Pavan Kumar Vijay\'s Article Published in Chartered Secretary June 2010

AN INSIGHT OF THE TRAC RECOMMENDATIONS AND DRAFT TAKEOVER
REGULATIONS, 2010

- by Pavan Kumar Vijay, Past President, ICSI
Managing Director, Corporate Professionals Capital Private Limited & Founder TakeoverCode.com

Introduction

The trend of Mergers and Acquisitions (M&As) as an itinerary for the growth of corporate world can be
traced back from twentieth century. However, with the liberalization and globalization of Indian
economy, the importance of M&A for inorganic growth has become more relevant for systematic growth
of the capital market. This new weapon in the armory of corporate though proved to be beneficial but
soon the predators with huge disposable wealth started exploiting this opportunity to the prejudice of
retail investor. This created a need for some regulation to protect the interest of investors so that the
process of takeover and mergers, of widely held companies, is used to develop the capital market and
not to sabotage it. In the year 1992, with the enactment of Securities and Exchange Board of India Act,
1992, the SEBI was established as regulatory body to promote and develop securities market and to
protect the interest of investors in securities market. Thereafter, in the year 1994, SEBI formulated the
SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1994 so that process of takeover
is carried out in a fair and transparent manner. After a time gap, a need was felt to review the
Regulations to make the regulatory framework more comprehensive and equitable. Thus, SEBI
appointed a committee headed by Justice P. N. Bhagwati to analyze the Securities and Exchange
Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1994 and to suggest the
appropriate changes.

In the year 1997, SEBI Takeover Code has been rechristened by enacting SEBI (Substantial
Acquisition of Shares and Takeovers) Regulations, 1997 substituting SEBI (Substantial Acquisition of
Shares and Takeovers) Regulations, 1994. These regulations also have been amended a number of
times to address the changing circumstances and needs of corporate sector and various clarifications,
orders and judgments have been given to simplify the complexities involved in these regulations. Thus,
a need was felt to review the SEBI Takeover Regulations to remove the ambiguities involved in the
Regulations which have been one of the major causes of defiance with the Regulations and to bring it
at par with the global practices so as to create a level playing field.

Accordingly, in September 2009, market watchdog SEBI constituted a multi-disciplinary expert
committee, Takeover Regulations Advisory Committee (TRAC) under the chairmanship of Sh. C.
Achuthan, the former Chairman of Securities Appellate Tribunal, with a terms of reference to examine
the existing Takeover Regulations and to suggest suitable amendments, as deemed fit. It also invited
the suggestions from the Indian corporate, professional bodies and public at large. After a detailed
analysis and considering the views of regulators, corporate bodies and public comments for about 9
months, the Committee on July 19, 2010 has released its much awaited report suggesting changes in
1 Vol. XL * Pp 761-904 * June 2010 | Chartered Secretary

the rules of game of takeover with a draft of new Takeover Regulations for the public comments. The
Report is comprehensive enough detailing the Key Recommendations; Deliberations and Rationale
along with Draft text of the proposed Takeover Regulations. The Committee felt it is appropriate to
rewrite the entire Regulations to incorporate all clarifications given in various orders and judgements
and to remove all possible ambiguity and issues in the Existing Regulations which are already
amended a number of times since 1997.

The Committee has framed the Regulations keeping in view the interest of public shareholders on one
side and that of the Strategic Investors, Private Equity Players, Target Company and Promoters on the
other side. While some of the recommendations which are in favour of the general shareholders have
become the concern for the Corporate and Strategic Investors, a few of them may be seen as not in the
interest of small shareholders. In this Article, the recommendations of the Committee have been
analyzed on the basis of major heads dealing with the Definitions, Triggering Limit for Open Offer and
Open Offer Process, Exemptions and Disclosures Requirements.

Overview of the Recommendations

a) More clarity in the language of various definition;
b) Inclusion of various judicial decisions in the Regulations itself to remove the ambiguity and reduce
future litigation;
c) Insertion of SEBI’s administrative views in the Regulations;
d) Effective protection for the small shareholders;
e) More Opportunities for Institutional Investors;
f) At par with Global Practices prevalent for M&As;
g) Simplification in the provisions relating to consolidation of holding;
h) Scrub out of Non Compete Fee.

An analysis of Key Recommendations in comparison with the Existing SEBI Takeover
Regulations

IMPORTANT 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;

The definition of the acquirer as given in the Draft Regulations is more or less same with the one in the
existing SEBI Takeover Regulations with an addition of the word through. In the Existing Regulations,
a person is termed as acquirer when he acquires or agrees to acquire the shares or voting rights or
control over a target company whether by himself or with person acting in concert with him. Thus, to
include a person within the ambit of the definition of Acquirer, the acquisition should be made by him
alone or in an association with the person acting in concert i.e. he should be a party to the transaction
of acquisition. On the other hand, the Proposed Regulations do also recognize a person as acquirer
even where the acquisition whether of shares or voting rights or control has been made by him through
person acting in concert with him i.e. through Special Purpose Vehicle or through the
controlling entities.


Control

“Control” includes the right or the ability to appoint majority of the directors or to control the
management or policy decisions of the target company, 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;

The Proposed Regulations have widened the scope of term Control to include not only the right but also
the situations where the persons have the ability to appoint majority of the directors or to exercise
control in any other manner. The existing definition of Control covers within its ambit only the right to
appoint majority of the directors or to exercise control in any other manner. Thus, by inserting the word
ability in the definition, the scope of term Control has been expanded to mean not only the de jure
control but de facto control also. However, the question whether the power to say “No” or to exercise
negative control would constitute the Control within the meaning of the SEBI Takeover Regulations
have not been addressed in the report.

Shares

“Shares” means shares in the equity share capital of a target company carrying voting rights, and
includes any security which entitles the holder thereof to exercise voting rights;

Provided that all depository receipts entitling the holder thereof to exercise voting rights in the
target company shall be regarded as shares.

The definition of the “Shares” has been broadened to include within its ambit even the depository
receipts. Thus, in terms of the Proposed Regulations, the holder of the depository receipts is treated at
par with the one who acquired the Equity Shares carrying voting rights.

Frequently Traded Shares

The term “Infrequently Traded Shares” has been replaced with the term “Frequently Traded
Shares”. The Existing Regulations state that for the purpose of checking the status of trading, the
trading turnover in that share during the 6 months preceding the month in which PA is made has to be
annualized. Whereas in the report, the Committee has recommended that trading turnover during the
12 months preceding the month in which the Public Announcement is made is to be considered.
Further, the existing definition provides a trading turnover of 5% to consider the shares as frequently
traded whereas the committee has raised the level to 10% to have a more realistic picture.

Identified Date

Further, the term “Specified Date” has been replaced with the term “Identified Date”. As the
purpose of Specified Date is to determine the names of the shareholders to whom the Letter of Offer
would be sent and an exit opportunity would be provided, therefore, it is argued by the Committee that
the same should not be much before the approval of Letter of Offer and initiation of offer period for
tendering the shares. Accordingly, it is recommended that the shareholders list should be finalized on a
date falling on 10th business day prior to the commencement of the tendering period. “Tendering
Period” is defined under Regulation 2(1)(ab) of the New Draft Takeover Regulations which means the


period within which shareholders may tender their shares in acceptance of an open offer to acquire
shares made under these Regulations.

Delisting Threshold

A definition of Delisting Threshold has been inserted in the New Draft Takeover Regulations which
means a shareholding entitling exercise of 90% of the voting rights in a target company, excluding
voting rights on shares held by a custodian and against which depository receipts have been issued
overseas, with reference to the share capital of the target company as of the last day of the tendering
period.

Open Offer and related concepts

I. Increase in Threshold from 15% to 25%:

The existing SEBI Takeover Regulations necessitate the acquirer to give an open offer to the
shareholders of Target Company on the acquisition of shares/ voting rights entitling to exercise 15% or
more voting rights in the Target Company. Prior to October 28, 1998, the threshold for Open Offer was
at 10%. In the Report, the Committee has recommended to increase the threshold limit for Open Offer
to 25%. The recommendation has been made considering the average promoters shareholding
prevalent in the Listed Companies and the international practices.

The recommendation seems to be beneficial from the point of Private Equity and Institutional investors
who had to restrict themselves to 14.99% stake in every listed company in terms of Existing
Regulations as otherwise it would necessitates the open offer to the shareholders of the Target
Company for which they are in no way interested to do as their objective is not to acquire the control
over the company. However, it is apprehended that the increase in threshold would reduce the number
of open offers and hence might be viewed negatively from the point of view of small shareholders.


Further, in the Proposed Regulations, two most debatable issues with respect to the calculation of
threshold for the purpose of open offer have been clarified:

a) No Netting off allowed:

The Proposed Regulations specifically provide that for the purpose of determining the quantum of
acquisition of additional voting rights, the gross acquisitions without considering the disposal of shares
or dilution of voting rights owing to fresh issue of shares by the target company shall be taken into
account.

b) Incremental voting rights in case of fresh issue

In the case of acquisition of shares by way of issue of new shares by the target company, the
difference between the pre-allotment and the post-allotment percentage voting rights shall be regarded
as the quantum of additional acquisition.

For instance:

Pre Allotment Post Allotment
Particulars No. of % Preferential No. of %
Shares Allotment Shares
(No. of
Shares)
Promoters 25 25 25 50 25
Non promoters 75 75 75 150 75
Total 100 100 200 100

As can be observed from the above Table, although the allotment made to the Promoters is 25 (in
absolute terms), constituting 25% of the Preferential Allotment of 100 shares, but in overall terms, the
Promoters’ voting rights percentage has remained intact (earlier, it was 25% of the Paid up capital of
100 shares and after the allotment, it is 25% of the expanded capital of 200 shares). Thus, there is no
incremental increase in the voting rights of the Promoters.

II. Offer Size:

In accordance with the existing SEBI Takeover Regulations, an acquirer of shares or voting rights
beyond the limit as prescribed under the Regulations is required to make a statutory open offer to the
shareholders of the Target Company for acquisition of a minimum 20% of the voting capital of that
Company. The Proposed Regulations have increased the open offer size to as high to 100% of
remaining shareholders. The recommendation has been made taking into consideration the interest of
the shareholders so that an opportunity to exit from the Target Company can be provided to all the
shareholders who desire to exit from the company in the event of substantial acquisition of shares/
change in control. Present provisions allow an offer of only 20% of the total paid-up capital. Thus, all
the shareholders do not get the opportunity of selling their shares in the offer, whereas the controlling
shareholders can get 100% secured exit by entering into the share purchase agreement. In this way
there is no equity for controlling shareholders and the public shareholders. However, the proposal will
make the offer a costly affair for the acquirer as it will involve a larger cash outflow and can be a
deterrent for takeover offers and might cause negative impact on M&A activities. Further, on account
of lacking of proper bank funding in India, the recommendation seems to be impracticable and will put


the foreign acquirers at an advantage in comparison to the Indian acquirers as the foreign acquirers
have easy access to the funding opportunities globally. To address this to some extent, the Committee
has proposed lower size of offer, only 10%, in case of Voluntary Offers.

III. Voluntary Open Offer:

The concept of voluntary open offer has been separately dealt in the draft Regulations submitted by
the Committee.

In case of voluntary open offer, the offer size may be of 10% or more of the voting rights at the will of
the Acquirer. The rationale of this option of lower size offer is that the purpose of offer is just
consolidation of holding and no one is being given preferred treatment as in case of transfer of shares
or control.

IV. Automatic Delisting:

The New Draft SEBI Takeover Regulations provide that where the holding of the acquirer, who has
given the open offer in terms of Regulation 3(1) i.e. on the acquisition of 25% or more shares, taken
together with the shareholding of the PACs has increased beyond the delisting threshold pursuant to
the completion of open offer, then the Target Company shall stand delisted provided that the acquirer
has stated his intention to delist at the time of making the detailed public announcement. Otherwise,
the acquirer shall be required to either,—

a) bring down the non-public shareholding to the level specified and within the time permitted under
the listing agreement; or

b) proportionately reduce the number of shares acquired under the open offer and under any
agreement that attracted the obligation to make such open offer, other than shares acquired by way
of allotment by the target company, such that the holding of the acquirer and persons acting in
concert does not exceed the maximum permissible non-public shareholding.


V. Acquisition of Control:

In the proposed Regulations, the exemption from open offer available in case of change in control
without acquisition of substantial shares, through a special resolution by postal ballot process, has
been withdrawn and now the only route available for change in management and control is through
the Open Offer to the shareholders of the Target Company. This is in contrast with the Regulation 12
of the existing SEBI Takeover Regulations which provides for the change in control through the
special resolution passed by way of postal ballot.

The committee has withdrawn this exemption of change in control through special resolution keeping
in view the fact that the New Draft Takeover Regulations allows for the acquisition of 24.99% shares in
the company with triggering the obligation to make the open offer which is a substantial percentage
and thus allowing the exemption will help the new acquirer to acquire the substantial shares and
control without providing the exit opportunity to the shareholders of the Target Company.

VI. Freedom to complete the acquisition under agreement

In the existing SEBI Takeover Regulations, the acquirer is not allowed to complete the acquisition of
shares or voting rights in, or control over, the target company under any agreement attracting the
obligation to make an open offer for acquiring shares until the completion of offer formalities. The
proposed Regulations have removed this restriction and allowed the completion of acquisition under
any agreement which has resulted into triggering the open offer obligations after a period of 21 days
from the date of Public Announcement subject to the acquirer depositing 100% of the consideration
payable under the open offer in the escrow account, assuming full acceptance. The most important
point to be noted here is that while allowing the freedom to execute the transaction, the proposed
Regulations have also prescribed the maximum time within which the acquisition under the agreement
must be completed which is 26 weeks from the expiry of the offer period. In other words, where the
acquirer has not taken the advantage of the completion of the acquisition before the expiry of the offer
period by not depositing 100% of the consideration payable under the offer, then the acquirer is
allowed to do so after the expiry of offer period but not later than 26 weeks from the expiry of such
period.

VII. Option to withdraw the shares tendered in Offer is withdrawn

In the report submitted by the Committee, the option available to the shareholders to withdraw the
shares tendered in the Open Offer has been taken back. This has been done considering the point
that in the Proposed Regulations, the last of upward revision by the acquirer is prior to the opening of
Offer Period and thus, the shareholders were well aware of the particulars necessary for them to take
an informed decision as to whether to tender the shares in response to the Open Offer or not.
Therefore, there is no need to permit withdrawal of shares tendered in response to the open offer.

VIII. Offer Price:
The Committee has also recommended changes in the method of computation of offer price. It has
proposed volume-weighted average market price of 60 trading days prior to the date of public
announcement in place of average of weekly high-low of closing price for 26 weeks and average of
daily high-low of last two weeks. This is expected to make the market price more broad based and
realistic.

A comparison of the calculation for the determination of Offer Price as provided in the existing
SEBI Takeover Regulations and in the Proposed Regulations is tabulated below:


Existing Regulations Proposed Regulations

The method of determination of Offer Price is Under the Proposed Regulations the Offer
provided in Regulation 20 of the existing SEBI Price for any offer under Regulation 3 shall
Takeover Regulations. As per the Regulation be the highest of the Following:
20(4) the Minimum Offer Price shall be the
highest of the following:
1. Highest Negotiated Price under a Share 1. Highest Negotiated Price under a Share
Purchase Agreement; Purchase Agreement;
2. Prior Acquisition Price 2. Prior Acquisition Price (Higher of the
two):
- Highest of the Price Paid by the Acquirer - The volume-weighted average price
during twenty-six weeks prior to the Public paid or payable for acquisitions,
Announcement under any public, rights whether by the acquirer or by any person
preferential issue; acting in concert with him during the
fifty-two weeks immediately preceding
the date of the public announcement;

[(Q1xP1)+(Q2xP2)+(Q3xP3)….(QnXPn)]
--------------------------------------------------------
[Q1+Q2+Q3+ ……… Qn]
Where Q = Quantity
P = Price
1, 2, 3 …. n denote days of purchase

-
The highest price paid or payable for
any acquisition, whether by the acquirer
or by any person acting in concert with
him during the twenty-six weeks
immediately preceding the date of the
public announcement; and
3. Market Price (Higher of the two): 3. Market Price:
- Average of weekly high and low of the - The volume-weighted average market
closing price quoted on the Stock price of such shares for a period of sixty
exchange where the shares of the trading days immediately preceding the
Company are most frequently traded date of the public announcement as
during last twenty-six weeks; OR traded on the stock exchange where the
maximum volume of trading in the shares
[(WH1+WL1)/2 + (WH2+WL2)/2…. (WH26+WL26)/2] /26 of the target company are recorded
WH = Weekly High Closing Price during such period, provided such shares
WL = Weekly Low Closing Price
1, 2, 3…. 26 denote the Weeks are frequently traded;
[(T1xWAP1)+(T2xWAP2)+…..(T60 X WAP60)]
- Average of daily high and low of the --------------------------------------------------------
prices of the shares as quoted on the [T1+T2+ ……… T60]
Stock exchange where the shares of the Where T= Trade Quantity of the Day
Company are most frequently traded WAP = Weighted Average Price of the Day
during two weeks preceding the date of 1,2,3 …… 60 denote trading days
public announcement.

[(DH1+DL1)/2+ (DH2+DL2)/2…. (DH10+DL10)/2] /10
DH = Daily High Price
DL = Daily Low Price
1,2, … 10 denote days


IX. Non-compete Fee

One of the most debated issue relating open offers has been the Non-compete Fee paid to the
existing promoters. Presently a Non-compete fee to the extent of 25% of the offer price is allowed to
be paid to the controlling shareholders, if the SEBI is convinced of their competing capability. The
Committee, however, has recommended to remove this provision keeping in view the spirit of equal
treatment for all shareholders. Thus, under the Proposed Regulations any direct or indirect non-
compete fee or control premium paid to the controlling shareholders would be added or made part of
the offer price.

X. Acquisition from the other competing acquirer

In the draft Regulations, the Committee has made a provision allowing the competing acquirer to
acquire either himself or through or with PACs with him, the shares acquired by the other competing
acquirer in the open offer without attracting the obligation to make another Open Offer provided that
the acquisition has been made at the price not exceeding the offer price governing the competing offer
made by the acquirer acquiring the shares and the acquisition has been made within 21 business
days from the expiry of the offer period for such competing offer. Keeping in view the increasing trend
of competitive biddings in India this may be taken as an imperative step as compelling two warring
groups to continue in a company may not be in the interest of the company and smooth passage to
one of the competitive bidders is desirable.

XI. No induction on the Board during the pendency of competing offer

Regulation 24(3) of the proposed Regulations prohibit the induction of new director on the board of the
Target Company during the pendency of the competing offer irrespective of the amount of
consideration deposited in the escrow account by the acquirer. The most interesting point to be noted
here is that the said sub-regulation prohibits the induction of new director on the board of the Target
Company regardless of the fact whether the proposed Director, to be appointed on the Board, belongs
to the acquirer or the existing management of the Target Company.

XII. Responsibility of the Board of Target Company

The Proposed Regulations have casted an obligation on the Board of the Target Company to
constitute a committee of independent directors which shall provide its written reasoned
recommendations on the open offer to the shareholders of the Target Company and such
recommendations shall be published at least two business days before the commencement of the
tendering period, in the same newspapers where the public announcement of the open offer was
published. However, this recommendation does not seem to be practical as the role of independent
director in India is generally considered to be passive. Further, the committee has not prescribed any
parameters or criteria which the committee of Independent Director(s) should consider for giving its
recommendation on the open offer.

In the German Takeover Code, specific provisions have been provided prescribing the criteria’s to be
considered while making the recommendation on the open offer.

For instance, suppose there are two competing offers of which one open offer is by a Financial
Investor who has offered a price of Rs.50 per shares and other is by a Technocrat having a long
experience and expertise in the industry in which the Target Company is involved and who has
offered an offer price of Rs.45 per share. Now, in this situation which of the offer, the committee should


recommend to the shareholders i.e. whether the committee should consider the High Offer Price or the
experience of the acquirer which might be useful for the bright future of the Target Company for giving
its recommendations to the shareholders of the Target Company.

This is in contrast with the Existing Regulations which have left this requirement at the choice of the
directors of the Target Company.

XIII. Reduction in Time Line for Open Offer Process:

Keeping in view the changing technologies and possibilities of faster execution and dissemination of
information, the Committee has recommended substantial reduction of timeline of the whole open
offer process. The timeline for the open offer process has been reduced from 95 days to 57 days.
Shorter timeline will reduce the cost of process and will also make the acquisitions commercially more
viable.

Exemptions

The exemptions under SEBI Takeover Regulations have been divided into two parts i.e. Automatic
Route and Approval Route. Automatic route means the exemption is available to the acquirer subject
to the compliance of the conditions as prescribed under the Regulations whereas under the Approval
route, an application for exemption is to be made to the Board. In the Committee Report, some of
automatic exemptions which have not been used frequently such as allotment of shares pursuant to an
application made under a Public Issue, acquisition of shares in the ordinary course of business by a
market maker have been removed. On the other hand, a few new categories of the automatic
exemptions have been introduced which are detailed below:

Increase in shareholding pursuant to Buy Back:

The increase in shareholding pursuant to buy back by the Target Company has been covered under
the automatic exemption route subject to certain conditions. The exemptions in respect of increase in
shareholding pursuant to buy back have been categorized into two parts i.e. where pre holding of the
acquirer before the buy back is less than 25% and other where the pre shareholding of the acquirer is
between 25% to 75%.

Pre Holding less 25% Pre Holding between 25-75%

• Exemption subject to the acquirer • In case of shareholder resolution,
reducing its shareholding below the approval of shareholders by way of
threshold within a period of ninety postal ballot has been obtained and
days from the date of such increase. such shareholder has not voted on
the resolution.
• In case of Board Resolution, such
shareholder as a director has not
voted.
• No change in control.


Acquisition of shares under Corporate Debt Restructuring Scheme

Another important exemption that has been introduced in the Committee Report is very much beneficial
for the general public shareholders i.e. acquisition of shares of a target company not involving a change
of control over such target company pursuant to a scheme of Corporate Debt Restructuring provided
such scheme has been authorized by shareholders by way of a special resolution passed by postal
ballot.

Voting Right on Preference Shares

Similarly, the increase in voting rights arising on preference shares in terms of section 87 of the
Companies Act, 1956 has also been included in the automatic exemption category. However, the
question which has remained unanswered is whether the acquisition of preference shares carrying
voting rights arising out of the operation of law would be exempt from the open offer obligation or not.

Inter se transfer of shares amongst the relatives

The existing SEBI Takeover Regulations as well as the Proposed Regulations provides the exemption
from the open offer obligations in case of inter se transfer of shares amongst the relatives. However,
the definition of Relatives in both the Regulations is different. In the existing Regulations, the term
Relative means as given in Section 6 of the Companies Act, 1956 whereas in the Proposed
Regulations, the concept of Immediate Relative is introduced which means any spouse of a person,
and includes parent, sibling or child of such person or of the spouse;

Inter se transfer of shares amongst the persons falling in the MRTP Group

The exemption from the Open Offer obligations in case of inter se transfer of shares amongst the
persons falling in the MRTP Group as provided in the existing SEBI Takeover Regulations has been
withdrawn in the Proposed Regulations.

Reporting to SEBI u/r 3(4) of Existing SEBI Takeover Regulations

Furthermore, at present, there is a lot of confusion about the requirement of reporting to SEBI in case of
automatic exemption from offer. In the Proposed Regulations, the Committee has considered this issue
and removed the ambiguity by deleting the pre-percentage of the acquirer. In other words, in the draft
Regulations submitted by the Committee, the disclosure is required in every circumstance whenever
the exemption under the categories as mentioned in the Regulations have been sought irrespective of
the pre shareholding of the acquirer seeking the exemptions.

Reference to Takeover Panel

The existing SEBI Takeover Regulations provide for the compulsory reference to the Takeover Panel of
the application filed with SEBI for seeking the exemption from the Open Offer obligations. However, in
the draft Takeover Regulations submitted by the committee, the reference to the Takeover Panel is
optional on the part of SEBI and SEBI may refer the application to the Takeover Panel in the
circumstances considered necessary.


Disclosure Requirements

The Committee Report has proposed more frequent and stringent disclosure requirements on the part
of the acquirer. The disclosure under the Regulations is divided into parts i.e. Event Based Disclosure
and Annual Disclosure.

Event Based Disclosure

Existing Regulation Proposed Regulation
Acquisition of 5 per cent and more shares or Disclosure of acquisition and disposal
voting rights of a company

Reg. Particulars Reg Particular
No. No.

7(1) Disclosure on the acquisition of >5%, 28(1) Disclosure on the acquisition of >5%.
10%, 14%, 54% and 74%
7(1A) Pre holding between 15-55% and change 28(2) Pre holding >5% and change in
in shareholding 2% or more. shareholding 2% or more.

7(2) Disclosure is to be given within 2 days of 28(3) Disclosure is to be made within 2
acquisition or receipt of intimation of business days of acquisition or receipt of
allotment. intimation of allotment.

7(3) Target Company to give disclosure to the No obligation on the Target Company to give
stock exchange on receipt of disclosure disclosure.
under 7(1) and 7(1A).

Annual Disclosures

Existing Regulation Proposed Regulation
Continual Disclosures Continual Disclosures

Reg. Particulars Reg. Particular
No. No.

8(1) Disclosure by person holding more than 15% 29(1) Disclosure by person holding more than
to Target Company with 21 days from the 25% to Target Company as well as to
March 31. stock exchange with 15 business days
from the March 31.
8(2) Disclosure by promoter or every person in 29(2) Disclosure by promoter to Target
control to Target Company within 21 days Company as well as to stock exchange
from the March 31 as well record date for within 15 business days from March 31
dividend of his own shareholding as well as of his own shareholding as well as that
that of PACs. of PACs.


8(3) Target Company to give disclosure to the No obligation on the Target Company to give
stock exchange on receipt of disclosure disclosure.
under 8(1) and 8(2) with 30days from the
March 31 as well record date for dividend.

8(4) Target Company to maintain the register to No requirement to maintain register.
record the information received under sub-
regulation (3) of regulation 6, sub-regulation
(1) of regulation 7 and sub-regulation (2) of
regulation 8.

However, it has not been prescribed whether the promoter who is not holding any shares in the
company but is having the control over it would also be required to file the Continual Disclosures or not.

The most important point to be noted here is that the acquisition and holding of any security or
instrument that would entitle the acquirer to receive shares in the target company, including warrants
and convertible debentures, shall also be regarded as shares for the purpose of making the disclosures
whether continual disclosure or otherwise. This amendment is in line with well accepted international
norms.

Recommendation made to other Regulators

I. Finance Ministry for Taxation
In the Draft Regulations, the committee has also touched an important issue i.e. Tax treatment with
respect to the shares tendered in the Open Offer. As the Open Offer is highly regulated and all the
parties involved in the process are required to follow the provisions laid in the Takeover
Regulations, therefore, according to the Committee, it would not be justified to treat the activity of
tendering the shares in the open offer at par with the Off market deal for the taxation purpose as the
off market deal is a private transaction between the parties.
II. Reserve Bank of India for funding
The Committee is of the view that more flexible norms for grant of loans for strategic investment in
Indian listed companies particularly for funding open offers under SEBI Takeover Regulations
should be prescribed so as to create a level playing for domestic acquirers’ vis-à-vis foreign
acquirers for speedy deal execution.

III. SEBI for changes in ICDR

In order to ensure that issuance of shares as a consideration for the shares tendered in the Open
Offer does not lead to undue delay in completion of offer formalities by the acquirer, therefore, the
committee has suggested that SEBI should amend the ICDR Regulations to facilitate a smooth
issuance of equity shares in such cases in a clear and transparent manner and further, the
disclosures and other procedural requirements to be followed for such issue of shares should be
appropriately spelt out.

Conclusion:

Based on these deliberations, it can be concluded that the Committee has tried to make takeover
battles a level playing field for controlling as well as non-controlling shareholders. The increase in
threshold would make listed companies more attractive to institutional investors and consequently
would lead to more Investment in Indian Listed Companies. On the other hand it may reduce the


number of offers as even 25% stake could be sufficient to control a company keeping in view the
passive nature of small shareholders. The 100% offer requirement is good for the cause of equity but
might also cause deterrent for acquisitions, which is a major concern. The increase in the offer size
upto 100% has made the Open Offer process a costlier affair for the acquirers. The Committee has also
made attempts to address many of the unintentional confusions and non-clarities and make the
takeover law less complicated in understanding and compliance. The India Inc. will look forward to an
early implementation of these new Regulations with some further modifications as per the comments
and suggestions of industry chambers, professional bodies and public at large.

For any query feel free to refer www.takeovercode.com or write to pkvijay@indiacp.com


Pavan Kumar Vijay\'s Article Published in Chartered Secretary June 2010

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