September 2011

SEBI Takeover Regulations 2011 Overview

Background SEBI at their Board Meeting held on 28 July 2011, had considered the report of Takeover Regulations Advisory Committee [TRAC] and accepted most of the recommendations made by TRAC. SEBI has, on 23 September 2011, notified SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 [SAST 2011]. SAST aims at protecting interest of the investors in securities of a listed company providing amongst others, an opportunity for the public shareholders to exit where there is a substantial acquisition of shares or voting rights or control over a listed company, consolidation of holdings by existing shareholders and related disclosures and penalties for non- compliance etc. SAST requires an acquirer to make an offer to shareholders of the target company on acquiring shares exceeding stipulated thresholds. It also contains provisions relating to open offer size and price, time bound process for making an open offer, exemption from making an open offer etc. Applicability SAST 2011 will come into force on the 30th day from the date of its publication in the Official Gazette. In view of this requirement, SAST 2011 will be effective from 22 October 2011 and SAST 1997 stands repealed from said date. Key provisions of SAST 2011 are summarized below. Triggers for making an open offer Direct acquisition of shares or voting rights Any acquisition of shares or voting rights in the target company by the acquirer and PAC which entitle them to exercise in aggregate 25% or more voting rights. Any acquisition of shares or voting rights exceeding permissible creeping limit (5%) in a financial year. This situation arises in cases where the acquirer and PAC have acquired and holds shares or voting rights in the target company which entitles them to exercise 25% or more but less than maximum permissible non-public shareholding and further acquires more than 5% shares or voting rights in a financial year. Acquisition of shares by any person such that the individual shareholding of such person acquiring shares exceeds stipulated thresholds irrespective of whether there is a change in the aggregate shareholding with the PAC. An indirect acquisition of shares or voting rights requiring an open offer would be considered as direct acquisition, for pricing, timing of open offer and other compliances/ requirements of open offer, where the proportionate net assets or sales turnover or market capitalization of the target company as a percentage of the consolidated net asset or sales turnover or the enterprise value for the entity or business being acquired is in excess of 80% on the basis of the most recent audited annual financial statements (Deemed Direct Acquisition).

 Any revision in voluntary offer size made by the acquirer within 15 working days from the PA of the competing offer. Acquisition of control Any direct or indirect acquisition of control of Target Company by an acquirer irrespective of acquisition or holding of shares or voting rights. Indirect acquisition of shares or control Acquisition of shares or voting rights in, or control over, any company or other entity, that would enable any person and PAC to exercise or direct the exercise of such percentage of voting rights in, or control over a target company, the acquisition of which would otherwise trigger open offer obligation, shall be considered as an indirect acquisition of shares or voting rights in, or control over the target company necessitating an open offer. Voluntary offer An acquirer, who together with PAC, holds shares or voting rights in a target company entitling them to exercise 25% or more but less than the maximum permissible non-public shareholding, shall be entitled to voluntarily make a PA of an open offer for acquiring shares. A voluntary offer is subject to certain conditions which includes the following: Minimum offer size is 10% of the total shares of the target company; The aggregate shareholding of the acquirer and PAC after completion of the open offer cannot exceed the maximum permissible non-public shareholding; Voluntary offer cannot be made where an acquirer or PAC has acquired shares of the target company in the preceding 52 weeks without attracting the obligation to make an open offer; During voluntary offer period such acquirer shall not be entitled to acquire any shares otherwise than under the open offer;

An acquirer and PAC who have made a voluntary offer shall not be entitled to acquire any shares of the target company for a period of 6 months after completion of the open offer except pursuant to another voluntary open offer or making a competing offer upon any other person making an open offer or bonus issue or stock splits. Minimum open offer size Trigger for open offer Direct acquisition of shares or voting rights or control over the target company Indirect acquisition Minimum open offer size 26% of the total shares of the target company as of 10th working day from the closure of the tendering period. Other conditions / observations Where post open offer shareholding of acquirer and PAC is in excess of the maximum permissible non-public shareholding: it must be reduced within 1 year; it shall not be eligible to make a voluntary delisting offer under SEBI Delisting Regulations for 12 months from the date of the completion of the offer period

Voluntary open offer

10% of the total shares of the target company. The post acquisition holding in such cases shall not exceed the maximum permissible non-public shareholding.

Any open offer shall be made to all shareholders of the target company, other than the acquirer, PAC and the parties to any underlying agreement including persons deemed to be PAC with such parties, for the sale of shares of the target company.

Increase in mandatory open offer from 20% to 26% to make open offer process expensive

Minimum open offer price Minimum open offer price shall be the highest of the following: In cases of direct and Deemed Direct Acquisition of shares or voting rights or control over the Target Company Highest negotiated price per share of the target company under the agreement that attracted the open offer Volume-weighted average price paid or payable for acquisitions by the acquirer or PAC during 52 weeks preceding the date of PA In case of an indirect acquisition of shares, voting rights or control over the Target Company Highest negotiated price per share, if any of the target company, under the agreement attracting open offer Volume-weighted average price paid or payable for any acquisition by the acquirer or PAC during preceding 52 weeks immediately preceding the earlier of: the date on which the primary acquisition is contracted, and date on which intention or decision to make primary acquisition is announced in public domain Highest price paid or payable by the acquirer or PAC for any acquisition during 26 weeks preceding the earlier of: date on which the primary acquisition is contracted, and date on which intention or decision to make primary acquisition is announced in public domain Where shares are frequently traded - volume weighted average market price during 60 trading days immediately preceding the earlier of: the date on which the primary acquisition is contracted, and date on which intention or decision to make primary acquisition is announced in public domain Where minimum offer price cannot be computed as per any of the parameters, it shall be fair price determined by acquirer and manager to the open offer taking into account valuation parameters including, book value, comparable trading multiples, and such other parameters as are customary for valuation of shares of such companies Where net assets value or sales turnover or market capitalization of the target company is more than 15% of consolidated net asset or sales turnover or the enterprise value of the entity or business being acquired as per latest audited annual financial statements, the per share value of the target company computed by the acquirer Highest price paid or payable for any acquisition by the acquirer or PAC during the earlier of: date on which the primary acquisition is contracted; date on which intention or decision to make primary acquisition is announced in public domain; date of PA under SAST 2011 Other parameters for determining offer price: Where acquirer or PAC has any outstanding convertible instruments convertible into shares of the target company at a specific price, the price at which such instruments are to be converted shall be considered. Where acquirer or PAC has acquired any shares of the target company during the period of 26 weeks after the tendering period at a price higher than the offer price paid, the acquirer and PAC shall pay the difference between the highest acquisition price and offer price, to all the shareholders whose shares were accepted in the open offer, within 60 days from the date of such acquisition except where acquisitions are pursuant to SEBI Delisting Regulations or open market purchases made in the ordinary course on the stock exchanges which are not negotiated deals or bulk deals or block deals or in any other form.
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Highest price paid or payable for any acquisition by the acquirer or PAC during 26 weeks preceding the date of PA

Where shares are frequently traded - volume weighted average market price of the target company during 60 trading days immediately preceding the date of PA

Where shares are infrequently traded - the price determined by the acquirer and manager to open offer taking into account valuation parameters, including, book value, comparable trading multiples and such other parameters as are customary for valuation of shares of such companies In case of Deemed Direct Acquisition where net assets value or sales turnover or market capitalization of the target company is more than 15% of consolidated net asset or sales turnover or the enterprise value of the entity or business being acquired as per latest audited annual financial statements, the per share value of the target company computed by the acquirer

 Minimum price shall include any price paid or payable in any form or manner and includes: control premium, if any; non-compete fees or otherwise Adjustment to minimum open offer price in following cases: If during the offer period acquirer directly or through PAC agrees or acquires any shares or voting rights in the target company in any manner at a price higher than the minimum offer price, the minimum offer price shall stand revised to such higher price. Where the open offer is subject to minimum level of acceptances and the open offer does not receive the minimum acceptance, the acquirer may indicate lower price for acquiring all the acceptances. For corporate actions like rights issue/ bonus issue/ stock splits/ dividend/ de-mergers/ reduction of capital etc. where the record date for effecting the same falls 3 business days prior to the commencement of the tendering period In case of an indirect acquisition, the minimum offer price would stand increased by 10% p.a. for the period earlier of the date on which primary transaction is contracted, or date on which the intention / decision to make primary acquisition is announced in public domain, and the date of detailed public statement, provided such period is more than 5 working days. General exemptions from making an open offer Illustrative list of acquisition which are exempted from making an open offer requirement (subject to conditions) are as under: Acquisition pursuant to inter-se transfer of shares among qualifying persons. Such transactions are to be intimated to the stock exchange 4 working days in advance. List of qualifying persons include: Immediate relatives; Persons named as promoters in the shareholding pattern filed by the target company for not less than 3 years; Persons acting in concert for not less than 3 years and disclosed to stock exchange; Specified ensemble of persons etc. Acquisition in the ordinary course of business in specified cases like scheduled commercial bank acting as an escrow agent or invocation of pledge by scheduled commercial bank or public financial institution as a pledgee etc.

Acquisition at subsequent stages by an acquirer pursuant to an agreement of disinvestment. Acquisition pursuant to a scheme Made under section 18 of SICA; Of arrangement involving target company or reconstruction of the target company including amalgamation, merger, de-merger pursuant to an order of court or an authority whether Indian or foreign; Of arrangement not directly involving target company or reconstruction not involving target companys undertaking including amalgamation, merger, de-merger pursuant to an order of court or an authority whether Indian or foreign. This exemption is subject to the following specific conditions viz: Cash and cash equivalent paid is less than 25% of the consideration paid; and After the implementation of the scheme, the persons holding minimum 33% of the voting rights in the combined entity are the same persons who held the entire voting rights before the implementation of the scheme. Acquisition pursuant to SARFAESI Act. Acquisition pursuant to SEBI Delisting Regulations. Acquisition by way of transmission, succession or inheritance. Acquisition of voting rights or preference shares carrying voting rights arising out of operation of section 87 (2) of the Companies Act. Acquisition of shares of a target company not involving a change in control pursuant to scheme of corporate debt restructuring (CDR) notified by RBI subject to such scheme being authorized by the shareholders of the target company by postal ballot. An increase in voting rights in a target company pursuant to buy-back of shares which necessitate making an open offer shall be exempt provided such shareholder reduces his shareholding so that the voting rights fall below the threshold within 90 days

Bonanza for public shareholders payments like non-compete fees, control premium etc. to be factored in offer price
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from the date on which the voting rights so increase. Acquisition of rights shares or voting rights in the target company in excess of creeping limit (5%): upto ones entitlement; beyond ones entitlement if the following conditions are fulfilled viz; the acquirer has not renounced any of his entitlements in such rights issue; and the price at which the rights issue is made is not higher than the ex-rights price of the shares of the target company computed in a specified manner Increase in voting rights in a target company of any shareholder in excess of the creeping limit (5%) pursuant to buy-back of shares subject to conditions that: such shareholders have not voted in favor of buy back resolution which is to be passed through postal ballot mechanism; or such shareholder in capacity as a director or any other interested director has not voted in favor of buy back at the board meeting of the target company where buy back is through board approval route; and the increase in voting rights does not result in an acquisition of control by such shareholder over the target company. If the above conditions are not met and such shareholders reduce the increase in shareholding within 90 days to the creeping acquisition limit, open offer obligations will not be attracted. Acquisition of shares in a target company from a venture capital fund or a foreign venture capital investor registered with SEBI, by promoters of the target company pursuant to an agreement between such venture capital fund or foreign venture capital investor and such promoters. SEBI may grant an exemption from the obligation to make an open offer for acquiring shares subject to such conditions as it deems fit. Open Offer process The open offer process is broadly divided into following sequential stages: Public Announcement [PA]; Detailed Public Statement [DPS]; and Letter of Offer [LO].

1. PA for an open offer for acquiring shares of the target company shall be made by the acquirer through the SEBI registered merchant banker to be appointed as the manager to the open offer in a specified manner. PA is to be sent to all stock exchanges where shares of the target company are listed for dissemination to the public. 2. SAST 2011 envisages different timelines for making PA which is as under: Event that would require PA Market purchases of shares Time of making PA Prior to placement of purchase order with the stock broker to acquire shares.

Acquiring shares or voting rights On the date of exercise of the option to convert or control upon conversion of such securities convertible securities (without fixed date of conversion) or upon conversion of depository receipts for the underlying shares Acquiring shares or voting rights or control upon conversion of convertible securities (with a fixed date of conversion) Acquisition pursuant to disinvestment In case of an indirect acquisition which is not a Deemed Direct Acquisition On 2nd working day preceding the scheduled date of conversion of such securities.

On the date of executing the agreement for acquisition. Any time within 4 working days from the earlier of: date on which primary acquisition is contracted, or date on which intention or decision to make primary acquisition is made public Earlier of: date of primary acquisition is contracted, or date on which intention / decision to make primary acquisition is made public On the date of passing special resolution under section 81 (1A) of Companies Act, 1956. Not later than 90th day from the date of increase in voting right beyond the stipulated threshold Not later than 2 working days from the date of receipt of intimation of having acquired such title.

In case of Deemed Direct Acquisition

Acquisition under preferential issue Increase in voting rights pursuant to buy back not qualifying for an exemption Acquisition wherein the specific date of acquisition of title of shares, voting right or control is beyond the control of the Acquirer

3. DPS is to be published by the acquirer in the newspaper within 5 working days from the PA. 4. Upon completion of the process of PA and DPS, the acquirer is required to file a draft letter of offer (LO) with SEBI and once the same is approved by SEBI, it has to be given to the shareholders of the target company. 5. Escrow account is to be created not later than 2 working days prior to the date of DPS. 6. Competing offers can be made within 15 working days from the date of the DPS published by the acquirer who has made the first PA. 7. The acquirer shall not complete the acquisition of shares or voting rights in or control over the target company until the expiry of offer period except in following cases: Event An offer under preferential allotment Acquirer depositing in the escrow account 100% of the consideration payable under the open offer assuming full acceptance of the open offer Completion time Within 15 days from the date of passing special resolution by shareholders The parties to such agreement may after the expiry of 21 working days from the date of DPS, act upon the agreement and the acquirer may complete the acquisition of shares or voting rights in, or control over the target company as contemplated. 8. Upon receipt of the DPS, board of directors of the target company shall constitute a committee of independent directors to provide reasoned recommendations on open offer, and the same shall be published in the newspapers. Key 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.

Control The basic definition of control has been retained. However, it has been expressly clarified that a director or officer of a target company shall not be considered to be in control over target company merely by virtue of holding such position. Disinvestment Disinvestment would now include direct or indirect sale of shares / voting rights of, or control over, a target public sector undertaking by the government company. Convertible security Convertible security has been defined to mean a security which is convertible into / exchangeable with equity shares at a later date, with or without the option of the holder of the security, and includes convertible debt instruments and convertible preference shares. For the purpose of disclosure of shareholding and voting rights of the acquirer or promoter or PAC the acquisition and holding of convertible security would be regarded as shares, and disclosures of such acquisitions and holdings need to be made. Immediate relative Immediate relative means spouse of a person, and includes parent, brother, sister or child of such person or of the spouse. Immediate relative are deemed to be PAC unless contrary is established. Maximum permissible non-public shareholding Maximum permissible non-public shareholding means such percentage shareholding in the target company excluding the minimum public shareholding required under the Securities Contracts (Regulation) Rules, 1957. As per Securities Contracts (Regulation) Rules, 1957, minimum 25% (10% in case of PSU) equity shareholding (excluding shares which are held by custodian against

Cessation of joint control or change in nature and quantum of control to trigger open offer Change in control with approval of shareholders to trigger open offer
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One time opportunity to increase stake without an open offer for select class
depository receipts issued overseas) must be maintained by public in every listed company. Accordingly, maximum permissible non-public shareholding in a listed company is 75% (other than PSU where it is 90%). Persons acting in concert The definition has been widened to include following additional category of persons: any company under the same control promoters and members of the promoter group immediate relatives trustee company of a mutual fund collective investment scheme and its collective investment management company, trustees and trustee company trustees, trustee company and asset management company of a venture capital fund Investment fund and any person having interest in such Investment Company or Investment Fund as a shareholder or unit holder having minimum 10% of the paid-up capital or unit capital of the fund and any other investment company or fund in which such person or his associate having minimum 10% of the paid-up capital of that investment company or unit capital of the fund (nothing in this sub-clause shall apply to holding of units of mutual funds registered with SEBI). Promoter and promoter group The definition of Promoter and Promoter Group has been cross-referenced to SEBI ICDR to bring uniformity. Volume weighted average market price Volume weighted average market price means the product of the number of equity shares traded on a stock exchange and the price of each equity share divided by the total number of equity shares traded on the stock exchange. Volume weighted average price Volume weighted average price means the product of the number of equity shares bought and price of each such equity share divided by the total number of equity shares bought. Weighted average number of total shares Weighted average number of total shares means the number of shares at the beginning of a period, adjusted for shares cancelled, bought back or issued during the aforesaid period, multiplied by a time-weighing factor. Conclusion 1. The increase in the open offer trigger limit from 15% to 25% of shares or voting rights will permit strategic investors in listed companies to increase their shareholding in such companies. 2. The change in the open offer trigger limit has given rise to various scenarios:, a. The shareholder who are holding 15% or more but less than 20% shares or voting rights in a listed company under SAST 1997, will be required to make an open offer if his holding is to ever increase to 25% or more of shares or voting rights on a go forward basis unless any exemption under SAST is available. b. Shareholders who are holding 20% or more but less than 25% shares or voting rights in a listed company have an opportunity to acquire upto 5% shares or voting rights before the SAST 2011 become effective under the creeping acquisition route of SAST 1997. If the opportunity is not exercised by such shareholders before SAST 2011 becoming effective, then they will also be required to make an open offer if their holding is to ever increase to 25% or more of shares or voting rights unless any exemption under SAST is available. c. The shareholders who are holding 25% or more shares or voting rights but less than maximum permissible non-public shareholding in a listed company may increase their shareholding or voting rights upto maximum permissible nonpublic shareholding through creeping acquisition route without making an open offer. 3. A voluntary open offer will help an acquirer to consolidate their holding in a listed company at a minimum open offer size of 10% which is lower than the mandatory open offer size of 26% in other cases.

4. Separate provisions for indirect acquisition of shares and control have now been inserted with specified indirect acquisition being regarded as Deemed Direct Acquisition. 5. The minimum price in open offer will have to be adjusted for including non-compete fees, control premium etc. if any payable to the seller. 6. Open offer process has been elaborated and has been broadly covered under 3 sequential stages viz. PA, DPS and LO. 7. The timelines for completion of open offer process has been substantially crunched. Assuming a trouble free run and all statutory approvals being received by the acquirer the entire open offer process is to be completed within 57 working days. Any delay in receiving statutory approvals by the acquirer would require the acquirer to pay an interest at rates to be specified by SBI to the shareholders who have accepted the open offer. 8. Scope of exemption from open offer mandatory requirement has been tightened in case of inter se transfer of shares. Relaxation from making an open offer is given to an acquirer who would otherwise be required to make the mandatory offer as a consequence of buy back of shares if certain conditions are fulfilled. SAST 2011 ushers in a fresh approach to takeover of shares and/or control listed companies and has substantially streamlined the process. The concept of payment of interest to the shareholders by the acquirer for delay in obtaining statutory approvals will add to the cost of acquisition. It will be interesting to see how SAST 2011 is implemented.

Glossary CDR DPS LO PA PAC PSU SARFAESI Corporate Debt Restructuring Detailed Public Statement Letter of Offer Public Announcement Persons Acting in Concert with Acquirer Public Sector Undertaking Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 SEBI (Substantial Acquisition of Shares and Takeovers) Regulations SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 Securities and Exchange Board of India SEBI (Delisting of Equity Shares) Regulations, 2009 SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 Sick Industrial Companies (Special Provisions) Act, 1985 Takeover Regulations Advisory Committee

SAST SAST 1997 SAST 2011 SEBI SEBI Delisting Regulations SEBI ICDR

SICA

TRAC

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