SEBI TAKEOVER CODE

INTRODUCTION

The concept of takeover emerged in late 19th century in some countries like US, UK etc.
when the first wave of mergers and acquisitions started. However, in India it was only in
20th century that the concept of takeover took birth but even then the concept of hostile
takeovers was not known to anybody. This concept emerged when Swaraj Paul started
efforts to takeover Escorts Ltd. and DCM Ltd. He was the first hostile raider among the
raiders of Indian stock market. Although Paul could not succeed in his efforts because the
incumbents fend him off by using the technicalities of rules governing non-residents but
this created a need for a takeover code.

This need was further accentuated in 1990s when the government initiated the policy of
liberalization and globalization which resulted in growth of Indian economy at an increased
pace, and it created a highly competitive business environment, which motivated many
companies to restructure their corporate strategies by including the tools of mergers and
takeovers.

The SEBI was established on April 12, 1988 through an administrative order, but it became
a statutory and really powerful organisation only in 1992.

In the meantime, SEBI was established in 1992 as a body corporate under the SEBI
Act, 1992 with the main objectives to,

i) Protect the interest of investors in securities market, and

ii) To provide for the orderly development of securities market.

Thus while the possibility of takeover of a company through share acquisition is desirable
in new competitive business environment for achieving strategic corporate objectives, there
has to be well defined regulation so that the interest of all concerned are not jeopardized by
sudden takeover threats.

In the light of the then present circumstances, the need for some law to regulate takeover
was strongly felt. Moreover to achieve its objectives as stated in SEBI Act, 1992, SEBI
enacted SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1994 in
exercise of powers conferred under section 30 of the Act which laid down a procedure to be
followed by an acquirer for acquiring majority shares or controlling in another company, so
that process of takeover is carried out in a fair and transparent manner.

In 2009, SEBI constituted a Takeover Regulation Advisory Committee (TRAC Committee)

under the Chairmanship of Mr. C Achutan to review the Takeover Regulations of 1997. The
committee submitted its report in 2010 and the Regulations, SEBI (Substantial Acquisition
of Shares and Takeovers) Regulations, 2011 were notified on September 21, 2011, became
effective from October 22, 2011. The major amendments were:

MEANING OF TAKEOVER

Takeovers and acquisitions are common occurrences in the business world. In some cases,
the terms takeover and acquisition are used interchangeably, but each has a slightly
different connotation. A takeover is a special form of acquisition that occurs when a
company takes control of another company without the acquired firm’s agreement.
Takeovers that occur without permission are commonly called hostile takeovers.
Acquisitions, also referred to as friendly takeovers, occur when the acquiring company has
the permission of the target company’s Board of directors to purchase and takeover the
company. Acquisition refers to the process of acquiring a company at a price called the
acquisition price or acquisition premium. The price is paid in terms of cash or acquiring
company's shares or both.
As the motive is to takeover of other business, the acquiring company offers to buy the
shares at a very high premium, that is, the gaining difference between the offer price and
the market price of the share. This entices the shareholders and they sell their stake to earn
quick money. This way the acquiring company gets the majority stake and takes over the
ownership control of the target company.

Acquiring an existing business enables a company to speed up its expansion process

because they do not have to start from the very scratch. The target company is already
established and has all the processes in place. The acquiring company simply has to focus
on merging the business with its own and move ahead with its growth strategies.

OBJECTS OF TAKEOVER

The objects of a takeover may inter alia include:

(i) To effect savings in overheads and other working expenses on the strength of combined
resources;
(ii) To achieve product development through acquiring firms with compatible products and
technological/manufacturing competence, which can be sold to the acquirer’s existing
marketing areas, dealers and end users;
(iii) To diversify through acquiring companies with new product lines as well as new market
areas, as one of the entry strategies to reduce some of the risks inherent in stepping out of
the acquirer’s historical core competence;
(iv) To improve productivity and profitability by joint efforts of technical and other personnel
of both companies as a consequence of unified control;
(v) To create shareholder value and wealth by optimum utilisation of the resources of both
companies;
(vi) To achieve economies of scale by mass production at economical costs;
(vii) To secure substantial facilities as available to a large company compared to smaller
companies for raising additional capital, increasing market potential, expanding consumer
base, buying raw materials at economical rates and for having own combined and improved
research and development activities for continuous improvement of the products, so as to
ensure a permanent market share in the industry;
(viii) To achieve market development by acquiring one or more companies in new
geographical territories or segments, in which the activities of acquirer are absent or do not
have a strong presence.

KINDS OF TAKEOVERS

Takeovers may be broadly classified into three kinds:

(i) Friendly Takeover: Friendly takeover is with the consent of taken over company. In
friendly takeover, there is an agreement between the management of two companies
through negotiations
and the takeover bid may be with the consent of majority or all shareholders of the target
company. This kind of takeover is done through negotiations between two groups.
Therefore, it is also called negotiated takeover.
(ii) Hostile Takeover: When an acquirer company does not offer the target company the
proposal to acquire its undertaking but silently and unilaterally pursues efforts to gain
control against the wishes of existing management.
(iii) Bailout Takeover: Takeover of a financially sick company by a profit earning company
to bail out the former is known as bailout takeover. There are several advantages for a profit
making company to takeover a sick company. The price would be very attractive as
creditors, mostly banks and financial institutions having a charge on the industrial assets,
would like to recover to the extent possible.
REGULATORY FRAMEWORK FOR TAKEOVERS

The legislations/regulations that mainly govern takeover are as under:

1. Companies Act, 2013
2. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (The
Regulations)
3. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

As far as Companies Act, 2013 is concerned, the provisions of Section 186 apply to the
acquisition of shares through a company. Section 235 and 236 of the Companies Act, 2013
lays down legal requirements for purpose of takeover of an unlisted company through
transfer of undertaking to another company.

SEBI (SAST) Regulations, 2011 lays down the procedure to be followed by an acquirer for
acquiring majority shares or controlling interest in another company.

TAKEOVER OF LISTED COMPANIES

Takeover of companies whose securities are listed on one or more recognized stock
exchanges in India is regulated by the Securities and Exchange Board of India (Substantial
Acquisition of Shares and Takeovers) Regulations, 2011.

Therefore, before planning a takeover of a listed company, any acquirer should understand
the compliance requirements under the Regulations and also the requirements under the
SEBI (LODR) Regulations, 2015 and the Companies Act, 2013. There could also be some
compliance requirements under the Foreign Exchange Management Act, 1999 if the
acquirer were a person resident outside India.

As per Regulation 38, the listed entity shall comply with the minimum public shareholding
requirements as specified in Rule 19(2) and Rule 19A of the Securities Contracts
(Regulation) Rules, 1957 in the manner as specified by the Board from time to time. In
other words, the listed entity shall ensure that the public shareholding shall be maintained
at 25% of the total paid up share capital of the company failing which the company shall
take steps to increase the public shareholding to 25% of the total paid up share capital by
the methods as specified in Rule 19(2) and Rule 19A of the Securities Contracts (Regulation)
Rules, 1957.
.

DEFINITIONS:

In order to understand the concept of the Regulations, it would be pertinent to go through

some of the important definitions:

The term ‘Takeover’ has not been defined under the said Regulations; the term basically
envisages the concept of an acquirer acquiring shares with an intention of taking over the
control or management of the target company. When an acquirer, acquires substantial
quantity of shares or voting rights of the target company, it results in the substantial
acquisition of shares. Substantial is again not defined in the Regulations and what is
substantial for one company may not be substantial for another company. It can therefore
not be quantified in terms of number of shares.

1. Acquirer [Regulation 2(1)(a)]

“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;

2. Acquisition [Regulation 2(1)(b)]

“Acquisition” means, directly or indirectly, acquiring or agreeing to acquire shares or voting
rights in, or control over, a target company;
It means that agreement to acquire the share or voting or control in a listed company
without actual acquisition of share will also be treated as acquisition for the purpose of
SEBI Takeover Regulations, 2011.

3. Control [Regulation 2(1)(e)]

“Control” includes 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:
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;

4. Immediate Relative [Regulation 2(1)(l)]

Immediate relative means any spouse of a person, and includes parent, brother, sister or
child of such person or of the spouse.

5. Maximum non Public Shareholding [Regulation 2(1)(o)]

Maximum permissible non-public shareholding means such percentage of shareholding in
the target company excluding the minimum public shareholding required under the
Securities Contracts (Regulation) Rules, 1957.

It means as per Rule 19(2)(b) of the Securities Contracts (Regulation) Rules, 1957 read with
Regulation 38 of the SEBI (LODR) Regulations, 2015 every company shall ensure that at
least 25% of each class or kind of equity shares issued by a listed company is held by
public shareholders in order to remain continuously listed. Currently only Listed Public
Sector Undertakings are exempted from this requirement and it is sufficient if the public
shareholding is maintained at 10% of the paid up capital of such public sector enterprises,
which are listed. Therefore the maximum permissible non-public shareholding in the
general sense of the term is 75% of the total paid up equity capital of the company for any
listed company, which is not a listed public sector undertaking.

6. Offer Period (Regulation 2(1)(p))

Offer Period means the period between the date of entering into an agreement, formal or
informal, to acquire shares, voting rights in, or control over a target company requiring a
public announcement, or the date of the public announcement, as the case may be, and the
date on which the payment of consideration to shareholders who have accepted the open
offer is made, or the date on which open offer is withdrawn, as the case may be.

7. Persons Acting in Concert (Regulation 2(1)(q))

Persons Acting in Concert means 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 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.

8. Promoter (Regulation 2(1)(s))

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.
9. Shares (Regulation 2(1)(v))
Shares means shares in the equity share capital of a target company carrying voting rights,
and include any security which entitles the holder thereof to exercise voting rights. For the
purpose of this clause, shares will include all depository receipts carrying an entitlement to
exercise voting rights in the target company.

10. “Target Company” (Regulation 2(1)(z))

“Target Company” means a company and includes a body corporate or corporation
established under a Central legislation, State legislation or Provincial legislation for the time
being in force, whose shares are listed on a stock exchange;

11. “Tendering period” (Regulation 2(1)(za))

“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;

TRIGGER POINTS UNDER TAKEOVER REGULATIONS

By trigger points, we mean the threshold levels upon reaching which, an acquirer, either on
its own individual account or along with Persons Acting in Concert (PAC) acquiring shares
or voting rights in a target company is required to make a public announcement for an open
offer and comply with the other provisions of the Takeover Code with regard to an open
offer.

These threshold levels are set in Regulation 3 of the SEBI (SAST) Regulations, 2011. In the
following paragraphs, the main points arising out of these regulations are discussed with
illustrative examples.

OPEN OFFER THRESHOLDS

REGULATION 3(1): Substantial acquisition of shares or voting rights

As per Regulation 3(1) of the SEBI (SAST) Regulations, 2011, any acquirer can acquire
shares or voting rights in a target company, which when taken together with the shares or
voting rights held by him either individually or along with Persons Acting in Concert (PACs)
with him entitles him / them to exercise 25% or more of the voting rights in such a target
company, only after making a public announcement of an open offer in accordance with the
provisions of the SAST Regulations. Suppose A Ltd is the target company listed on the BSE
and the shareholding pattern as on April 25, 2015 is as under:

Name of the Shareholder Number of shares held Percentage of voting

(in number) rights
(in %)
A (promoter) 5000 50
B (Part of the Public) 500 5
Others (all constituting other Public 4500 45
Shareholders)

Total Equity Share Capital 10000 100

On April 26, 2015 if B were to acquire 2000 shares by way of a Share Purchase Agreement
with A, the promoter, his holding would increase to 2500 shares, which would be 25% of
the voting rights of the company and he would therefore under Regulation 3(1) of the SEBI
(SAST) Regulations, 2011 be under an obligation to make a public announcement in
accordance with the SAST Regulations. He can proceed with the acquisition only by giving a
public announcement of making an open offer for acquiring the shares from the
shareholders of the target company.
REGULATION 3(2)
Regulation 3(2) of the SAST Regulations, stipulates that an acquirer, who along with
persons acting in concert has acquired and holds 25% or more of the shares or voting rights
in a target company, in accordance with the SEBI (SAST) Regulations, but less than the
maximum permissible non-public shareholding which is normally 75% of the total paid up
share capital of the company, can acquire additional shares or voting rights in a financial
year in a target company, entitling them to exercise 5% of the voting rights. Any acquisition
beyond 5% of the voting rights of the target company can be made only after making a
public announcement of an open offer for acquiring shares of such a target company in
accordance with the provisions of the target company.

Regulation 3(2) further stipulates that the acquirer shall not enter into any Share Purchase
Agreement or acquire such number of shares, which when taken together with the shares
already held by him along with the PACs would take the aggregate shareholding of the
Acquirer and the PACs beyond the maximum permissible limit of non-public shareholding,
which is normally 75% of the total paid up capital of the company.

The above provisions are explained with the following example:

Suppose A Ltd. is the target company listed on the BSE and the shareholding pattern as on
April 25, 2015 is as under:

Name of the Shareholder Number of shares held Percentage of voting rights

(in number) (in %)

A (promoter) along with PACs 5000 50

/ persons
belonging to the promoter
group

Others (all constituting other 5000 50

Public
Shareholders)

Total Equity Share Capital 10000 100

In the above example, if A, who is holding 50% of the voting rights of the company, which
has been acquired in accordance with the provisions of the SEBI (SAST) Regulations, he can
acquire another 5% of the voting rights in the financial year beginning April 01, 2015. This
acquisition can be done either by himself or by the other members of the promoter group or
partially by him and partially by the other members of the promoter group.

Regulation 3(3)
As per the provisions of Regulation 3(3) of the SEBI Takeover Regulations, when any person
or entity acquires shares, if the individual shareholding of such an acquirer post such
acquisition exceeds the threshold limit of 25% as laid down in Regulation 3(1) of the
Takeover Regulations or the creeping acquisition limit of 5% in a financial year as laid down
in Regulation 3(2) of the Takeover Regulations, that person or individual or entity would be
under an obligation to make a public announcement of an open offer.
This is irrespective of the aggregate shareholding of such an individual or an entity with
persons acting in concert with him. This condition can be best understood with the
following example:

Example 1
The Paid up Equity Share Capital of A Ltd is 10000 shares as on April 01, 2014
The promoters hold 4000 shares as on April 01, 2014, which is 40% as on April 01, 2014
The promoters comprise of three shareholders, A who holds 2200 shares (i.e. 22%), B who
holds 1500 shares (i.e. 15%) and C who holds 300 shares (i.e. 3%).
The company makes a preferential allotment of 800 shares to A as a result of which the
post issue shareholding of A would be 3000 shares.
Let us determine whether there would be a trigger using the methods enumerated in the
previous pages:
(4800/10800)% - (4000/10000)% = 44.44% - 40% = 4.44%.
Since the acquisition by all the promoters together does not exceed 5% in a financial year
there is no trigger.

However we need to check what would be the post issue holding of A the allottee, who is
currently holding 22% of the paid up capital of the company, with respect to the fully
expanded capital which works out to 3000/11000 = 27.27%, by virtue of which he has
crossed the initial threshold limit of 25% as stipulated in Regulation 3(1) of the Takeover
Regulations. Therefore A has triggered the Code and is under an obligation to make an
public announcement.
Regulation 3(4)
As per Regulation 3(4), any acquisition of shares made by the promoters of the target
company in an offer made by them to the dissenting shareholders pursuant to an exit offer
to be given to them in accordance with Chapter VIA of the SEBI (ICDR) Regulations, 2009
shall not be treated as an acquisition under Regulation 3 of the SEBI (SAST) Regulations,
2011. In other words, this acquisition shall be exempt and shall not be required to make an
open offer as mandated by the Regulations. As exit offer is made when the company which
has made a public issue after April 01, 2014 wants to change the objects of the issue from
the stated object in the Prospectus and seeks the approval of the shareholders for the same.
In case there are dissenting shareholders the promoters and person in control of the
company need to give an exit offer to these shareholders. Such acquisitions made pursuant
to the offer shall be exempt from the requirement of making an open offer.

Regulation 4: Acquisition of control.

As per the provisions of Regulation 4 of the SEBI Takeover Regulations, 2011, an acquirer
shall make a public announcement of an open offer for acquiring shares of a company, in
case he / she acquires control of the target company either directly or indirectly. This is
irrespective of the fact whether the acquisition of control is accompanied by acquisition or
holding of shares or voting rights of the target company.

Regulation 5: Indirect acquisition of shares or control.

Regulation 5(1) of the Takeover Regulations, states that any acquisition of shares or voting
rights in a target company or control over a company or any other entity which enables the
person or persons acting in concert with him to exercise or direct the exercise of such
percentage of voting rights or control over a target company, such acquisition would be
deemed to have attracted the obligation of making a public announcement of an open offer.
This is considered an indirect acquisition of shares or voting rights or control over a target
company.