Decoding the “Takeover Code”

[SEBI (Substantial Acquisition of Shares and Takeovers)

Regulations 1997]

By Payel Jain
Vinod Kothari & Company

Main idea behind the Coding of Takeover Code

Some group of individuals commonly referred to as “promoters” come together to

form a company and offer shares to the public for subscription. Public subscribe to
such shares based on the credentials of the promoters. Now is it fair on the part of
public shareholders to allow these promoters to dilute their stake in the company
leaving the public shareholders in the hands of the new management or substantially
change their shareholding in the company?

To protect the investors, the Takeover Code has been codified by the Securities and
Exchange Board of India, the regulator of Securities Market, which requires the
promoters to give mandatory offer to the public to decide if they wish to continue to
be the shareholders of the company in the changed circumstances.

To fulfill the intent as stated above, the Code therefore ensures the following:

• Exit opportunity to the investors if they do not want to continue with the new
management.
• Full and truthful disclosure of all material information relating to the open
offer to enable the investors to take an informed decision.
• Ensuring the sufficiency of financial resources by the promoters for the
payment of acquisition price to the investors.
• Timely completion of takeover formalities.

What is public offer?

Public offer refers to the exit opportunity given to the public to dilute their
shareholding in the Target Company if there is a substantial change in the
shareholding pattern as envisaged in the Code or if there is a change in control of the
Target Company. The acquirers are compulsorily required to make public offer to
acquire 20% of the shares or voting rights from public in cases where the Code is hit
which we will discuss in detail hereinbelow.

Understanding the important terms

“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
(PACs) with the acquirer;
Thus PACs are included in the definition of Acquirer itself and any reference to
Acquirer would therefore include PACs also.

“control” includes
• the right to appoint majority of the directors, or
• to control the management or policy decisions exercisable by a person or
persons acting individually or in concert, directly or indirectly, including by
virtue of
o their shareholding or
o management rights or
o shareholders agreements or
o voting agreements or
o in any other manner.

“promoter” means—

(a) any person who is in control of the target company;

(b) any person named as promoter in any offer document of the target company or
any shareholding pattern filed by the target company with the stock exchanges
pursuant to the Listing Agreement, whichever is later;
and includes any person belonging to the promoter group.

“public shareholding” means shareholding held by persons other than promoters

“promoter group” shall include:

(a) in case promoter is a body (b) in case the promoter is an
corporate— individual—
(i) a subsidiary or holding (i) the spouse of that person, or any
company of that body parent, brother, sister or child
corporate; of that person or of his spouse;
(ii) any company in which the (ii) any company in which 10 % or
promoter holds 10 % or more of the share capital is held
more of the equity capital or by the promoter or an immediate
which holds 10 % or more of relative of the promoter or a firm
the equity capital of the or HUF in which the promoter or
promoter; any one or more of his immediate
(iii) any company in which a group relative is a member;
of individuals or companies (iii) any company in which a
or combinations thereof who company specified in (i) above,
holds 20 % or more of the holds 10 % or more, of the share
equity capital in that company capital; and
also holds 20 % or more of the (iv) any HUF or firm in which the
equity capital of the target aggregate share of the promoter
company; and and his immediate relatives is
equal to or more than 10 per cent
of the total.
Events attracting Public Announcement or Open Offer:
Regulation 10, 11 and 12

Under
Regulation Event attracting requirement of PA

Acquisition of shares/voting rights which (taken

together with shares or voting rights held by him or
by PAC), entitle him to exercise 15% or more of
10 the voting rights in the Target Company

Acquisition by person whose current shareholding

together with PAC is between 15 %- 55%, of
additional shares entitling him to exercise more
11(1) than 5% of voting rights in one financial year

Acquisition by person whose current shareholding

together with PAC is between 55 %- 75%, of any
11(2) additional shares

Person whose current shareholding together with

PAC is between 55 %- 75% intends to
11(2A) consolidate his shareholding

To acquire control over the Target Co. whether or

not there is any acquisition (If is not by Special
12 Resolution carried by Postal Ballot)

Creeping acquisition under second proviso to Reg 11(2):

• An acquirer holding 55 % or more but less than 75 % of the shares or voting

rights in a target company, may acquire, either by himself or with PACs,
additional shares or voting rights entitling him up to 5 % voting rights in the
target company without making a public announcement under the SAST
Regulations through open market purchase in normal segment on the stock
exchange.
• The aforesaid acquisition will be of shares or voting rights upto a maximum of
5 % voting rights in the target company in one or more tranches, without any
restriction on the time-frame within which the same can be acquired;
• The percentage of shareholding / voting rights of the acquirer, together with
persons acting in concert with him, in the target company, shall not increase
beyond 75 %.
Disclosure requirement under the Takeover Code
• Disclosure on happening of certain event – Regulation 7
• Yearly disclosure – Regulation 8

Disclosure on happening of certain event – Regulation 7

Regulation 7(1)
Event attracting Who shall Whom to What to
Compliance Time Limit disclose disclose disclose
On reaching
every stage of
On acquiring shres or shareholding,
voting rights entitling within 2 days to the target
the acquirer to hold of receipt of company and
together with shares intimation of the SE where
already held more than allotment or the shares of the
5%, 10%, 14%, 54% acquisition of Target Co. are His
and 74% shares shares Acquirer listed Shareholding

Regulation 7(1A)
Acquirer, purchase or
who has sale
acquired aggregating
shares or two percent
voting rights or more,
Within 2 days of a to the target alongwith
Purchase or sale of receipt of company company and the aggregate
aggregating two percent intimation of under sub- the SE where shareholding
or more of the share allotment or regulation(1) the shares of the after such
capital of the target acquisition of of regulation Target Co. are acquisition
company shares 11 listed or sale

Regulation 7(3)
the aggregate
number of
shares held
by each of
the persons
Within 7 days who have
of receipt of To all SE where given
Shares acquired in the information the shares of the disclosure to
manner under Reg 7(1) under Reg 7(1) Target company are the Target
& 7(1A) & 7(1A) Company listed Co
 Yearly disclosures – Regulation 8

Regulation 8(1)
Event attracting Who shall Whom to What to
Compliance Time Limit disclose disclose disclose
Person
Within 21 days holding
from the more than
financial year 15 % shares his holdings
Yearly disclosure of ending March in any To the as on 31st
shareholding 31 company Company March

Regulation 8(2)
Within 21 days disclose the
from the number and
financial year % of shares
ending March or voting
31, as well as rights held
the record date by him and
of the promoter or by persons
company for every person acting in
the purposes of having concert with
Yearly disclosure of declaration of control over To the him, in the
shareholding dividend a company Company company

Regulation 8(3)
Changes in
shareholding
of person
holding 15 %
or more
shares;
Within 30 days holdings of
from the promoter &
financial year persons
ending March To all SE where having
Yearly disclosure of 31, as well as Listed the shares of the control over
shareholding the record date Company Co are listed the company
Exemptions under the Takeover Code:

9 Allotment in pursuance of an application made to a public issue.

9 Allotment pursuant to rights issue,
(i) to the extent of his entitlement; and
(ii) up to the percentage specified in Regulation 11

9 Allotment to the underwriters pursuant to an underwriting agreement

9 Inter- se transfer of shares amongst :-
(i) group coming within the definition of group as defined in the
M R T PAct, 1969
(ii) relatives within the meaning of Section 6 of the Companies
Act, 1956
(iii) Qualifying Indian promoters and foreign collaborators who are
shareholders;
(iv) Qualifying Promoters
9 Acquisition of shares in the ordinary course of business by-
i. a registered stock-broker of a stock exchange on behalf of clients;
ii. a registered market maker of a stock exchange in respect of shares
for which he is the market maker, during the course of market
making;
iii. by Public Financial Institutions on their own account;
iv. by banks and public financial institutions as pledgees
9 Acquisition of shares by way of transmission on succession or inheritance
9 Acquisition of shares by government companies within the meaning of Section
617 of the Companies Act, 1956 and statutory corporations
9 Pursuant to a scheme –
(i) framed under Section 18 of the Sick Industrial Companies
(Special Provisions) Act,1985;
(ii) of arrangement or reconstruction including amalgamation or
merger or demerger under any law or regulation, Indian or
foreign
9 acquisition of shares in companies whose shares are not listed on any stock
exchange
Open Offer process in a nutshell

Appointment of Before
Acquirer to start the Merchant Banker making PA
process by

Merchant Banker to
make PA Not later than 4
days of acquisition

SEBI
Copy of PA to be
Target Company
sent to
SEs where TC’s
shares are listed
Submission of draft
Within 14
letter of offer to Board
days of PA
along with fees

PA must be to acquirer
minimum 20 % of
voting capital

For payment of consideration- transfer 90

% of amount lying in escrow account + Within 7 days
deposit such sum as necessary to make up of closure of
the total value of shares to be acquired offer