This article is written by Ishita Raghav, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.
Table of Contents
Introduction
Mergers and acquisition in India can be said to be broadly regulated by legal frameworks such as, the Companies Act 2013, Securities and Exchange Board of India Act 1992, SEBI Regulations, Securities Contracts (Regulations) Act 1956, Competition Act 2002, Foreign Exchange Regulations act 1999, Income Tax Act 1961 and any sector specific regulators.
Today the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, aka known as ‘SEBI (SAST) Regulations, 2011’ regulates inter-company stake and maintains transparency in transactions with further aim to protect interest of all investors. However, due to growing capital market and to include judicial pronouncements in one framework, it was realised to redefine the previous, Securities and Exchange Board of India (Substantial Acquisitions of Shares and Takeovers) Regulations, 1997 code. Thus, the act observed many amendments since its first inauguration. It was only in the year 2009 wherein the Takeover Regulations Advisory Committee (“TRAC”) was constituted under the chairmanship of Mr. M C Achuthan. On the committee’s suggestions, the new Takeover code referred herein as, “Takeover code” was affected replacing the previous code.
The code is applicable to all direct and indirect acquisition of shares or voting rights or control that is exercised over a target company. However, the condition precedent for application of these regulations is that the target company need to listed on a recognised stock exchanges. Shares here mean equity shares of the target company that carry voting rights to it and any security that provides voting rights to investors.
Exit opportunities are bestowed upon shareholders via three ways, Mandatory offer, Voluntary and Competing offer.
Mandatory Open Offer
The Mandatory Open Offer bids mentioned in Regulation 3 of the SEBI (SAST) Regulations, 2011 are triggered on occurrence certain events, to which the acquirer and/or Person Acting in Concert (PAC) must provide an open offer to buy further shares from other shareholders of the target company. The triggering events for Mandatory Open Offer are in two cases, initial trigger and creeping trigger events.
Initial trigger is raised when the acquirer, individually or with PAC, intends, to acquire along with their existing shareholding (in the target company) 25% or more shares or voting rights, the acquirer or PAC must announce additional purchase of at least 26% of shares or voting rights from the rest of the shareholders via an open offer.
The creeping trigger event is raised only for shareholders holding more than 25% but less than 75% shares or voting rights in the target company. The effect of the event implicit shareholders to compulsory purchase addition 5% shares or voting rights in the company. The purchases must be executed within the end of the relevant financial year. While calculating the creeping acquisition limit, gross acquisitions/ purchases is taken in to account and any intermittent fall in shareholding or voting rights is ignored. The additional acquisition of shares, every time the event is triggered by any shareholder is known as creeping acquisition.
Voluntary Open Offer
The Voluntary Open Offer is presented by acquirer voluntarily without depending on Mandatory Open Offer regime. Regulation 6 of the SEBI (SAST) Regulations, 2011, deals with Voluntary Open Offer considers this transaction as an aim to consolidate the shareholding. The eligibility criteria for accessing provisions of Voluntary Open Offer states that, acquirer along with the PAC should be holding 25% or more shares or voting rights in the target company, before announcing Voluntary Open Offer.
The conditional precedents for following up with Voluntary Open Offer are that, first, the acquirer or the PAC should not be holding any shares of the target company in the preceding 52 weeks from the date of the offer, without attracting Open Offer obligations. This restriction is not applicable for acquirer or PAC holding less than 25% shares in the target company.
Secondly, the aggregate shareholding held in the company post the Voluntary Open Offer should not exceed the maximum permissible non-public shareholding. The SEBI (SAST) Regulations, 2011 defines this limit as maximum shareholding that can be held in a target company excluding the minimum public shareholding limit as required under the Securities Contracts (Regulation) Rules, 1957. In other words, the maximum number of shares that can be held by promoters in a listed company, other than being a public sector company is 75% of the share capital.
Lasty, post the Voluntary Open offer, no acquire or PAC can acquire any shares or voting rights in the target company, other than the ones offered on the open offer.
Restriction is also imposed on acquires and PACs in exercising Voluntary Open Offer provisions and thus these parties cannot for the next 6 months acquire shares of the target company, other than by way of announcing another voluntary offer or acquiring shares by way of competing offers. This restriction is not applicable for acquirer or PAC holding less than 25% shares in the target company.
Offer size for Voluntary Open Offer depends on the number of shares held. In case where the shares or voting rights held in the target company are more than 25% then the minimum offer size that needs to be offered to the shareholders of the target company must be atleast 10%. However, if the acquirer of PAC hold less than 25% shares and desire to propose Voluntary Open Offer, the minimum offer size in that scenario must be of at least 26% shares or voting rights.
The maximum shareholding that can be acquired is restricted by the maximum permissible non-public shareholding in case the shareholding held by acquirer or PAC is more than 25%. On the other hand, for shareholding less than 25% there is no upper limit and entire share capital can be acquired by them.
The provisions of The SEBI (SAST) Regulations, 2011 are applicable for direct as well indirect acquisition. Where threshold limits for direct acquisitions are comparatively easier to be defined. For analysing indirect acquisitions, triggering limit is based on voting and/or control exercised by acquirer or PAC on the target company. Control is defined as the power of exercising executive decisions in the target company such as, capacity to appoint majority directors in the company or influence its management by controlling policy dictions, directly or indirectly. This arrangement of power can be present in the way of shareholders, voting agreements or any other manner.
Other than the above two kinds of offers, competing offer is also provided by SEBI (SAST) Regulations under Regulation 20. Competing offer can be understood when another acquirer (competing acquirer) offers to purchase shares or voting rights of the target company, even when a similar offer is already presented by a previous acquirer. The new offer presented by the acquirer is called the competing offer. The idea behind SEBI to accommodate competing offer was to provide best possible exit plans to minority shareholders while at the same time to enhance positive competition between companies.
Exemptions are notified in Regulation 10 and 11 which excuse acquirer or PAC from establishing open offers to the target company. the general exemptions are summarized as:
- Inter-se transfer transactions.
These transactions are carries out qualifying parties and are not regarded as typical acquisition transactions undertaken for economic value. The qualifying parties are understood as immediate relatives including spouse, sister, brother, parents etc.; promoters of the target company holding the same position and file the same in stock exchanges for duration of preceding 3 years, company and its subsidiaries and shareholders of the target company which were regarded as PAC for the target company in the preceding 3 years.
- Carrying out acquisition transactions by persons within the ordinary course of business are exempted from following open offer regulations. Parties included in this category are merchant banker, stock-brokers, underwriters, agents, scheduled commercial banks, public financial bank while acting as pledgees, nominated investors while subscribing to the unsubscribed portion of the target company.
- Acquisitions carried forward due to disinvestment decisions in the companies. In such cases open offer is already disclosed between the parties. However, caution is ensured so that party’s identity are still intact and are not changed during the process while at the same time full disclosure is made at all stages of the transaction.
- Acquisitions conducted in the form of certain schemes and/or arrangements are granted exemption. Schemes included but not limited in this category are:
a) Schemes executed under Insolvency and Bankruptcy Code 2016
b) Court ordered restructuring of companies in the form of mergers, amalgamations and demergers.
c) Non-court ordered restructuring schemes in the form of mergers, amalgamations and dangers upon fulfilment of two conditions. Firstly, the amount of cash equivalents paid is less than 25% of the total consideration under the scheme of arrangement and the members whose votes implemented the restructure should hold 33% shares in the new combined entity.
5) Acquisition transactions conducted in the manner of inheritance, transmission or succession.
The SEBI is further allowed discretionary power to exempt acquirer or target company from open offer obligations. This power is established in Regulation 11 of the rules.
References
- ‘SEBI | Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 [Last Amended on September 11, 2018]’ (Sebi.gov.in, 2011).
- Vijay D, ‘Voluntary Open Offer’ (Indiacp.blogspot.com)
- Hans R, ‘Exit Opportunity Under SEBI (SAST) Regulations, 2011 – Corporate/Commercial Law – India’ (Mondaq.com, 2012)
- ‘Exemptions Under the Takeover Code – Corporate/Commercial Law – India’ (Mondaq.com)
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