made by the acquirer and
the PACs disclosing all relevant information regarding the open offer. It
enables the shareholders to make an informed decision regarding the open
offer. Under Regulation 13(4) of
the Takeover Code, a DPS shall be published by the acquirer through the
manager to the offer within a maximum of five working days from the date
of Public Announcement.
Regulation 15(2) of the Takeover
Code provides the format for the Detailed Public Statement.
LETTER OF OPEN OFFER (LO):
After the publication of Detailed Public Statement (DPS), within 5 days,
the acquirer through the manager of the offer is required to file a draft
letter of offer with SEBI. SEBI is required to revert with its comments on
the LO within 15 working days. SEBI oversees that the disclosures
contained in the LO are adequate and in conformity with the Regulations.
Once approved by SEBI, it is dispatched to the shareholders of the target
company as on an identified date.
While the PA and the DPS are
made by the acquirer to inform the public of an exit opportunity available
to them, the LOO is an offer made by the acquirer to the identified
shareholder of the target company to purchase their shares.
CONCLUSION:
Although not all corporate takeovers may be deemed beneficial to the
economy, an overwhelming majority of them are economically justifiable and
are not mere opportunistic managerial power-grabs. SEBI has constantly
strived to curb undesirable practices and protect the interests of
investors to encourage mergers and takeovers.
The new Code
based on the suggestions of the TRAC has relied on court rulings,
International Takeover Codes, and sound statistical analysis to plug all
loopholes. It aims to provide clarity by simplifying and aligning with
internationally accepted practices.
The ever-evolving public
M&A landscape continues to throw new challenges for SEBI to address.
However, the new Takeover Code presently is at par with any foreign code
on mergers and acquisitions and continues to ensure a systematic and
transparent mechanism for takeovers in India.
-By Anjana Ravikumar
