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SEBI - Takeover Code Presented By: •Harkesh Bansal(05) •Deep Shikha(08) •Siddharth Iyer(10) •Jaimin Patwa(19) •Jharna Tinani(26) October 14, 2008

1

Evolution of TOC

October 14, 2008

2

Evolution... Apr-2007 SEBI amended Code

Post - 1994

Oct - 2002 Few amendments as per Bhagwati Committee’s reco. Feb - 1997 New Takeover Code (Bhagwati Committee) Nov - 1994 SEBI Takeover Code

Nov 1990 Clause 40(A) & 40(B) of Listing Agreement

Pre - 1990 Clause 40 of Listing Agreement

October 14, 2008

Pre - 1990

3

Modes of Restructuring – Where does TOC fit in

Indian M&A

Amalgamations

Merger

Acquisitions

Asset Purchase

De-merger

Slump Sale

October 14, 2008

Stock Purchase Itemized Sale

The Takeover Code, 1997

4

Objectives 

Shareholders: – Equality of treatment – Adequate opportunity – Protection of interests



Acquirers: – Adequate disclosure – Disclosure to all – Disclosure within stipulated time limits



Managements: – Ensure flow of information – No unnecessary action during the offer period

AT THE SAME TIME: Ensure full play to the predatory instincts of the corporate and business class (i.e. facilitate legitimate takeovers)

October 14, 2008

5

Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997

October 14, 2008

6

Framework of the Code… Chapter 1

Preliminary, Definitions, exemptions and the takeover panel

Chapter 2

Disclosures of shareholding and control in a listed company

Chapter 3

Substantial Acquisition of shares and control

Chapter 4

Bail out takeovers

Chapter 5

Investigation and action by the Board

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Definitions

October 14, 2008

8

Key Definitions... Acquirer  Any person who, directly or indirectly, acquires or agrees to acquire shares or voting rights in the target company, or acquires or agrees to acquire control over the target company, either by himself or with any person acting in concert with the acquirer Shares  Means shares in the share capital of a company carrying voting rights and includes any security which would entitle the holder to receive shares with voting rights [but shall not include preference shares] Control  Right to appoint majority of directors or Right to control management decisions or Right to take policy decisions exercisable by PAC, directly or indirectly, by virtue of their shareholding or management rights or SHA or voting agreements or in any other manner October 14, 2008

9

Key Definitions... Persons Acting in Concert (‘PAC’) 

PACs - persons who for a common objective of substantial acquisition of shares or voting rights or gaining control over the target company, directly or indirectly co-operate by acquiring or agreeing to acquire shares or voting rights in or control over the target company.



Persons deemed to be PACs with other persons in the same category –

a company, its holding or subsidiary company or a company under the same management and their directors or persons responsible for management of funds



Mutual fund with sponsor or trustee or AMC



FIIs with sub account (s)



Merchant bankers with their clients as acquirers



VCFs with sponsors



Banks with financial advisors, stock brokers of acquirer, a company which is a holding / subsidiary or relative of the acquirer

October 14, 2008

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Key Definitions...  Promoter shall include Person/s

in control of the company Named as promoters in any document of offer of securities

 Deemed to be a promoter Individual – spouse, parents, brothers, sisters or children  Corporate: 

a

subsidiary or holding company any company in which it holds 26% or more of the equity capital any other body corporate under the same management

 A financial institution, scheduled commercial bank, FII or VCF shall not be deemed to be a promoter by virtue of shareholding

October 14, 2008

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Key Definitions... Offer period  Period between the date of entering into MOU or the PA, as the case may be and the date of completion of offer formalities relating to the offer made under these regulations

Public shareholding  Means shareholding held by persons other than promoters as defined

October 14, 2008

12

Disclosures

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Disclosures Periodical disclosures  Disclosures by acquirer to the company / stock exchange within 2 working days –

If holding crosses 5%, 10%, 14%, 54% or 74% limits



In case of acquisition under Regulation 11 (1) / (1A) – on Purchase or sale of 2% or more of the share capital

Company in turn to disclose to all stock exchanges within 7 days Continual - “Yearly Disclosures”  Disclosure to be made within 21 days to the company by – 



Persons holding more than 15%



Promoter or every person having control over company

Company in turn to disclose to all stock exchanges within 30 days SEBI has the power to call for this information as and when it requires 

October 14, 2008

14

Open Offers

October 14, 2008

15

Trigger points…. 



Substantial acquisition –

Acquisition upto 15% of shares or voting rights or control - No open offer



Beyond 15% - Open offer triggered

Consolidation of Holdings –

15% to 55% - Open offer triggered for acquisition beyond 5% per year



55% to 75% - Open offer triggered on every acquisition



Beyond 75% - Delisting triggered

October 14, 2008

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Trigger Provisions Regarding Open Offers Regulation 10

Regulation 11

Regulation 12

Substantial Acquisition of Shares

Consolidation of Holdings

Acquisition of Control





Open tender offer needs to be made if the Acquirer (along with PAC) decides to acquire, directly or indirectly, more than 15% of shares outstanding in Target Once 15% stake has been acquired in the target, an open offer for a minimum of 20% of shares outstanding must be made October 14, 2008



Open tender offer needs to be made if: –





Acquirer and PAC hold >15% but < 55% of the Voting Capital of Target



Open tender offer needs to be made if acquirer along with PAC wants to acquire control over Target



Offer needs to be made irrespective of:

Want to exceed creeping limit of 5% within a financial year

Offer needs to be made if acquirer wants to exceed 55% shareholding in Target





Whether or not any shares have been acquired



Whether control is acquired directly or indirectly

This regulation is not applicable if change of control is pursuant to a special resolution 17

Exemptions

October 14, 2008

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Exemptions from Open Offer… Reg. 3 Provides Exemptions from Reg. 10, Reg. 11 and Reg. 12… 

allotment to underwriter pursuant to any underwriting agreement;



acquisition of shares in ordinary course of business by; 

Regd. Stock brokers on behalf of clients;



Regd. Market makers



Public financial institutions on their own account;



Banks & FIs as pledges;



Acquisition of shares by way of transmission on succession or by inheritance



Acquisition of shares in companies whose shares are not listed;



Acquisition pursuant to a scheme framed under section 18 of Sick Industrial Companies Act (SICA) 1985

October 14, 2008

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Public Announcement 

to disclose intention to acquire a minimum of 20% of the voting capital of the target company



an Acquirer may also make an offer for less than 20% of shares of target company in case the acquirer is already holding 75%



Acquirer is required to appoint a Merchant Banker registered with SEBI before making a PA and is also required to make the PA within four working days of the entering into an agreement to acquire shares

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Public Announcement The other disclosures in this announcement would inter alia include:       

the offer price, the number of shares to be acquired from the public, the identity of the acquirer, the purposes of acquisition, the future plans of the acquirer, if any, regarding the target company, the change in control over the target company, if any the procedure to be followed by acquirer in accepting the shares tendered by the shareholders and the period within which all the formalities pertaining to the offer would be completed.

October 14, 2008

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Other key provisions

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Minimum Size of Offer 

Minimum of 20% of the voting capital of the target company



Less than 20% where an acquirer has shareholding between 55% to 75%



Acquisition through MOU should ensure to maintain the minimum specified public shareholding post open offer



An acquirer may make a conditional offer which may be less than 20% of minimum offer size – (S&P / Crisil) –

Acquirer to deposit in the escrow account in cash a sum of 50% of the consideration payable under the public offer



Cancel the MOU in case minimum acceptance condition is not met



Disclosure in the Public Announcement

October 14, 2008

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Minimum Public shareholding 



Breach of minimum public shareholding limit specified in the Listing Agreement: 

Acquirer to make an offer to buy the remaining shares in accordance with the Delisting guidelines



Acquire only such number of shares under the agreement or MOU to maintain the minimum public shareholding

Acceptance on proportionate basis if number of shares offered by the shareholders are more

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Timing of Open Offer 



Direct acquisition or change in control - Within 4 working days of – 

Agreeing or deciding to acquire the shares/voting rights/change in control



Execution of Shareholders agreement



Upon conversion or exercise of option – Convertibles

Indirect acquisition or change in control - Within 3 months of 



Consummation of acquisition or change in control or restructuring of the parent or holding company

Submission of Letter of Offer to SEBI / Shareholders

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Minimum Offer Price 



Frequently traded shares, highest of the following: –

Negotiated price



Highest of average of weekly highs and low of the last 26 weeks or daily highs and low of last 2 weeks



Highest price paid by the acquirer during the last 26 weeks

Infrequently traded shares – in consultation with Merchant Banker , highest of the following: –

Negotiated price



Highest price paid by the acquirer during the last 26 weeks



Return on net worth, BV of shares, EPS, PE multiple vis-à-vis industry average

October 14, 2008

26

Payment of Offer Price Modes of payment – 



Offer price payable in –

Cash; or



Shares (other than preference shares) of acquirer listed company; or



Secured instruments of acquirer company with a minimum A Grade from a credit rating agency; or



Combination of the above

Discharge of consideration 

Transfer of cash consideration to a special account within 7 days from closure of the offer



Issue of shares / secured instruments

October 14, 2008

27

Timelines MOU Within 4 days DATE OF PUBLIC ANNOUNCEMENT Within 14 days Filing of Letter of Offer with the SEBI

Within 45 days Offer to reach the shareholders

Within 55 days

Within 7 days

SEBI may permit extension on payment of interest for delay

Offer to open

Within 20 days October 14, 2008

Within 15 days of Offer Closure

Offer to close

Open a Special A/c for Payment

Dispatch consideration to shareholders

28

Examples

October 14, 2008

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Example… Group F co1

Public,FIs etc

100%

51%

F co2

Indian listed co

49%

• Acquisition of more than 15% stake in a listed company • Exemption under Regulation 3(1)(e) – Inter se transfer amongst the ‘Group’ – Group as per the MRTP Act – Disclosure as Group in the last published annual report

• F co2, wholly owned subsidiary of F co1, hence should constitute as Group Transfer of 51% stake in Indian listed co to F co2

Would the transfer trigger open offer ?? October 14, 2008

30

Example…Non Compete Fee FACTS: 

X Ltd proposes to acquire a 35% stake in Y Ltd.



15% stake is proposed to be acquired from Mr. A, the promoter



X Ltd will also pay a non compete fee as under: – Rs. 150 per share to Mr. A – Rs. 50 per share to Y Ltd. (target company)



Minimum offer price as per the Takeover Code is determined at Rs. 500 per share

ISSUE: 

What consideration per share would flow from X Ltd to: – Mr. A, the promoter – Mr. B, an ordinary shareholder who tenders his shares

CALCULATION: Non compete fees paid to person(s) other than the Target Company

Rs.150

25% of the minimum offer price

(25% of 500)

Rs.125

Amount to be added to the offer price

(150 – 125)

Rs. 25

Revised Offer Price

(500 + 25)

Rs.525

Consideration per share that would flow to Mr. A Consideration per share that would flow to Mr. B

October 14, 2008

(500 + 150)

Rs.650 Rs.525

31

Example… Acquisition of convertibles Domestic currency convertibles (debentures, warrants etc.)

ADRs / GDRs / FCCBs

X Ltd.

A co Outside India

Mr. B

India

What should A co and B do to ensure compliance with the Takeover Code? When should these steps be taken?  Both A co and Mr. B will be required to make relevant disclosures.  Calculation to be based on the expanded capital presuming full conversion into shares. Such disclosure shall be made at the time of conversion of such instruments into shares carrying voting rights Regulations 10, 11 & 12 applicable only at the time of conversion into shares carrying voting rights

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Thank you

October 14, 2008

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