“Takeover code” is framed in order to promote fairness in the capital market and to protect the Interest of small investors. It is commonly known as SEBI regulation for Acquisition of shares and takeover of listed companies. Takeover of companies is a strategy for corporate growth. As per the SEBI (Substantial acquisition of Shares) Regulation, a Takeover Bid implies that an acquirer acquires substantial quantity of shares (directly or indirectly ) carrying voting rights in excess of the limits specified, in a target listed company to gain or acquire control over the management of such a company.
Acquirer means any Individual including the person acting in concert or company or other legal entity acquiring the shares or voting power or control over a target company.
Person acting in concert' means Individual or companies or other legal entities acting together for a common purpose of substantial acquisition of shares or voting rights or gaining control over a target company in pursuance of understanding or agreement.
Target Company means a listed company whose shares or voting rights are acquired/ being acquired by an acquirer or whose control is taken over or being taken over by an acquirer.
Acquisition of Control means Acquisition of control over a target company with acquisition of shares or voting Rights control. It includes right to appoint directly or indirectly majority of directors on the board of Target Company or to control the management or to make policy decision by a person or person acting individually or person acting in concert by virtue of their shareholding or management rights or shareholder agreements.
Shares mean any security which entitles the holder to voting rights.
Responsibility of the board of directors and independent directors – The Takeover Code makes it mandatory for the board of directors of the target company to constitute a committee of independent directors to provide written reasoned recommendations on such open offer, which the target company is required to publish.
Under Takeover Code, based on the limits, the acquirer has to comply with disclosure requirements. He may acquire shares from the public after making public announcements. The SEBI Takeover Code adheres to the framework and principles of the Takeover or acquisition as follows-
- Initial threshold to Trigger for making open offer by "Public announcement"
- Acquisition by person already holding more than 25% but less than 55%
- Acquisition by person already holding shares or voting rights more than 55% less than 75% .
- Initial threshold limit for triggering of an open offer
- An acquirer with existing shareholding and voting right is mandated to make an open offer if he want to acquire 25% or more of voting right in the target company.
Under the Takeover Code the investors, including private equity funds and foreign investors, will be able to increase their shareholding in listed companies up to 25% and will have greater say in the management of the company. An acquirer with 25% shares will have a better chance to block any decision of the company. He can acquire share after making "Public announcement". However, at the same time, this will help the listed companies to get more investments without triggering the open offer requirement. Therefore The SEBI takeover code makes the process more attractive and cost effective.
2. Creeping acquisition
Any acquirer, holding 25% or more but less than i.e. 55% and the maximum permissible limit i.e.75% can purchase additional shares or voting rights of up to 5% every financial year, after making "Public announcement” only. It is known as creeping acquisition. Requirement of public announcement for open offer is not needed. Code also lays down the manner of determination of the quantum of acquisition of such additional voting rights. It is beneficial for the investors as well as the promoters, who can increase their shareholding in the company without necessarily purchasing shares from the stock market.
3. Voluntary offer or Acquisition by a person already holding shares or voting rights more than 55% but less than 75% (consolidation of holding) :-
By this offer, an acquirer holds more than 55% shareholding but less than the maximum permissible limit (75%), shall be entitled to make a public announcement voluntarily for acquiring additional shares subject to their aggregate shareholding after completion of the open offer. Such voluntary offer would be for acquisition of at least such number of shares as would entitle the acquirer to exercise an additional 10% of the total shares of the target company. In this case an acquirer can do acquisition of shares or voting rights in a target company after making "Public announcement" This type of acquisition is called as consolidation of holding.
5. Size of the open offer
Takeover code gives an opportunity to the acquiring company to attain simple majority in a target company by acquirer. An acquirer with 25% shareholding can increase it by another 26% through an open offer that would facilitate to have a 51% shareholding in the target company and thereby an acquirer can attain simple majority in the target company. The Takeover Code required an acquirer, obligated to place an offer for at least 26% of the ‘total shares of the target company’, as on the ‘10th working day from the closure of the tendering period’.
3. Indirect acquisition
Indirect acquisition is permitted under Takeover Code. It states that any acquisition of share or control over a company would enable a person to exercise such percentage of voting rights or control over the company which would have otherwise necessitated a public announcement for open offer, it shall be considered an indirect acquisition of voting rights or control of the company.
It also states that wherever on the basis of the latest audited annual financial statements, the proportionate net asset value or sales turnover or market capitalisation of the target company being acquired, is more than 80%, such indirect acquisition shall be regarded as a direct acquisition of the target company and all the obligations relating to timing, pricing and other compliance requirements for the open offer would be same as that of a direct acquisition.
Procedure Involved in SEBI takeover for Acquisition
(1) Appointment of banker- Before making public announcement, the acquirer shall have to appoint a merchant banker, who is not associated with the acquirer or the target company.
(2) Disclosure of Intention- Merchant Banker shall disclose the intention of the acquirer to acquire shares /voting rights of Target Company from existing shares holding by means of an open offer. Intention shall be disclose by public announcement. Object of public announcement is to make aware of an exit opportunity available the shares holders of the target company.
(3) Publication of announcement -Public announcement must be made in English and also in a vernacular language daily news paper circulating in the State where registered office of the target company is situated and the stock exchange where the share are most frequently traded.
(4) Details of Public announcement – It must contain the offer price, number of shares to be acquired from the public, identify of acquires, purpose, future plans in respect of target company, period with in which offer would be completed.
(5) Filing offer letter of takeover with SEBI – offer must be filed with SEBI within 14 days from the date of public announcement for a purpose of overseeing whether the disclosures contained therein are adequate and are in conformity with the takeover regulation. The acquirer has to furnish a due deligence certificate and registration details. It would facilitate the shares holder to take an informed decision with regard to the offer.
(6) Minimum offer price – offer letter must contain the minimum offer price.
(7) Obligation of the board of target company/merchant banker - After public announcement of offer, the board of directors of the target company, shall not sell, transfer or dispose of assets of the company or its subsidiaries or issue or allot any issued securities or enter into any material contracts.
(8) Withdrawal of offer - The Shareholder shall have the option to withdrawal acceptance given by him up to 3 working days prior to the date of closure of the offer.
(9) Escrow account - The acquires must create an escrow account of 25% of consideration for offer size and 10% for the excess consideration. The Escrow account shall consist of cash deposited with a scheduled commercial bank.
(10) Competitive bids- it is an offer made by a person other than the acquirer who has made the first public announcement. The bid must be equal to the present and proposed share holding of first acquires. The first acquires can revise his offer pursuant to the competitive bid within 14 days. Both acquirers can make upward revision in the price and number of shares till 7 days. Before the closure of the offer The shares holder shall have option to switch his acceptance between different offers to enable him to be in a better position to decide as to which of the subsisting offers is better.
(11) Penalty - SEBI (Substantial Acquisition of shares and takeover) Regulation lay down the obligation of acquires Target Company and merchant banker. Failure or non compliance of provision of the regulation by them would entail penal consequences. The penalty may be-
(i) Forfeiture of the escrow account
(ii) Directing the person concerned to sell the shares acquired in violation of the regulation and not to further deal in securities
(iii) Levy of monetary penalties
(iv) Prosecutions proceeding
(v) Directing transfer of any proceeds to investor protection fund of a stock exchange,
(vi) Debarring any person concerned from accessing the capital market or dealing in securities for such a period as may be directed by SEBI board.
The Takeover Code facilitates investments and attracts investors. It has tried to maintain a balance between the concerns of the investors as well as that of the promoters. First takeover code was framed in 1997 which was amended in 2002 and subsequently replaced in 2011, namely SEBI (Substantial Acquisition of shares and take Over) Regulation, 2011. This regulation further amended in 2014, 2015, 2016 and finally in August 2017. These amendments are made keeping in view the good corporate governance in India.
Prof. (Dr.) Pallavi Gupta
HOD, JIMS School of Law, Greater Noida