Indian M&A Regulatory Environment

Merger Control Provisions in India

Pre 1991: Only the MRTP Act, 1969 and the Companies Act, 1956 had merger control provisions. Post 1991: The Companies Act, 1956; SEBI (Takeover) Guidelines, 2011; and the Competition Act, 2002 now form the backbone of merger control provisions in India.

The Legal Framework

1. The Companies Act, 1956 Sections 390 - 396A 2. SEBI (Substantial Acquisition of Shares and Takeovers) Regulation, 2011 3. The Competition Act, 2002 Sections 5 and 6 deal with Combination and Regulation of Combination respectively.

SEBI (Substantial Acquisition of Shares and Takeovers) Regulation, 2011

SEBI Takeover code

The SEBI takeover code deals with law relating to substantial acquisition of shares or control of a quoted company ( listed company) or and unquoted public limited company or a private limited company (an unlisted company) including a foreign registered company , which owns or controls a listed company

Objectives of takeover code

Exit opportunities to the retail investors if they do not want to continue with new management Full and truthful disclosures relating to open offer so as to take informed decision Acquirer to ensure sufficiency of resources for payment of acquisition price M & A process to completed in time bound manner (open offer time 57 days)

M&A and Takeovers are the powerful ways to achieve corporate growth, but because of their complex nature, to protect the interest of all the parties, curb the malpractices and to facilitate orderly development these activities are regulated by a takeover code in most part of the world. In India after liberalization Govt. started to regulate these activities by introducing a takeover code.

The Development of Takeover code

In the year 1992, with the enactment of SEBI Act, SEBI was established as regulatory body to promote the development of securities market and protect the interest of investors in securities market. Thus SEBI appointed a committee headed by P.N. Bhagwati to study the effect of takeovers and mergers on securities market and suggest the provisions to regulate takeovers and mergers

From legal perspective, takeover is of three types:

[i] Friendly takeover, [ii] Bail out takeover, [iii] Hostile takeover

Friendly or Negotiated Takeover

Friendly takeover means takeover of one company through negotiations between the existing promoters and prospective investor in a friendly manner. Thus it is also called Negotiated Takeover. Generally, friendly takeover takes place as per the provisions of Section 395 of the Companies Act, 1956.

Bail out Takeover

Takeover of a financially sick company by a financially rich company as per the provisions of Sick Industrial Companies (Special Provisions) Act, 1985 to bail out the former from losses

Hostile takeover
Hostile takeover is a takeover where one company unilaterally pursues the acquisition of shares of another company without being into the knowledge of that other company.

The hostile takeover takes place as per the provisions of SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011

SECURITIES AND EXCHANGE BOARD OF INDIA(SUBSTANTIAL ACQUISTION OF SHARES AND TAKEOVERS ) REGULATION ,2011 TAKEOVER CODE

Takeover Code
1. The concept of Takeover Although, the term Takeover has not been defined under the said Regulations, the term basically envisages the concept of an acquirer 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.

Meaning of substantial quantity of shares or voting rights

The said Regulations have discussed this aspect of substantial quantity of shares or voting rights separately for two different purposes:

(I) For the purpose of disclosures to be made by acquirer(s): (II) For the purpose of making an open offer by the acquirer

For the purpose of disclosures

(1)

5% or more shares or voting rights:

Any acquirer who acquires shares or voting rights in a target company , which taken together with shares or voting rights , if any , held by him and by the persons acting in concert with him in such target company , aggregating to 5% or more of shares of such target company ,shall disclose their holdings to the target company and the Stock Exchanges where the shares of the target company are traded within 2 days of receipt of intimation of allotment of shares or acquisition of shares . Every subsequent acquisition or disposal of shares of target company representing 2% or more of shares needs to be disclosed to the target company and stock exchange

Continual Disclosures
2) More than 25% shares or voting rights: Every person (together with PAC) holds more than 25% shares or voting rights of the target company, shall within 7 working days from the financial year ending March 31 make yearly disclosures to the stock exchange/target company in respect of his holdings as on the mentioned date .

Continual Disclosures
3) Disclosures by promoters: The promoter of the target company (together with PAC) disclose their aggregate shareholding and voting rights as of 31st march The disclosures shall be made within 7 working days from the end of each financial year to the Stock exchange /Target company .

For the purpose of making an open offer

Limits on acquisition of shares or voting Rights Any person, singly or together with PACs (together referred to as acquirer), can acquire up to 24.99% shares or voting rights in a listed company in India (target company), provided the acquirer does not take control over the target company

If the acquisition results into entitlement of 25% or more voting rights in the target company, the acquirer is required to make an open offer to acquire at least 26% shares from the existing public shareholders of the target company in terms of the Takeover Code (open offer obligation).

Acquisition of control
Acquisition of control, directly or indirectly, by the acquirer, irrespective of shares or voting rights held, triggers open offer obligation. Control includes right to Appoint majority of directors Control the management Control policy decisions
Irrespective of acquisition or holding of shares or voting rights in a target company, no acquirer shall acquire, directly or indirectly, control over such target company unless the acquirer makes a public announcement of an open offer for acquiring shares of such target company in accordance with these regulations

Creeping acquisition limit

The acquirer holding 25% or more voting rights in the target company can acquire additional shares or voting rights to the extent of 5% of the total voting rights in any financial year, up to the maximum permissible non-public shareholding limit (generally 75%). Creeping acquisition of 5%, in a financial year, is allowed up to the maximum permissible nonpublic shareholding (generally 75%)

Mandatory open offer

A mandatory open offer gets triggered on any of the following cases : Acquisition of substantial shares or voting rights entitling the acquirer to 25% or more voting rights in the target company Creeping acquisition of more than 5% voting rights in a financial year by the acquirer who already holds 25% or more voting rights in the target company Acquisition of control over the target company, irrespective of shares or voting rights held by the acquirer

In a mandatory open offer, the acquirer has to offer to acquire minimum 26% of the total shares of the target company from public shareholders, in accordance with the Takeover Code.

Exemptions from open offer obligation

The public offer provisions of the Takeover Code will not be apply in the following cases: Acquisition by way of transmission, succession or inheritance Acquisition in ordinary course of business by: - Allotment to underwriter pursuant to any underwriting agreement; -Scheduled commercial bank or Public financial institutions as a pledgee, on invocation of pledge Acquisition of shares pursuant to rights issue

Voluntary open offer

The acquirer holding 25% or more voting rights in the target company can make a voluntary openoffer for at least 10% of the total shares of the target company. This is subject to fulfilment of the following conditions: Total shareholding of the acquirer post open offer should not exceed maximum permissible non-public shareholding (generally 75%). The acquirer should not have acquired shares of the target company in the preceding 52 weeks without attracting open offer obligation.
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PAC
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.

Public Announcement
A Public announcement is generally an announcement given in the newspapers by the acquirer, primarily to disclose his intention to acquire a minimum of 26% of the voting capital of the target company from the existing shareholders by means of an open offer.

Appoint a Merchant Banker

The Acquirer is required to appoint a Merchant Banker registered with SEBI before making a PA and is also required to make the PA within five working days of the entering into an agreement to acquire shares, which has led to the triggering of the takeover, through such Merchant Banker.

Disclosures in public announcement

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 .

The basic objective behind the PA being made is to ensure that the shareholders of the target company are aware of the exit opportunity available to them in case of a takeover / substantial acquisition of shares of the target company. They may, on the basis of the disclosures contained therein and in the letter of offer, either continue with the target company or decide to exit from it.

Procedure to be followed after the Public Announcement Acquirer is required to file a draft Offer Document with SEBI within 5 days of the PA through its Merchant Banker, along with appropriate filing fees along with the draft offer document, the Merchant Banker also has to submit a due diligence certificate as well as certain registration details

The filing of the draft offer document is a joint responsibility of both the Acquirer as well as the Merchant Banker Thereafter, the acquirer through its Merchant Banker sends the offer document as well as the blank acceptance form within 32 days from the date of PA, to all the shareholders whose names appear in the register of the company on a particular date

The offer remains open for 10 days. The shareholders are required to send their Share certificate(s) / related documents to the Registrar or Merchant Banker as specified in the PA and offer document The acquirer is obligated to offer a minimum offer price as is required to be paid by him to all those shareholders whose shares are accepted under the offer, within 10 days from the closure of offer

Minimum Offer Price and Payments made It is not the duty of SEBI to approve the offer price, however it ensures that all the relevant parameters are taken in to consideration for fixing the offer price and that the justification for the same is disclosed in the offer document.

The offer price shall be the highest of :

a) Highest negotiated price b) Average price paid or payable by the acquirer during the preceding 52 weeks c) The highest price paid or payable by the acquirer during the preceding 26 weeks d) 60 trading day average market price, for frequently traded shares. e)For infrequently traded shares, the price determined by the acquirer and the manager to the open offer taking into account valuation parameters

 Acquirers are required to complete the payment of consideration to shareholders who have accepted the offer within 10 days from the date of closure of the offer. In case the delay in payment is on account of nonreceipt of statutory approvals and if the same is not due to wilful default or neglect on part of the acquirer, the acquirers would be liable to pay interest to the shareholders for the delayed period in accordance with Regulations.

Acquirer(s) are however not to be made accountable for postal delays. If the delay in payment of consideration is not due to the above reasons, it would be treated as a violation of the Regulations.

Safeguards incorporated so as to ensure that the Shareholders get their payments

Before making the Public Announcement the acquirer has to create an escrow account having 25% of total consideration payable under the offer of size Rs. 500 crores (Additional 10% if offer size more than 500 crores)

Competitive offer
Any third person other than the acquirer who has made the first public announcement can make a competitive bid or a counter offer;

within 15 days of the public announcement of the first offer.

Upon the public announcement of this competitive bid, the original acquirer shall have the option to either revise the original offer or withdraw it.
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Withdrawal of offer
No public offer , once made , shall be withdrawn except under the following circumstances1 The statutory approval required have been refused 2 The sole acquirer has died 3 such circumstances as in the opinion of the Board merit withdrawal

New Takeover Code- Highlights

Threshold to trigger an open offer be increased from 15 per cent to 25 per cent. Size of such an open offer should be hiked from 20 per cent to 26 per cent, thereby ensuring parity and equal opportunity to large and small shareholders. To minimise speculative interest, the overall timeline for an open offer has been brought down from 95 calender days to 57 business days.

BACK UP

DEFINITIONS (TAKEOVER CODE) Control means the right to appoint majority of

the directors or to control the management or policy decisions of a company Enterprise value means the value calculated as market capitalization of a company plus debt, minority interest and preferred shares, minus total cash and cash equivalents

What is a Target Company?

A Target Company is a company whose shares are listed on any stock exchange and whose shares or voting rights are acquired/being acquired or whose control is taken over/being taken over by an acquirer

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