Merger and Aquisition

Mergers And Acquisitions
- 1 PRASHANT NARKHEDE 121(MMS)
MERGERS
&
ACQUISITION
A book made by:
Contents
Chapters
Page No.
Chapter 1. Introduction to Mergers and Acquisition.
2-5
Chapter 2. Purpose of merger and acquisition.
6-8
Chapter 3. Types of Mergers.
9-10
Chapter 4. Advantages of mergers and takeovers.
11-14
Chapter 5. Consideration of Merger and Takeover.
15-19
Chapter 6. Reverse Merger.
20-24
Chapter 7. Procedure of Merger and Acquisition.
25-28
Chapter 8. SEBI takeover code & Regulations.

Chapter9. Methods of merger and takeovers.
Chapter10. Defenses: pre & post Merger.
Chapter11. CASE -STUDY
Chapte
r
1
Introduction to
Mergers and
Acquisition
We have been learning about the companies coming together to from another company and
companies taking over the existing companies to expand their business.
With globalisation taking toll of many Indian businesses and the feeling of insecurity surging
over our businessmen, it is not surprising when we hear about the immense numbers of corporate
restructurings taking place, especially in the last couple of years. Several companies have been taken
over and several have undergone internal restructuring, whereas certain companies in the same field of
business have found it beneficial to merge together into one company.
In this context, it would be essential for us to understand what corporate restructuring and
mergers and acquisitions are all about.
All our daily newspapers are filled with cases of mergers, acquisitions, spin-offs, tender offers, &
other forms of corporate restructuring. Thus important issues both for business decision and public
policy formulation have been raised. No firm is regarded safe from a takeover possibility. On the more
positive side Mergers & Acquisitions may be critical for the healthy expansion and growth of the firm.
Successful entry into new product and geographical markets may require Mergers & Acquisitions at
some stage in the firm's development. Successful competition in international markets may depend on
capabilities obtained in a timely and efficient fashion through Mergers & Acquisition's. Many have
argued that mergers increase value and efficiency and move resources to their highest and best uses,
thereby increasing shareholder value.
.
To opt for a merger or not is a complex affair, especially in terms of the technicalities involved.
We have discussed almost all factors that the management may have to look into before going for
merger. Considerable amount of brainstorming would be required by the managements to reach a
conclusion. e.g. a due diligence report would clearly identify the status of the company in respect of the

financial position along with the net worth and pending legal matters and details about various
contingent liabilities. Decision has to be taken after having discussed the pros & cons of the proposed
merger & the impact of the same on the business, administrative costs benefits, addition to shareholders'
value, tax implications including stamp duty and last but not the least also on the employees of the
Transferor or Transferee Company.
Merger:
Merger is defined as combination of two or more companies into a single company where one
survives and the others lose their corporate existence. The survivor acquires all the assets as well as
liabilities of the merged company or companies. Generally, the surviving company is the buyer, which
retains its identity, and the extinguished company is the seller.
Merger is also defined as amalgamation. Merger is the fusion of two or more existing companies.
All assets, liabilities and the stock of one company stand transferred to Transferee Company in
consideration of payment in the form of:
Equity shares in the transferee company,
Debentures in the transferee company,
Cash, or
A mix of the above modes.
Acquisition:
Acquisition in general sense is acquiring the ownership in the property. In the context of business
combinations, an acquisition is the purchase by one company of a controlling interest in the share capital
of another existing company.

Methods of Acquisition:
An acquisition may be affected by
(a) agreement with the persons holding majority interest in the company management like members
of the board or major shareholders commanding majority of voting power;
(b) purchase of shares in open market;
(c) to make takeover offer to the general body of shareholders;
(d) purchase of new shares by private treaty;
(e) Acquisition of share capital through the following forms of considerations viz. means of cash,
issuance of loan capital, or insurance of share capital.
Takeover:
A takeover is acquisition and both the terms are used interchangeably.
Takeover differs from merger in approach to business combinations i.e. the process of takeover,
transaction involved in takeover, determination of share exchange or cash price and the fulfillment of
goals of combination all are different in takeovers than in mergers. For example, process of takeover is
unilateral and the offer or company decides about the maximum price. Time taken in completion of
transaction is less in takeover than in mergers, top management of the offerer company being more cooperative.
De-merger or corporate splits or division:
De-merger or split or divisions of a company are the synonymous terms signifying a movement in
the company.
A successful Mergers & Acquisition growth strategy must be supported by three capabilities:
deep local networks, the abilities to manage uncertainty, and the skill to distinguish worthwhile targets.
Companies that rush in without them are likely to be stumble.
Due diligence can be difficult because disclosure practices are poor and companies often lack the
information buyer need. Moreover, most Asian conglomerates still do not present consolidated financial
statements, leaving the possibilities that the sales and the profit figures might be bloated by transactions
between affiliated companies. The financial records that are available are often unreliable, with different
projections made by different departments within the same company, and different projections made for
different audiences. Banks and investors, naturally, are likely to be shown optimistic forecasts.
Chapte
r
2
Purpose of Mergers
and Acquisition
The purpose for an offeror company for acquiring another company shall be reflected in the
corporate objectives. It has to decide the specific objectives to be achieved through acquisition. The
basic purpose of merger or business combination is to achieve faster growth of the corporate business.
Faster growth may be had through product improvement and competitive position.
Other possible purposes for acquisition are short listed below: (1)Procurement of supplies:
1. to safeguard the source of supplies of raw materials or intermediary product;
2. to obtain economies of purchase in the form of discount, savings in transportation costs,
overhead costs in buying department, etc.;
3. to share the benefits of suppliers economies by standardizing the materials.
(2)Revamping production facilities:
1.
2.
3.
4.
5.
6.
7.
to achieve economies of scale by amalgamating production facilities through more

intensive utilization of plant and resources;
to standardize product specifications, improvement of quality of product, expanding
market and aiming at consumers satisfaction through strengthening after sale
services;
to obtain improved production technology and know-how from the offeree company
to reduce cost, improve quality and produce competitive products to retain and
improve market share.
(3) Market expansion and strategy:

1. to eliminate competition and protect existing market;

2. to obtain a new market outlets in possession of the offeree;
3. to obtain new product for diversification or substitution of existing products and to enhance the
product range;
4. strengthening retain outlets and sale the goods to rationalize distribution;
5. to reduce advertising cost and improve public image of the offeree company;
6. strategic control of patents and copyrights.
(4) Financial strength:
1.
2.
3.
4.
5.
to improve liquidity and have direct access to cash resource;

to dispose of surplus and outdated assets for cash out of combined enterprise;
to enhance gearing capacity, borrow on better strength and the greater assets backing;
to avail tax benefits;
to improve EPS (Earning Per Share).
(5) General gains:

1. to improve its own image and attract superior managerial talents to manage its affairs;
2. to offer better satisfaction to consumers or users of the product.
(6) Own developmental plans:
The purpose of acquisition is backed by the offeror companys own developmental plans.
A company thinks in terms of acquiring the other company only when it has arrived at its own
development plan to expand its operation having examined its own internal strength where it
might not have any problem of taxation, accounting, valuation, etc. but might feel resource
constraints with limitations of funds and lack of skill managerial personnels. It has to aim at
suitable combination where it could have opportunities to supplement its funds by issuance of
securities, secure additional financial facilities, eliminate competition and strengthen its market
position.

(7) Strategic purpose:
The Acquirer Company view the merger to achieve strategic objectives through alternative type
of combinations which may be horizontal, vertical, product expansion, market extensional or
other specified unrelated objectives depending upon the corporate strategies. Thus, various types
of combinations distinct with each other in nature are adopted to pursue this objective like
vertical or horizontal combination.
(8) Corporate friendliness:
Although it is rare but it is true that business houses exhibit degrees of cooperative spirit despite
competitiveness in providing rescues to each other from hostile takeovers and cultivate situations
of collaborations sharing goodwill of each other to achieve performance heights through business
combinations. The combining corporates aim at circular combinations by pursuing this objective.
(9) Desired level of integration:
Mergers and acquisition are pursued to obtain the desired level of integration between the two
combining business houses. Such integration could be operational or financial. This gives birth to
conglomerate combinations. The purpose and the requirements of the offeror company go a long
way in selecting a suitable partner for merger or acquisition in business combinations.
Chapte
r
3
Types of mergers
Merger or acquisition depends upon the purpose of the offeror company it wants to achieve.
Based on the offerors objectives profile, combinations could be vertical, horizontal, circular and
conglomeratic as precisely described below with reference to the purpose in view of the offeror
company.
(A) Vertical combination:
A company would like to takeover another company or seek its merger with that company to expand
espousing backward integration to assimilate the resources of supply and forward integration
towards market outlets. The acquiring company through merger of another unit attempts on reduction
of inventories of raw material and finished goods, implements its production plans as per the
objectives and economizes on working capital investments. In other words, in vertical combinations,
the merging undertaking would be either a supplier or a buyer using its product as intermediary
material for final production.
An example of this is where a motorcar manufacturer and a manufacturer of sheet metal merge.
Here, a supplying enterprise, which merges, with a customer enterprise can extend its control over
the market by foreclosing an actual or potential outlet for the products of its competitors. The object
of the merger may be to ensure a source of supply or an outlet for products and the effect may
improve efficiency
The following main benefits accrue from the vertical combination to the acquirer company i.e.
(1) it gains a strong position because of imperfect market of the intermediary products, scarcity of
resources and purchased products;
(2) has control over products specifications.
- 10 PRASHANT NARKHEDE
121(MMS)

(B) Horizontal combination:
It is a merger of two competing firms, which are at the same stage of industrial process. The
acquiring firm belongs to the same industry as the target company. The mail purpose of such mergers
is to obtain economies of scale in production by eliminating duplication of facilities and the
operations and broadening the product line, reduction in investment in working capital, elimination
in competition concentration in product, reduction in advertising costs, increase in market segments
and exercise better control on market.
(for example, sugar and artificial
sweeteners).
(C) Circular combination:
Companies producing distinct products seek amalgamation to share common distribution and
research facilities to obtain economies by elimination of cost on duplication and promoting market
enlargement. The acquiring company obtains benefits in the form of economies of resource sharing
and diversification.
(D) Conglomerate combination:
It is amalgamation of two companies engaged in unrelated industries like DCM and Modi Industries.
The basic purpose of such amalgamations remains utilization of financial resources and enlarges debt
capacity through re-organizing their financial structure so as to service the shareholders by increased
leveraging and EPS, lowering average cost of capital and thereby raising present worth of the
outstanding shares. Merger enhances the overall stability of the acquirer company and creates
balance in the companys total portfolio of diverse products and production processes.
121(MMS)
Chapte
r
4
Advantages of mergers
and takeovers
Mergers and takeovers are permanent form of combinations which vest in management complete
control and provide centralized administration which are not available in combinations of holding
company and its partly owned subsidiary. Shareholders in the selling company gain from the merger and
takeovers as the premium offered to induce acceptance of the merger or takeover offers much more price
than the book value of shares. Shareholders in the buying company gain in the long run with the growth
of the company not only due to synergy but also due to boots trapping earnings.
Motivations for mergers and acquisitions

Mergers and acquisitions are caused with the support of shareholders, managers ad promoters of
the combing companies. The factors, which motivate the shareholders and managers to lend support to
these combinations and the resultant consequences they have to bear, are briefly noted below based on
the research work by various scholars globally.
(1) From the standpoint of shareholders
Investment made by shareholders in the companies subject to merger should enhance in value.
The sale of shares from one companys shareholders to another and holding investment in shares should
give rise to greater values i.e. the opportunity gains in alternative investments. Shareholders may gain
from merger in different ways viz. from the gains and achievements of the company i.e. through
(a) realization of monopoly profits;
(b) economies of scales;
(c) diversification of product line;
(d) acquisition of human assets and other resources not available otherwise;
(e) better investment opportunity in combinations.
121(MMS)

One or more features would generally be available in each merger where shareholders may have
attraction and favour merger.
(2) From the standpoint of managers

Managers are concerned with improving operations of the company, managing the affairs of the
company effectively for all round gains and growth of the company which will provide them better deals
in raising their status, perks and fringe benefits. Mergers where all these things are the guaranteed
outcome get support from the managers. At the same time, where managers have fear of displacement at
the hands of new management in amalgamated company and also resultant depreciation from the merger
then support from them becomes difficult.
(3) Promoters gains
Mergers do offer to company promoters the advantage of increasing the size of their company
and the financial structure and strength. They can convert a closely held and private limited company
into a public company without contributing much wealth and without losing control.
(4) Benefits to general public
Impact of mergers on general public could be viewed as aspect of benefits and costs to:
(a) Consumer of the product or services;
(b) Workers of the companies under combination;
(c) General public affected in general having not been user or consumer or the worker in
the companies under merger plan.
(a) Consumers
The economic gains realized from mergers are passed on to consumers in the form of
lower prices and better quality of the product which directly raise their standard of living
and quality of life. The balance of benefits in favour of consumers will depend upon the
fact whether or not the mergers increase or decrease competitive economic and
productive activity which directly affects the degree of welfare of the consumers through
changes in price level, quality of products, after sales service, etc.
121(MMS)

(b) Workers community
The merger or acquisition of a company by a conglomerate or other acquiring company
may have the effect on both the sides of increasing the welfare in the form of purchasing
power and other miseries of life. Two sides of the impact as discussed by the researchers
and academicians are: firstly, mergers with cash payment to shareholders provide
opportunities for them to invest this money in other companies which will generate
further employment and growth to uplift of the economy in general. Secondly, any
restrictions placed on such mergers will decrease the growth and investment activity with
corresponding decrease in employment. Both workers and communities will suffer on
lessening job opportunities, preventing the distribution of benefits resulting from
diversification of production activity.
(c) General public
Mergers result into centralized concentration of power. Economic power is to be
understood as the ability to control prices and industries output as monopolists. Such
monopolists affect social and political environment to tilt everything in their favour to
maintain their power ad expand their business empire. These advances result into
economic exploitation. But in a free economy a monopolist does not stay for a longer
period as other companies enter into the field to reap the benefits of higher prices set in
by the monopolist. This enforces competition in the market as consumers are free to
substitute the alternative products. Therefore, it is difficult to generalize that mergers
affect the welfare of general public adversely or favorably.
121(MMS)

Chapte
r
5
Consideration of
Merger and Takeover
Mergers and takeovers are two different approaches to business combinations. Mergers are
pursued under the Companies Act, 1956 vide sections 391/394 thereof or may be envisaged under the
provisions of Income-tax Act, 1961 or arranged through BIFR under the Sick Industrial Companies Act,
1985 whereas, takeovers fall solely under the regulatory framework of the SEBI Regulations, 1997.
Minority shareholders rights

SEBI regulations do not provide insight in the event of minority shareholders not agreeing to the
takeover offer. However section 395 of the Companies Act, 1956 provides for the acquisition of shares
of the shareholders. According to section 395 of the Companies Act, if the offerer has acquired at least
90% in value of those shares may give notice to the non-accepting shareholders of the intention of
buying their shares. The 90% acceptance level shall not include the share held by the offerer or its
associates. The procedure laid down in this section is briefly noted below.
1. In order to buy the shares of non-accepting shareholders the offerer must have reached the 90%
acceptance level within 4 months of the date of the offer, and notice must have been served on
those shareholders within 2 months of reaching the 90% level.
2. The notice to the non-accepting shareholders must be in a prescribed manner. A copy of a notice
and a statutory declaration by the offerer (or, if the offerer is a company, by a director) in the
prescribed form confirming that the conditions for giving the notice have been satisfied must be
sent to the target.
3. Once the notice has been given, the offerer is entitled and bound to acquire the outstanding
shares on the terms of the offer.
121(MMS)

4. If the terms of the offer give the shareholders a choice of consideration, the notice must give
particulars of options available and inform the shareholders that he has six weeks from the date
of the notice to indicate his choice of consideration in writing.
5. At the end of the six weeks from the date of the notice to the non-accepting shareholders the
offerer must immediately send a copy of notice to the target and pay or transfer to the target the
consideration for all the shares to which the notice relates. Stock transfer forms executed on
behalf of the non-accepting shareholders by a person appointed by the offerer must also be sent.
Once the company has received stock transfer forms it must register the offerer as the holder of
the shares.
6. The consideration money, which is received by the target, should be held on trust for the person
entitled to shares in respect of which the sum was received.
7. Alternatively, if the offerer does not wish to buy the non-accepting shareholders shares, it must
still within one month of company reaching the 90% acceptance level give such shareholders
notice in the prescribed manner of the rights that are exercisable by them to require the offerer to
acquire their shares. The notice must state that the offer is still open for acceptance and specify a
date after which the right may not be exercised, which may not be less than 3 months from the
end of the time within which the offer can be accepted. If the offerer fails to send such notice it
(and its officers who are in default) are liable to a fine unless it or they took all reasonable steps
to secure compliance.
8. If the shareholder exercises his rights to require the offerer to purchase his shares the offerer is
entitled and bound to do so on the terms of the offer or on such other terms as may be agreed. If a
choice of consideration was originally offered, the shareholder may indicate his choice when
requiring the offerer to acquire his shares. The notice given to shareholder will specify the choice
of consideration and which consideration should apply in default of an election.
9. On application made by an happy shareholder within six weeks from the date on which the
original notice was given, the court may make an order preventing the offerer from acquiring the
shares or an order specifying terms of acquisition differing from those of the offer or make an
order setting out the terms on which the shares must be acquired.
In certain circumstances, where the takeover offer has not been accepted by the required 90% in
value of the share to which offer relates the court may, on application of the offerer, make an order
121(MMS)

authorizing it to give notice under the Companies Act, 1985, section 429. It will do this if it is satisfied
that:
a. the offerer has after reasonable enquiry been unable to trace one or more shareholders to whom
the offer relates;
b. the shares which the offerer has acquired or contracted to acquire by virtue of acceptance of the
offerer, together with the shares held by untraceable shareholders, amount to not less than 90% in
value of the shares subject to the offer; and
c. the consideration offered is fair and reasonable.
The court will not make such an order unless it considers that it is just and equitable to do so,
having regard, in particular, to the number of shareholder who has been traced who did accept the offer.
Alternative modes of acquisition

The terms used in business combinations carry generally synonymous connotations and can be
used interchangeably. All the different terms carry one single meaning of merger but each term cannot
be given equal treatment in the discussion because law has created a dividing line between take-over
and acquisitions by way of merger, amalgamation or reconstruction. Particularly the takeover
Regulations for substantial acquisition of shares and takeovers known as SEBI (Substantial Acquisition
of Shares and Takeovers) Regulations, 1997 vide section 3 excludes any attempt of merger done by way
of any one or more of the following modes:
(a) by allotment in pursuant of an application made by the shareholders for right issue and under
a public issue;
(b) preferential allotment made in pursuance of a resolution passed under section 81(1A) of the
Companies Act, 1956;
(c) allotment to the underwriters pursuant to underwriters agreements;
(d) inter-se-transfer of shares amongst group, companies, relatives, Indian promoters and Foreign
collaborators who are shareholders/promoters;
121(MMS)

(e) acquisition of shares in the ordinary course of business, by registered stock brokers, public
financial institutions and banks on own account or as pledges;
(f) acquisition of shares by way of transmission on succession or inheritance;
(g) acquisition of shares by government companies and statutory corporations;
(h) transfer of shares from state level financial institutions to co-promoters in pursuance to
agreements between them;
(i) acquisition of shares in pursuance to rehabilitation schemes under Sick Industrial Companies
(Special Provisions) Act, 1985 or schemes of arrangements, mergers, amalgamation, Demerger, etc. under the Companies Act, 1956 or any other law or regulation, Indian or Foreign;
(j) acquisition of shares of company whose shares are not listed on any stock exchange.
However, this exemption in not available if the said acquisition results into control of a listed
company;
(k) such other cases as may be exempted from the applicability of Chapter III of SEBI
regulations by SEBI.
The basic logic behind substantial disclosure of takeover of a company through acquisition of
shares is that the common investors and shareholders should be made aware of the larger financial stake
in the company of the person who is acquiring such companys shares. The main objective of these
Regulations is to provide greater transparency in the acquisition of shares and the takeovers of
companies through a system of disclosure of information.
Escrow account
To ensure that the acquirer shall pay the shareholders the agreed amount in redemption of his
promise to acquire their shares, it is a mandatory requirement to open escrow account and deposit therein
the required amount, which will serve as security for performance of obligation.
The Escrow amount shall be calculated as per the manner laid down in regulation 28(2).
Accordingly:
121(MMS)

For offers which are subject to a minimum level of acceptance, and the acquirer does want to
acquire a minimum of 20%, then 50% of the consideration payable under the public offer in cash shall
be deposited in the Escrow account.
Payment of consideration
Consideration may be payable in cash or by exchange of securities. Where it is payable in cash
the acquirer is required to pay the amount of consideration within 21 days from the date of closure of the
offer. For this purpose he is required to open special account with the bankers to an issue (registered with
SEBI) and deposit therein 90% of the amount lying in the Escrow Account, if any. He should make the
entire amount due and payable to shareholders as consideration. He can transfer the funds from Escrow
account for such payment. Where the consideration is payable in exchange of securities, the acquirer
shall ensure that securities are actually issued and dispatched to shareholders in terms of regulation 29 of
SEBI Takeover Regulations.
121(MMS)
Chapte
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6
Reverse Merger
Generally, a company with the track record should have a less profit earning or loss making but
viable company amalgamated with it to have benefits of economies of scale of production and marketing
network, etc. As a consequence of this merger the profit earning company survives and the loss making
company extinguishes its existence. But in many cases, the sick companys survival becomes more
important for many strategic reasons and to conserve community interest. The law provides
encouragement through tax relief for the companies that are profitable but get merged with the loss
making companies. Infact this type of merger is not a normal or a routine merger. It is, therefore, called
as a Reverse Merger.
The allurement for such mergers is the tax savings under the Income-tax Act, 1961. Section 72A
of the Act ensures the tax relief which becomes attractive for amalgamations of sick company with a
healthy and profitable company to take the advantage of carry forward losses. Taking advantage of the
provisions of section 72A through merger or amalgamation is known as reverse merger, which gives
survival to the sick unit by merging it with the healthy unit. The healthy unit extincts loosing its name
and the surviving sick company retains its name. Companies to take advantage of the section follow this
route but after a year or so change their names to the one of the healthy company as were done amongst
others by Kirloskar Pneumatics Ltd. The company merged with Kirloskar Tractors Ltd, a sick unit and
initially lost its name but after one year it changed its name as was prior to merger.
Reverse Merger under Tax Laws

Section 72A of the Income-tax Act, 1961 is meant to facilitate rejuvenation of sick industrial
undertaking by merging with healthier industrial companies having incentive in the form of tax savings
designed with the sole intention to benefit the general public through continued productive activity,
increased employment avenues and generation of revenue.
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(1) Background
Under the existing provisions of the Income-tax Act, so much of the business loss of a year as
cannot be set off by him against the profits of the following year from any business carried on by him. If
the loss cannot be so wholly set off, the amount not so set off can be carried forward to the next
following year and so on, up to a maximum of eight assessment years immediately succeeding the
assessment year for which the loss was first computed. The benefit of carry forward and set off of
business loss is, however, not available unless the business in which the loss was originally sustained is
continued to be carried on by the assessee. Further, only the assessee who incurred the loss by his
predecessor. Similarly, if a business carried on one assessee is taken over by another, the unabsorbed
depreciation allowance due to the predecessor in business and set off against his profits in subsequent
years. In view of these provisions, the accumulated business loss and unabsorbed depreciation allowance
of a company which merges with another company under a scheme of amalgamation cannot be carried
forward and set off by the latter company against its profits.
The very purpose of section 72A is to revive the business of an undertaking, which is financially
non-viable and to bring it back to health. Sickness among industrial undertakings is a matter of grave
national concern. Experience has shown that taking over of such units by Government is not always the
most satisfactory or the most economical solution. The more effective course suggested was to facilitate
the amalgamation of sick industrial units with sound ones by providing incentives and removing
impediments in the way of such amalgamation. To save the Government from social costs in terms of
loss of production and employment and to relieve the Government of the uneconomical burden of taking
over and running sick industrial units is one of the motivating factors in introducing section 72A. To
achieve this objective so as to facilitate the merger of sick industrial units with sound one, the general
rule of carry forward and set off of accumulated losses and unabsorbed depreciation allowance of
amalgamating company by the amalgamated company was statutorily related. By a deeming fiction, the
accumulated loss or the unabsorbed depreciation of the amalgamating is treated to be the loss or, as the
case may be, allowance for depreciation of the amalgamated company for the previous year in which
amalgamation was effected.
There are three statutory conditions which are to be fulfilled under section 72A(1) for the
benefits prescribed therein to be available to the amalgamated company, namely
(i)
The amalgamating company was, immediately before such amalgamation, financially nonviable by reason of its liabilities, losses and other relevant factors;
(ii)
The amalgamation is in the public interest;
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(iii)
Such other conditions as the Central Government may by notification in the Official Gazette,
specify, to ensure that the benefit under this section is restricted to amalgamation, which would
facilitate the rehabilitation or revival of the business of amalgamating company.
(2) Reverse merger

As it can be now understood, a reverse merger is a method adopted to avoid the stringent
provisions of Section 72A but still be able to claim all the losses of the sick unit. For doing so, in case of
a reverse merger, instead of a healthy unit taking over a sick unit, the sick unit takes over/ amalgamates
with the healthy unit.
High Court discussed 3 tests for reverse merger:
a. assets of transferor company being greater than transferee company;
b. equity capital to be issued by the transferee company pursuant to the acquisition
exceeding its original issued capital, and
c. the change of control in the transferee company clearly indicated that the present
arrangement was an arrangement, which was a typical illustration of takeover by reverse
bid.
Court held that prime facie the scheme of merging a prosperous unit with a sick unit could not be
said to be offending the provisions of section 72A of the Income Tax Act, 1961 since the object
underlying this provision was to facilitate the merger of sick industrial unit with a sound one.
(3) Salient features of reverse merger under section 72A
1. Amalgamation should be between companies and none of them should be a firm of partners or
sole-proprietor. In other words, partnership firm or sole-proprietary concerns cannot get the
benefit of tax relief under section 72A merger.
2. The companies entering into amalgamation should be engaged in either industrial activity or
shipping business. In other words, the tax relief under section 72A would not be made
available to companies engaged in trading activities or services.
3. After amalgamation the sick or financially unviable company shall survive and other
income generating company shall extinct. In other words essential condition to be fulfilled is
121(MMS)

that the acquiring company will be able to revive or rehabilitate having consumed the healthy
company.
4. One of the merger partner should be financially unviable and have accumulated losses to
qualify for the merger and the other merger partner should be profit earning so that tax relief to
the maximum extent could be had. In other words the company which is financially unviable
should be technically sound and feasible, commercially and economically viable but
financially weak because of financial stringency or lack of financial recourses or its liabilities
have exceeded its assets and is on the brink of insolvency. The second requisite qualification
associated with financial unavailability is the accumulation of losses for past few years.
5. Amalgamation should be in the public interest i.e. it should not be against public policy, should
not defeat basic tenets of law, and must safeguard the interest of employees, consumers,
creditors, customers and shareholders apart from promoters of company through the revival of
the company.
6. The merger must result into following benefit to the amalgamated company i.e. (a) carry
forward of accumulated business loses of the amalgamated company; (b) carry forward of
unabsorbed depreciation of the amalgamating company and (c) accumulated loss would be
allowed to be carried forward set of for eight subsequent years.
7. Accumulated loss should arise from Profits and Gains from business or profession and not
be loss under the head Capital Gains or Speculation.
8. For qualifying carry forward loss, the provisions of section 72 should have not been
contravened.
9. Similarly for carry forward of unabsorbed depreciation the conditions of section 32 should not
have been violated.
10. Specified authority has to be satisfied of the eligibility of the company for the relief under
section 72 of the Income Tax Act. It is only on the recommendations of the specified authority
that Central Government may allow the relief.
121(MMS)

11. The company should make an application to a specified authority for requisite
recommendation of the case to the Central Government for granting or allowing the relief.
12. Procedure for merger or amalgamation to be followed in such cases is same as in any other
cases. Specified Authority makes recommendation after taking into consideration the courts
direction on scheme of amalgamation.
121(MMS)
Chapte
r
7
Procedure for
Takeover
and Acquisition
Public announcement:
To make a public announcement an acquirer shall follow the following procedure:
1. Appointment of merchant banker:
The acquirer shall appoint a merchant banker registered as category I with SEBI to advise him
on the acquisition and to make a public announcement of offer on his behalf.
2. Use of media for announcement:
Public announcement shall be made at least in one national English daily one Hindi daily and
one regional language daily newspaper of that place where the shares of that company are listed and
traded.
3. Timings of announcement:
Public announcement should be made within four days of finalization of negotiations or entering
into any agreement or memorandum of understanding to acquire the shares or the voting rights.
121(MMS)

4. Contents of announcement:
Public announcement of offer is mandatory as required under the SEBI Regulations. Therefore,
it is required that it should be prepared showing therein the following information:
(1)
paid up share capital of the target company, the number of fully paid up and partially
paid up shares.
(2)
Total number and percentage of shares proposed to be acquired from public subject
to minimum as specified in the sub-regulation (1) of Regulation 21 that is:
a) The public offer of minimum 20% of voting capital of the company to the
shareholders;
b) The public offer by a raider shall not be less than 10% but more than 51% of
shares of voting rights. Additional shares can be had @ 2% of voting rights in any
year.
(3)
The minimum offer price for each fully paid up or partly paid up share;
(4)
Mode of payment of consideration;
(5)
The identity of the acquirer and in case the acquirer is a company, the identity of the
promoters and, or the persons having control over such company and the group, if
any, to which the company belong;
(6)
The existing holding, if any, of the acquirer in the shares of the target company,
including holding of persons acting in concert with him;
(7)
Salient features of the agreement, if any, such as the date, the name of the seller, the
price at which the shares are being acquired, the manner of payment of the
consideration and the number and percentage of shares in respect of which the
acquirer has entered into the agreement to acquirer the shares or the consideration,
monetary or otherwise, for the acquisition of control over the target company, as the
case may be;
121(MMS)

(8)
The highest and the average paid by the acquirer or persons acting in concert with
him for acquisition, if any, of shares of the target company made by him during the
twelve month period prior to the date of the public announcement;
(9)
Objects and purpose of the acquisition of the shares and the future plans of the
acquirer for the target company, including disclosers whether the acquirer proposes to
dispose of or otherwise encumber any assets of the target company:
Provided that where the future plans are set out, the public announcement shall
also set out how the acquirers propose to implement such future plans;
(10)
The specified date as mentioned in regulation 19;
(11)
The date by which individual letters of offer would be posted to each of the
shareholders;
(12)
The date of opening and closure of the offer and the manner in which and the date by
which the acceptance or rejection of the offer would be communicated to the share
holders;
(13)
The date by which the payment of consideration would be made for the shares in
respect of which the offer has been accepted;
(14)
Disclosure to the effect that firm arrangement for financial resources required to
implement the offer is already in place, including the details regarding the sources of
the funds whether domestic i.e. from banks, financial institutions, or otherwise or
foreign i.e. from Non-resident Indians or otherwise;
(15)
Provision for acceptance of the offer by person who own the shares but are not the
registered holders of such shares;
(16)
Statutory approvals required to obtained for the purpose of acquiring the shares under
the Companies Act, 1956, the Monopolies and Restrictive Trade Practices Act, 1973,
and/or any other applicable laws;
(17)
Approvals of banks or financial institutions required, if any;

121(MMS)
(18)
Whether the offer is subject to a minimum level of acceptances from the

shareholders; and
(19)
Such other information as is essential fort the shareholders to make an informed

design in regard to the offer.
121(MMS)
SEBI TAKEOVER CODE

A takeover generally involves acquisition of a certain block of equity capital of a co., which
enables the acquirer to exercise control over the affair of the co.
TYPES TAKEOVERS:
Friendly Takeover: Takeovers call be friendly or hostile. A negotiated settlement is possible in friendly
takeovers. Friendly ones are characterized by bargaining until agreement is signed.
Successful takeovers depend on the premium offered to the targets current share price, the
composition of the board, the composition and sentiment of targets current shareholders.
Aggressive takeovers take the form of bear hug, proxy contests, open market operations and tender
offers. Alternative takeover defenses may be classified under pre-bid and post-bid.
Hostile takeover: Hostile takeover is an unsolicited offer made by a potential acquirer that is resisted by
target firm's management. It is normally disclosed in the press. Aggressive public rejection of the offer is
the first step in the process leading to a negotiated settlement. If there are confidential negotiations
before there is a public announcement of a bid or a completed negotiation, the transaction may be
considered friendly. The existence of negotiations is some times revealed to attract alternative bidders.
Bear Hug: Bear hug limits target's option. If the friendly approach is considered inappropriate or is
unsuccessful the acquiring company may attempt to limit the option of the target management by
making a formal acquisition proposal to the board of directors of the target. The intent is to move the
board to a negotiated settlement. The board may be motivated to do so because of its fiduciary
responsibility to the target's shareholders. Once the bid is made the company is effectively put into play.
The target board is unlikely to reject the bid without obtaining a fairness opinion from an
investment banker that the offer is inadequate. Otherwise the management may face litigation from
shareholders that it has not properly discharged its fiduciary responsibility.
PROXY CONTEST
Proxy contest takes place for seats on the board of directors and those concerning management
proposals. By replacing board members proxy contests can be an effective means of gaining control
without owning 51 % of voting stock or used to eliminate takeover defenses.
A successful proxy fights represent purchasing at a substantial premium a controlling interest in the
target company.
Pretender Tactics: By purchasing target stock at a price lower than the eventual price secretly bidder
accumulates large stock which helps in achieving potential leverage with the voting rights associated
with the stock it has purchased.
121(MMS)

Street Sweeps: Purchases made clandestinely before prenotitication percentages are reached. Once a
purchaser's intentions are made public the target's stock price will soar.
TENDER OFFER
A public limited company carries the risk that any person or company can go to it shareholders and offer
to buy their shares. If enough shareholders are willing to sell or tender their shares at a certain price a
formal shareholder vote is not necessary. Tender offers give share holders a chance to vote without a
formal proxy.
Tender offer takes the battle to the shareholders. But it is resorted when a friendly negotiated settlement
is not possible. An unsolicited offer may be made to shareholders without board approval of the target. It
can force management's attention and response. If the bid is real, management must find some
alternative means of getting shareholders comparable value. Otherwise, the hostile bidder may
eventually be able to negotiate the final bid with the target's management.
Tender offers can be for cash or securities. In either case the proposal is put directly to the
shareholders of the target. The offer is extended for a specific period of time and may be unrestricted
(any or all offer) or restricted to a certain percentage or number of the target's shares.
Acquirer" means 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
Target company" means a listed company whose shares or voting rights or
control is directly or indirectly acquired or is being acquired.
"Control" shall include 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 their shareholding
or management rights or shareholders agreements or voting agreements or in any other
manner;
* ["Explanation: (i) Where there are two or more persons in control over the target company, the
cesser of any one of such persons from such control shall not be deemed to be a change in control
of management nor shall any change in the nature and quantum of control amongst them
constitute change in control of management.
Provided that the transfer from joint control to sole control is effected in accordance with clause
(e) of sub - regulation (1) of regulation 3.
(ii). If consequent upon change in control of the target company in accordance with regulation 3,
the control acquired is equal to or less than the control exercised by person (s) prior to such
acquisition of control, such control shall not be deemed to be a change in control".] *
121(MMS)

Offer period means the period between the date of entering into Memorandum of Understanding
or the public announcement, as the case may be and the date of completion of offer formalities
relating to the offer made under these regulations.
Promoter" means (i) the person or persons who are in control of the company, directly or indirectly, whether as a
shareholder, director or otherwise; or
(ii) person or persons named as promoters in any document of offer of securities to the public or
existing shareholders,
and includes,
(a) where the promoter is an individual, (1) a relative of the promoter within the meaning of section 6 of the Companies Act, 1956 (1 of
1956);
(2) any firm or company, directly or indirectly, controlled by the promoter or a relative of the
promoter or a firm or Hindu undivided family in which the promoter or his relative is a partner or
a coparcener or a combination thereof:
Provided that, in case of a partnership firm, the share of the promoter or his relative, as the case
may be, in such firm should not be less than 50%.
(b)
where
the
promoter
is
a
body
corporate,(1) a subsidiary or holding company of that body; or
(2) any firm or company, directly or indirectly, controlled by the promoter of that body corporate
or by his relative or a firm or Hindu undivided family in which the promoter or his relative is a
partner or coparcener or a combination thereof:
Provided that, in case of a partnership firm, the share of such promoter or his relative, as the case
may be, in such firm should not be less than 50%.
PERSON ACTING IN CONCERT" comprises, (1) persons who, for a common objective or purpose of substantial acquisition of shares or voting
rights or gaining control over the target company, pursuant to an agreement or understanding
(formal or informal), directly or indirectly co-operate by acquiring or agreeing to acquire shares
or voting rights in the target company or control over the target company.
(2) Without prejudice to the generality of this definition, the following persons will be deemed to be
persons acting in concert with other persons in the same category, unless the contrary is established :
(i) a company, its holding company, or subsidiary of such company or company under the same
management either individually or together with each other;
(ii) a company with any of its directors, or any person entrusted with the management of the funds of the
company;
(iii) directors of companies referred to in sub-clause (i) of clause (2) and their associates;
(iv) mutual fund with sponsor or trustee or asset management company;
(v) foreign institutional investors with sub account(s);
(vi) merchant bankers with their client(s) as acquirer;
(vii) portfolio managers with their client(s) as acquirer;
(viii) venture capital funds with sponsors;
121(MMS)

(ix) banks with financial advisers, stock brokers of the acquirer, or any company which is a holding
company, subsidiary or relative of the acquirer.
Provided that sub-clause (ix) shall not apply to a bank whose sole relationship with the acquirer or with
any company, which is a holding company or a subsidiary of the acquirer or with a relative of the
acquirer, is by way of providing normal commercial banking services or such activities in connection
with the offer such as confirming availability of funds, handling acceptances and other registration work.
(x) any investment company with any person who has an interest as director, fund manager, trustee, or as
a shareholder having not less than 2% of the paid-up capital of that company or with any other
investment company in which such person or his associate holds not less than 2% of the paid up capital
of the latter company.
*[ Note: For the purposes of this clause `associate' means:
(a) any relative of that person within the meaning of section 6 of the Companies Act, 1956 (1 of 1956);
and
(b) family trusts and Hindu Undivided Families.]*
Non-Applicability of the Regulation
(a) Allotment in pursuance of an application made to a public issue.
Such allotment shall be exempt only if full disclosures are made in the prospectus about the identity of
the acquirer who has agreed to acquire the shares, the purpose of acquisition, consequential changes in
voting rights, shareholding pattern of the company and in the Board of Directors of the Company, if any,
and whether such allotment would result in change in control over the company.
(b) Allotment pursuant to an application made by the shareholder for rights issue,
*[(i) to the extent of his entitlement; and
(ii) upto the percentage specified in consolidations of holdings]*
Provided further that this exemption shall not be available in case the acquisition of securities results in
the change of control of management.
(c) Allotment to the underwriters pursuant to any underwriting agreement;
(d) 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;
(v) a merchant banker or a promoter of the target company pursuant to a scheme of safety net under the
provisions of the Securities and Exchange Board of India
(e) Shares held by banks and financial institutions by way of security against loans
(f) Issue of American Depository Receipts and Global Depository Receipts or Foreign Currency
Convertible Bonds, till such time as they are not converted into equity shares;
(g) In addition to the above cases, even when there is a change in control and management of the
company, the Takeover Code would still not apply if at least 51% of the shareholders of the company
121(MMS)

have approved the acquisition by the acquirer after being made aware that such acquisition would result
in change in control and management.
121(MMS)

The Takeover Panel
(1) The Board shall for the purposes of this Regulation constitute a Panel of majority of independent
persons from within the categories
(2) For seeking exemption the acquirer shall file an application [supported by a duly sworn affidavit]
with the Board, giving details of the proposed acquisition and the grounds on which the exemption has
been sought.[Format of application]
(3) The acquirer shall, along with the application pay a fee of Rs. 25, 000/- to the Board, either by a
bankers cheque or demand draft in favour of the Securities and Exchange Board of India, payable at
Mumbai.
(4) The Board shall within 5 days of the receipt of an application forward the application to the Panel.
(5) The Panel shall within 15 days from the date of receipt of application make a recommendation on the
application to the Board.
(6) The Board shall after affording reasonable opportunity to the concerned parties and after considering
all the relevant facts including the recommendations, if any, pass a reasoned order on the application
within 30 days thereof.
(7) The order of the Board shall be published by the Board.
DISCLOSURES OF SHAREHOLDING AND CONTROL IN A LISTED COMPANY
(1) Any person, who holds more than 5 percent shares or voting rights in any company, shall within two
months of notification of these Regulations disclose his aggregate shareholding in that company, to the
company.
(2) Every company whose shares are held by the persons referred to in sub-regulation (1) shall, within
three months from the date of notification of these Regulations, disclose to all the stock exchanges on
which the shares of the company are listed, the aggregate number of shares held by each person.
(3) A promoter or any person having control over a company shall within two months of notification of
these Regulations disclose the number and percentage of shares or voting rights held by him and by
person(s) acting in concert with him in that company, to the company.
(4) Every company, whose shares are listed on a stock exchange, shall within three months of
notification of these Regulations, disclose to all the stock exchanges on which the shares of the company
are listed, the names and addresses of promoters and, or person(s) having control over the company, and
number and percentage of shares or voting rights held by each such person.
Acquisition of 5% voting rights
(1) Any acquirer of shares or voting rights with a total of existing holdings in excess of five per cent or
ten per cent. or fourteen per cent. shares or voting rights in a company, in any manner whatsoever,
shall disclose at every stage to the concerned company the aggregate of his shareholding or voting
rights within two working days of the receipt of intimation of allotment/ acquisition of shares/voting
rights.
(2) Any acquirer who has acquired shares or voting rights of a company under the provisions of
consolidation of holdings shall disclose purchase or sale aggregating two per cent. or more of the
share capital of the target company to the target company, and the stock exchanges where shares of
the target company are listed within two days of such purchase or sale along with the aggregate
shareholding after such acquisition or sale.
121(MMS)

(2)The disclosures
(a) the receipt of intimation of allotment of shares; or
(b) the acquisition of shares or voting rights, as the case may be must be made.
The stock exchange shall immediately display the information received from the acquirer on the trading
screen, the notice board and also on its website.]
(3) Every company, whose shares are acquired shall disclose to all the stock exchanges on which the
shares of the said company are listed the aggregate number of shares held by each of such persons
referred above within seven days of receipt of information
Continual disclosures
(a)Every person who holds more than 15% shares shall 21 days from F. Y. March 31st disclosed to the
co. his holdings.
(b)Promoter within 21 days from F. Y. March 31st disclosed the no. & % of shares to the company
(c)Every co. within 30 days make yearly discloser to the stock exchange the changes in respect of the
holdings.
Acquisition of 15 Per cent or More Shares/Voting Rights An acquirer acquiring shares/voting rights
that, together with existing holdings by him/person(s) working in concert with him entitle him, to
exercise 15 per cent or more of the voting rights in a company has to make a public announcement to the
effect.
Consolidation of Holdings An acquirer (together with a person acting in concert) holding not less than
15 per cent but not more than 75 per cent of the shares/voting rights in a company has to make a public
announcement to acquire additional shares/voting rights entitling him to exercise more than 5 per cent of
the rights in any financial year ending on March31. Moreover, an acquirer who (together with a person
acting in concert with him) has acquired 75 per cent of the shares/ voting rights in a company cannot
acquire, either by himself/or through a person acting in concert with him, any additional shares without
making a public announcement. The term acquisition, with reference to the substantial acquisition and
consolidation of holdings, includes both direct in a listed company as well as indirect by virtue of
acquisition of companies, whether listed/unlisted in India/abroad.
Acquisition of Control Irrespective of whether or not there has been any acquisition of shares/ voting
rights no person can acquire control over the target company without making public announcement. A
change in control in pursuance to a special resolution of the shareholders passed in general meeting is
exempted from this requirement. For passing the special resolution, the facility of voting through a ballot
box should also be provided. Acquisition would include direct/indirect acquisition of control of the target
company by virtue of acquisition of companies, whether listed/unlisted and whether in India/abroad.
Appointment of a Merchant Banker
Before making any public announcement of offer ,the acquirer shall appoint a merchant banker in
Category-I holding a certificate of registration granted by the Board, who is not associate of or group of
the acquirer or the target company
121(MMS)
Timing of the Public Announcement of Offer:

(1) The merchant banker should make the public announcement not later than four working days of
entering into an agreement for acquisition of shares or voting rights or deciding to acquire shares or
voting rights in excess of the specified percentage .
[Provided that in case of disinvestment of a Public Sector Undertaking, the public announcement shall
be made by the merchant banker not later than 4 working days of the acquirer executing the Share
Purchase Agreement or Shareholders Agreement with the Central Government [or the State Government
as the case may be] for the acquisition of shares or voting rights exceeding the percentage of share
holding or the transfer of control over a target Public Sector Undertaking]
(2) In case of an acquirer acquiring securities, including Global Depositories Receipts or American
Depository Receipts which, when taken together with the voting rights, if any already held by him or
persons acting in concert with him, would entitle him to voting rights, exceeding the percentage
specified the public announcement (1) shall be made not later than four working days before he acquires
voting rights on such securities upon conversion, or exercise of option, as the case may be.
(3) The public announcement shall be made by the merchant banker not later than four working days
after any such change or changes are decided to be made as would result in the acquisition of control
over the target company by the acquirer.
(4) In case of indirect acquisition or change in control, a public announcement shall be made by the
acquirer within three months of consummation of such acquisition or change in control or restructuring
of the parent or the company holding shares of or control over the target company in India.
Public Announcement of Offer:
(1) The public announcement to be made shall be made in all editions of one English national daily with
wide circulation, one Hindi national daily with wide circulation and a regional language daily with wide
circulation at the place where the registered office of the target company is situated and at the place of
the stock exchange where the shares of the target company are most frequently traded.
(2) Simultaneously with publication of the public announcement in the newspaper in a copy of the
public announcement shall be,
(i) submitted to the Board through the merchant banker,
(ii) sent to all the stock exchanges on which the shares of the company are listed for being notified
on the notice board,
(iii) sent to the target company at its registered office for being placed before the Board of Directors
of the company.
(3) Simultaneous with the submission of the public announcement to the Board, the public
announcement shall also be sent to all the stock exchanges on which the shares of the company are listed
for being notified on the notice board, and to the target company at its registered office for being placed
before the board of directors of the Company.
(4) The offer under these Regulations shall be deemed to have been made on the date on which the
public announcement has appeared in any of the newspapers
121(MMS)

Contents of the Public Announcement Offer: - These include the following particulars:
1. The existing paid-up share capital of the target company, giving break-up of the number of fully paid
up & partly paid up shares.
2. Total number & percentage of shares proposed to be acquired from the public, subject to the
specified minimum.
3. Minimum offer price for each partly paid up share and fully paid - up share.
4. The identity of the acquirer(s) and in case the acquirer is the company/companies, the identity of the
promoters and, or the persons having control such company(ies) belong.
5. The existing holding, if any, of the acquirer in the shares of the target company, including holdings of
persons acting in concert with him.
6. salient features of the agreement, if any, such as the date, the name of the seller, the price at which
the shares are being acquired, the manner of payment of consideration and the number & percentage
of shares in respect of which the acquirer has entered into agreement to acquire the shares or the
consideration, monetary or otherwise, for the acquisition of control over the target company, as the
case may be.
7. the highest and the average price paid by the acquirer or persons acting in concert with him for
acquisition, if any, of shares of the target company made by him during the 12 months period prior to
the date of public announcement.
8. object and purpose of acquisition of shares; the future plans of the acquirer, if any, for the target
company including whether he proposes to strip/dispose off or otherwise encumber any assets of the
target company during the succeeding two years except in the ordinary course of business of the
target company. When the public announcement sets out, the future plan should also be stated how
he propose to implement it.
9. the specified date the public announcement should specify a date for the purpose of determining
the names of shareholders to whom the letter of offer would be sent. The specified date cannot be
later than the 30th day from the date of the public announcement.
10. the date by which the individual letters of offer would be posted to the shareholders
11. the date of opening and closure of the offer and the manner in which and the date by which the
acceptance & rejection of the offer should be communicated to the shareholders
12. the date by which the shares in respect of which the offer is accepted would be acquired against
payment of consideration
13. statement to the effect that firm arrangement for financial resources required to implement the offer
is already in place including the details regarding the source of funds
14. provision for acceptance of the offer by person(s) who own shares but are not the registered holder of
such shares
15. the statutory approvals, if any, required to be obtained for the purpose of acquiring the shares under
the Companies Act, the MRTP Act, 1969, The Foreign Exchange Regulation Act, 1973 and/or any
other applicable laws.
16. whether the offer is subject to a minimum level of acceptances from the shareholders
17. mode of payment of consideration
18. approval of banks & financial institution
19. Such other information as is essential for the shareholders to make an informed decision in regard to
offer.
121(MMS)
Submission of Letter of offer to the Board

The acquirer shall, through its merchant banker, file with the Board, the draft of the letter of offer,
containing disclosures as specified by the Board. within 14 days from the date of public announcement
with a fee of Rs. 50000.
(2) The letter of offer shall be dispatched to the shareholders not earlier than 21 days from its submission
to the Board
The Board specifies changes, if any, in the letter of offer, (without being under any obligation to do so)
the merchant banker and the acquirer shall carry out such changes before the letter of offer is dispatched
to the shareholders.
[Provided further that if the disclosures in the draft letter of offer are inadequate or the Board has
received any complaint or has initiated any enquiry or investigation in respect of the public offer, the
Board may call for revised letter of offer with or without rescheduling the date of opening or closing of
the offer and may offer its comments to the revised letter of offer within seven working days of filing of
such revised letter of offer.]
OFFER PRICE
(1) The offer price shall be payable (a) in cash ;
(b) by issue, exchange and, or transfer of shares (other than preference shares) of acquirer company, if
the person seeking to acquire the shares is a listed body corporate; or
(c) by issue, exchange and, or transfer of secured instruments of acquirer company with a minimum A
grade rating from a credit rating agency registered with the Board;
(d) a combination of clause (a), (b) or (c) :
*[Provided that where the payment has been made in cash to any class of shareholders for acquiring their
shares under any agreement or pursuant to any acquisition in the open market or in any other manner
during the immediately preceding twelve months from the date of public announcement, the letter of
offer shall provide an option to the shareholders to accept payment either in cash or by exchange of
shares or other secured instruments
Provided further that the mode of payment of consideration may be altered in case of
revision in offer price or size subject to the condition that the amount to be paid in cash as mentioned in
any announcement or the letter of offer is not reduced.
(3 Where approval of the shareholders, is required for issuance of securities as consideration it should
be obtained within 21 days from date of closure of the offer , failing which the acquirer shall pay the
entire consideration in cash.]*
The minimum offer price should be the highest of the
(a)The negotiated price under the agreement
(b) The highest price paid by the acquirer/person working with the company for acquisition or can be in
a way of allotment in a right/public issue/ a preferential treatment, if any, during the 26 month prior to
the date of public announcement.
121(MMS)

(c) The average of the quoted weekly high & low of the closing prices of the shares of the target
company on the stock exchanges where the shares of the target company are mostly frequently traded
during 26 weeks preceding the date of public announcement. or the average of the daily high and low of
the closing prices of the shares as quoted on the stock exchange where the shares of the company are
most frequently traded during the two weeks preceding the date of public announcement, whichever is
higher.
If the share price of the target company is not frequently traded, the offer price should be determined in
consultation with the merchant banker based on the following factors: The negotiated price under the agreement
The highest price paid by the acquirer/person working with the company for acquisition or can be in
a way of allotment in a right/public issue/ preferential treatment, if any, during the 26 month prior to
the date of public announcement..
Other parameters like Return on networth, EPS, P/E multiple Vis - a - Vis industry average.
(Shares are said to be frequently traded, if on the stock exchange, the annualized trading turnover in
that share during the preceding calendar month prior to the month in which the public announcement is
made, is less than 2% (by number of shares) of listed shares)
Where the acquirer has acquired shares in the open market or through negotiation or otherwise, after the
date of public announcement at a price higher than the offer price stated in the letter of offer, then, the
highest price paid for such acquisition shall be payable for all acceptances received under the offer:
Provided that no such acquisition shall be made by the acquirer during the last seven working days prior
to the closure of the offer.
Any payment made to the persons other than the target company in respect of non compete agreement in
excess of twenty five per cent. of the offer price should be added to the offer price
The letter of offer shall contain justification or the basis on which the price has
been determined.
Acquisition price under creeping acquisition
An acquirer who has made a public offer and seeks to acquire further shares shall not acquire such
shares during the period of 6 months from the date of closure of the public offer at a price higher than
the offer price.
(2) This shall not apply where the acquisition is made through the stock
exchanges.
Minimum number of shares to be acquired
(1) The public offer made by the acquirer to the shareholders of the target company shall be for a
minimum twenty per cent of the voting capital of the company.
(2) If the public offer results in the public shareholding being reduced to 10% or less of the voting
capital of the company, or if the public offer is in respect of a company which has public shareholding of
less than 10% of the voting capital of the company, the acquirer shall either,
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(a) make an offer to buy the outstanding shares remaining with the shareholders in
accordance with the Guidelines specified by the Board in respect of Delisting of
Securities; or
(b) undertake to dis-invest through an offer for sale or by a fresh issue of capital to the public,
which shall open within a period of 6 months from the date of closure of the public offer,
such number of shares so as to satisfy the listing requirements.
(3) The letter of offer shall state clearly the option available to the acquirer.
(4) For the purpose of computing the percentage voting rights as at the expiration of 30 days after the
closure of the public offer shall be reckoned.
(5) Where the number of shares offered for sale by the shareholders are more than the shares agreed to
be acquired by the person making the offer, such person shall, accept the offers received from the
shareholders on a proportional basis, in consultation with the merchant banker, taking care to ensure that
the basis of acceptance is decided in a fair and equitable manner and does not result in non-marketable
lots.
Provided that acquisition of shares from a shareholder shall not be less than the minimum marketable lot
or the entire holding if it is less than the marketable lot.
Offer conditional upon level of acceptance
(1)Subject
to
the
provisions
an
acquirer
or
any
person acting in concert with him may make an offer conditional as to the level of acceptance which may
be less than twenty per cent:
Provided that where the public offer is in pursuance of a Memorandum of Understanding, the
Memorandum of Understanding shall contain a condition to the effect that in case the desired level of
acceptance is not received the acquirer shall not acquire any shares under the Memorandum of
Understanding and shall rescind the offer.] *
General Obligations of the acquirer
(1) The public announcement of offer to acquire the shares of the target company shall be made only
when the acquirer is able to implement the offer.
(2) Within 14 days of the public announcement of the offer, the acquirer shall send a copy of the draft
letter of offer to the target company at its registered office address, for being placed before the board of
directors and to all the stock exchanges where the shares of the company are listed.
(3) The acquirer shall ensure that the letter of offer is sent to all the shareholders (including non-resident
Indians) of the target company, whose names appear on the register of members of the company as on
the specified date mentioned in the public announcement, so as to reach them within 45 days from the
date of public announcement.
Provided that where the public announcement is made pursuant to an agreement to acquire shares or
control over the target company, the letter of offer shall be sent to shareholders other than the parties to
the agreement.
Explanation:- (i) A copy of the letter of offer shall also be sent to the Custodians of Global Depository
Receipts or American Depository Receipts to enable such persons to participate in the open offer, if they
are entitled to do so.
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(ii) A copy of the letter of offer shall also be sent to warrant holders or convertible
debenture holders, where the period of exercise of option or conversion falls within the
offer period.
Offer Period means a period between the date of entering into MOU / public
announcement and the date of completion of offer formalities.
(4) The date of opening of the offer shall be not later than the sixtieth day from the date of public
announcement.
(5) The offer to acquire shares from the shareholders shall remain open for a period of 30 days.
[(5A) The shareholder shall have the option to withdraw acceptance tendered by him upto three working
days prior to the date of closure of the offer.]
(6) In case the acquirer is a company, the public announcement of offer, brochure, circular, letter of offer
or any other advertisement or publicity material issued to shareholders in connection with the offer must
state that the directors accept the responsibility for the information contained in such documents.
Provided that if any of the directors desires to exempt himself from responsibility for the information in
such document, such director shall issue a statement to that effect, together with reasons thereof for such
statement.
(7) During the offer period, the acquirer or persons acting in concert with him shall not be entitled to be
appointed on the board of directors of the target company.
[Provided that in case of acquisition of shares or voting rights or control of a Public Sector Undertaking
pursuant to a public announcement the provision relating to general obligations of the board of directors
would be applicable.
[Provided further that where the acquirer, other than the acquirer who has made an offer under regulation
, after assuming full acceptances, has deposited in the escrow account hundred per cent. of the
consideration payable in cash where the consideration payable is in cash and in the form of securities
where the consideration payable is by way of issue, exchange or transfer of securities or combination
thereof, he may be entitled to be appointed on the Board of Directors of the target company after a
period of twenty one days from the date of public announcement.]
(8) Where an offer is made conditional upon minimum level of acceptances, the acquirer or any person
acting in concert with him (i)
shall, irrespective of whether or not the offer received response to the minimum
level of acceptances, acquire shares from the public to the extent of the minimum
percentage specified
(ii)
Provided that the provisions of this clause shall not be applicable in case the
acquirer has deposited in the escrow account, in cash, 50% of the consideration payable
under the public offer.
(ii) shall not acquire, during the offer period, any shares in the target company, except by
way of fresh issue of shares of the target company,
(iii) shall be liable for penalty of forfeiture of entire escrow amount, for the nonfulfillment of obligations under the Regulations;
(9) If any of the persons representing or having interest in the acquirer is already a director on the board
of the target company or is an "insider" within the meaning of Securities and Exchange Board of India
(Insider Trading) Regulations, 1992, he shall refuse himself and not participate in any matter(s)
concerning or 'relating' to the offer including any preparatory steps leading to the offer.
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(10) On or before the date of issue of public announcement of offer, the acquirer shall create an escrow
account.
(11) The acquirer shall ensure that firm financial arrangements has been made for fulfilling the
obligations under the public offer and suitable disclosures in this regard shall be made in the public
announcement of offer.
(12) The acquirer shall, within a period of 30 days from the date of the closure of the offer, complete all
procedures relating to the offer including payment of consideration to the shareholders who have
accepted the offer and for the purpose open a special account as provided under Regulation 29.
Provided that where the acquirer is unable to make the payment to the shareholders who have accepted
the offer before the said period of 30 days due to non-receipt of requisite statutory approvals, the Board
may, if satisfied that non-receipt of requisite statutory approvals was not due to any willful default or
neglect of the acquirer or failure of the acquirer to diligently pursue the applications for such approvals,
grant extension of time for the purpose, subject to the acquirer agreeing to pay interest to the
shareholders for delay beyond 30 days, as may be specified by the Board from time to time.
(13) Where the acquirer fails to obtain the requisite statutory approvals in time on account of willful
default or neglect or inaction or non-action on his part, the amount lying in the escrow account shall be
liable to be forfeited apart from the acquirer being liable for penalty as provided in the Regulations.
(14) In the event of withdrawal of offer in terms of the Regulations, the acquirer shall not make any offer
for acquisition of shares of the target company for a period of six months from the date of public
announcement of withdrawal of offer.
(15) In the event of non-fulfillment of obligations under Chapter III or Chapter IV of the Regulations,
the acquirer shall not make any offer for acquisition of shares of any listed company for a period of
twelve months from the date of closure of offer.
(16) If the acquirer, in pursuance to an agreement, acquires shares which along with his existing holding,
if any, increases his share holding beyond [15%], then such an agreement for sale of shares shall contain
a clause to the effect that in ca se of non-compliance of any provisions of this regulation, the agreement
for such sale shall not be acted upon by the seller or the acquirer.
[ Provided that in case of acquisition of shares of a Public Sector Undertaking pursuant to a public
announcement made under the Regulations,
(17) Where the acquirer or persons acting in concert with him has acquired any shares at a price equal to
or less or more than the offer price, he shall disclose the number, percentage, price and the mode of
acquisition of such shares to the stock exchanges on which the shares of the target company are listed
and to the merchant banker within 24 hours of such acquisition and the stock exchanges shall forthwith
disseminate such information to the public.]
(18) Where the acquirer has not either, in the public announcement, and, or in the letter of offer, stated
his intention to dispose of or otherwise encumber any assets of the target company except in the ordinary
course of business of the target company, the acquirer, where he has acquired control over the target
company, shall be debarred from disposing of or otherwise encumbering the assets of the target company
for a period of 2 years from the date of closure of the public offer.
(19) The acquirer and the persons acting in concert with him shall be jointly and severally responsible
for fulfillment of obligations under these Regulations.]
121(MMS)

General Obligations of the board of directors of the target company
(1) Unless the approval of the general body of shareholders is obtained after the date of the public
announcement of offer, the board of directors of the target company shall not, during the offer period, (a) Sell, transfer, encumber or otherwise dispose of or enter into an agreement for sale, transfer,
encumbrance or for disposal of assets otherwise, not being sale or disposal of assets in the
ordinary course of business, of the company or its subsidiaries; or
(b) Issue [or allot] any authorized but un-issued securities carrying voting rights during the offer
period; or
(c) Enter into any material contracts.
[Explanation: - Restriction on issue of securities under clause (b) of sub-regulation (1) shall not affect (i) The right of the target company to issue or allot shares carrying voting
rights upon conversion of debentures already issued or upon exercise of
option against warrants, as per pre-determined terms of conversion or
exercise of option.
(ii) Issue or allotment of shares pursuant to public or rights issue in respect
of which the offer document has already been filed with the Registrar of
Companies or Stock Exchanges, as the case may be.]
(2) The target company shall furnish to the acquirer, within 7 days of the request of the acquirer
or within 7 days from the specified date, whichever is later, a list of shareholders or warrant
holders or convertible debenture holders as are eligible for participation containing names,
addresses, shareholding and folio number, and of those persons whose applications for
registration of transfer of share s are pending with the company.
(3) Once the public announcement has been made, the board of directors of the target company shall
not, (a) Appoint as additional director or fill in any casual vacancy on the board of directors, by any
person(s) representing or having interest in the acquirer, till the date of certification by the
merchant banker as provided under sub-regulation (6) below.
Provided that upon closure of the offer and the full amount of consideration payable to the
shareholders being deposited in the special account, changes as would give the acquirer
representation on the Board or control over the company, can be made by the target company.
(b) Allow any person or persons representing or having interest in the acquirer, if he is already a
director on the board of the target company before the date of the public announcement, to
participate in any matter relating to the offer, including any preparatory steps before the date of
the public announcement..
(4) The board of directors of the target company may, if they so desire, send their unbiased comments
and recommendations on the offer(s) to the shareholders, keeping in mind the fiduciary responsibility of
the directors to the shareholders and for the purpose seek the opinion of an independent merchant banker
or a Committee of Independent Directors;
Provided that for any misstatement or for concealment of material information, the directors shall be
liable for action in terms of these Regulations and the Act.
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(5) The board of directors of the target company shall facilitate the acquirer in verification of securities
tendered for acceptances.
(6) Upon fulfillment of all obligations by the acquirers under the Regulations as certified by the
merchant banker, the board of directors of the target company shall transfer the securities acquired by the
acquirer, whether under the agreement or from open market purchases, in the name of the acquirer and,
or allow such changes in the board of directors as would give the acquirer representation on the board or
control over the company.
(7) The obligations of the acquirer, having a shareholding exceeding 15% should be complied with the
target company
(8) The restrictions(a) for appointment of directors on the Board of a target company by the acquirer
(b) for acting on agreement for sale of shares where the share holding of the acquirer exceeds
15% .
(c) for appointment of directors by the target company till the date of certification by the
merchant banker and :
(d) for on transfer of securities or changes in the Board of Directors of the target company shall
not be applicable, in case of sale of shares of a Public Sector Undertaking by the Central
Government [or the State Government], and the agreement to sell contains a clause to the effect
that in case of non-compliance of any of the provisions of the Regulations by the acquirer,
transfer of shares or change of management or control of Public Sector Undertaking shall vest
back with the Central Government [or the State Government] and the acquirer shall be liable to
such penalty as may be imposed by the Central Government [or the State Government]. ]
General obligations of the merchant banker
(1) Before the public announcement of offer is made, the merchant banker shall ensure that(a) the acquirer is able to implement the offer;
(b) the provision relating to escrow account referred to in Regulation 28 has been
made;
(c) firm arrangements for funds and money for payment through verifiable means to fulfill the
obligations under the offer are in place;
(d) the public announcement of offer is made in terms of the Regulations.
(2) The merchant banker shall furnish to the Board a due diligence certificate which shall accompany the
draft letter of offer.
(3) The merchant banker shall ensure that the public announcement and the letter of offer is filed with
the Board, target company and also sent to all the stock exchanges on which the shares of the target
company are listed in accordance with the Regulations.
(4)The merchant banker shall ensure that the contents of the public announcement of offer as well as the
letter of offer are true, fair and adequate and based on reliable sources, quoting the source wherever
necessary.
(5) The merchant banker shall ensure compliance of the Regulations and any other laws or rules as may
be applicable in this regard.
121(MMS)

(6) Upon fulfillment of all obligations by the acquirers under the Regulations, the merchant banker shall
cause the bank with whom the escrow amount has been deposited to release the balance amount to the
acquirers.
(7) The merchant banker shall send a final report to the Board within 45 days from the date of closure of
the offer.
121(MMS)

Competitive bid
(1) Any person, other than the acquirer who has made the first public announcement, who is desirous of
making any offer, shall, within 21 days of the public announcement of the first offer, make a public
announcement of his offer for acquisition of the shares of the same target company. : such an offer made
shall be deemed to be a competitive bid.
(2) No public announcement for an offer or competitive bid shall be made after 21 days from the date of
public announcement of the first offer.
[(2A) No public announcement for a competitive bid shall be made after an acquirer has already made
the public announcement pursuant to entering into a Share Purchase or Shareholders Agreement with the
Central Government [or the State Government as the case may be], for acquisition of shares or voting
rights or control of a Public Sector Undertaking]
(3) Any competitive bid \offer by an acquirer shall be for such number of shares which, when taken
together with shares held by him along with persons acting in concert with him, shall be [at least equal to
the holding of the first bidder including the number of shares for which the present offer by the first
bidder has been made
(4) Upon the public announcement of a competitive bid or bids, the acquirer(s) who had made the public
announcement(s) of the earlier offer(s), shall have the option to [make an announcement revising the
offer].
Provided that if no such announcement is made within fourteen days of the announcement of the
competitive bid(s), the earlier offer(s) on the original terms shall continue to be valid and binding on the
acquirer(s) who had made the offer(s) except that the date of closing of the offer shall stand extended to
the date of closure of the public offer under the last subsisting competitive bid.
(5) The provisions of these Regulations shall mutatis-mutandis apply to the competitive bid(s)
(6) The acquirers who have made the public announcement of offer(s) including the public
announcement of competitive bid(s) shall have the option to make upward revisions in his offer(s), in
respect to the price and the number of shares to be acquired, at any time upto seven working days prior
to the date of closure of the offer:
Provided that the acquirer shall not have the option to change any other terms and conditions of their
offer [except the mode of payment following an upward revision in offer].
Provided further that any such upward revision shall be made only upon the acquirer, (a) making a public announcement in respect of such changes or amendments in all the
newspapers in which the original public announcement was made;
(b) simultaneously with the issue of public announcement referred in clause (a), informing the
Board, all the stock exchanges on which the shares of the company are listed, and the target
company at its registered office;
(c) increasing the value of the escrow account
(7) Where there is a competitive bid, the date of closure of the original bid as also the date of closure of
all the subsequent competitive bids shall be the date of closure of public offer under the last subsisting
competitive bid and the public offers under all the subsisting bids shall close on the same date.
121(MMS)

Upward Revision of Offer
Irrespective of whether or not there is a competitive bid, the acquirer who has made the public
announcement of offer, may make upward revisions in his offer in respect to the price and the number of
shares to be acquired, at anytime upto seven working days prior to the date of the closure of the offer.
Provided that any such upward revision of offer shall be made only upon the acquirer (a) making a public announcement in respect of such changes or amendments in all the
newspapers in which the original public announcement was made;
(b) simultaneously with the issue of such public announcement, informing the Board, all the
stock exchanges on which the shares of the company are listed, and the target company at its
registered office.
(c)
increasing the value of the escrow account as provided under sub-regulation (9) of
Regulation 28.
Withdrawal of Offer
(1) No public offer, once made, shall be withdrawn except under the following circumstances:(a) the statutory approval(s) required have been refused;
(b) the sole acquirer, being a natural person, has died;
(c) such circumstances as in the opinion of the Board merits withdrawal.
(2) In the event of withdrawal of the offer under any of the circumstances specified under sub-regulation
(1), the acquirer or the merchant banker shall :
(a) make a public announcement in the same newspapers in which the public announcement of
offer was published, indicating reasons for withdrawal of the offer.
(b) simultaneously with the issue of such public announcement, inform (i) the Board;
(ii) all the stock exchanges on which the shares of the company are listed; and
(iii) the target company at its registered office.
Provision of Escrow
(1) The acquirer shall as and by way of security for performance of his obligations under the
Regulations, deposit in an escrow account such sum as specified
(a)deposit at least 25% of the total consideration payable in public offer upto and including Rs.
100 crores and 10% of the consideration in excess of Rs. 100 crores
(b) For offers which are subject to a minimum level of acceptance, and the acquirer does not
want to acquire a minimum of 20%, then 50% of the consideration payable under the public offer
in cash shall be deposited in the escrow amount.
(3) The total consideration payable under the public offer shall be calculated assuming full acceptances
and at the highest price if the offer is subject to differential pricing, irrespective of whether the
consideration for the offer is payable in cash or otherwise.
(4) The escrow amount should consist of
(a) cash deposited with a scheduled commercial bank ; or
(b) bank guarantee in favour of the merchant banker; or
(c) deposit of acceptable securities with appropriate margin, with the merchant banker; or
121(MMS)

(d) cash, deposited with a bank in case of offers that are subject to minimum level of
acceptance and the acquirer does not want to acquire a minimum of 20% .
(5) Where the escrow account consists of deposit with a scheduled commercial bank, the acquirer shall,
while opening the account, empower the merchant banker appointed for the offer to instruct the bank to
issue a banker's cheque or demand draft for the amount lying to the credit of the escrow account.
(6) Where the escrow account consists of bank guarantee, such bank guarantee shall be in favour of the
merchant banker and shall be valid atleast for a period commencing from the date of public
announcement until 30 days after the closure of the offer.
(7) The acquirer shall, in case the escrow account consists of securities empower the merchant banker to
realize the value of such escrow account by sale or otherwise provided that if there is any deficit on
realization of the value of the securities, the merchant banker shall be liable to make good any such
deficit.
(8) In case the escrow account consists of bank guarantee or approved securities, these shall not be
returned by the merchant banker till after completion of all obligations under the Regulations.
(9) In case there is any upward revision of offer, consequent upon a competitive bid or otherwise, the
value of the escrow account shall be increased to equal at least 10% of the consideration payable upon
such revision.
(10) Where the escrow account consist of bank guarantee or deposit of approved securities, the acquirer
shall also deposit with the bank a sum of at least 1% of the total consideration payable, as and by way of
security for fulfillment of the obligations by the acquirers.
(11) The Board shall in case of non-fulfillment of obligations by the acquirer forfeit the escrow account
either in full or in part. In case of failure by the acquirer to obtain shareholders' approval for issue of
securities as consideration within 21 days from the date of closure of offer.
(12) The escrow account deposited with the bank in cash shall be released only in the following manner,
(a) the entire amount to the acquirer upon withdrawal of offer upon certification by the merchant
banker;
(b) for transfer to the special account provided the amount so transferred shall not exceed 90% of
the cash deposit made under escrow account.( 25% of the total consideration payable in public
offer upto and including Rs. 100 crores and 10% of the consideration in excess of Rs. 100 crores)
(c) to the acquirer, the balance of 10 per cent of the cash deposit made on completion of all
obligations under the Regulations, and upon certification by the merchant banker;
(d) the entire amount to the acquirer upon completion of all obligations , upon certification by the
merchant banker, where the offer is for exchange of shares or other secured instruments;
(e) the entire amount to the merchant banker, in the event of forfeiture for non-fulfillment of any
of the obligations under the Regulations, for distribution among the target company, the regional
stock exchange and to the shareholders who had accepted the offer in the following manner, after
deduction of expenses, if any, of the merchant banker and the registrars to the offer, (i) one third of the amount to the target company;
(ii) one third of the amount to the regional stock exchange for credit of the
investor protection fund or any other similar fund for investor education, research,
grievance redressal and similar such purposes as may be specified by the Board
from time to time;
121(MMS)

(iii) residual one third to be distributed pro-rata among the shareholders who have
accepted the offer.
(13) In the event of non-fulfillment of obligations by the acquirer, the merchant banker shall ensure
realisation of escrow amount by way of foreclosure of deposit, invocation of bank guarantee or sale of
securities and credit proceeds thereof t o the regional stock exchange of the target company, for the
credit of the Investor Protection Fund or any other similar fund.
Payment of consideration
(1) For the amount of consideration payable in cash, the acquirer shall, within a period of 21 days from
the date of closure of the offer, open a special account with a Bankers to an Issue registered with the
Board and deposit therein, such sum as would, together with 90% of the amount lying in the escrow
account, if any, make up the entire sum due and payable to the shareholders as consideration for
acceptances received and accepted in terms of these Regulations and for this purpose, transfer the funds
from the escrow account.
(3) The unclaimed balance lying to the credit of the account referred in sub-regulation (1) at the end of
3 years from the date of deposit thereof shall be transferred to the investor protection fund of the
regional stock exchange of the target company
BAIL OUT TAKEOVERS
Bail out takeovers
(1) The provisions of this Chapter shall apply to a substantial acquisition of shares in a financially weak
company not being a sick industrial company, in pursuance to a scheme of rehabilitation approved by a
public financial institution or a scheduled bank; (hereinafter referred to as lead institution). A financially
weak company means a company that has at the end of the previous financial year accumulated losses,
which have resulted in the erosion of more than 50% but less than 100% of its net worth at the beginning
of the previous financial year.
(2) The lead institution shall be responsible for ensuring compliance with the provisions of this Chapter.
(3) The lead institution shall appraise the financially weak company taking into account the financial
viability, and assess the requirement of funds for revival and draw up the rehabilitation package on the
principle of protection of interests of minority shareholders, good management, effective revival and
transparency.
(4) The rehabilitation scheme shall also specifically provide the details of any change in management.
(5) The scheme may provide for acquisition of shares in the financially weak company in any of the
following manner:
(a) outright purchase of shares, or
(b) exchange of shares, or
(c) combination of both.
Provided that the scheme as far as possible may ensure that after the proposed acquisition the erstwhile
promoters do not own any shares in case such acquisition is made by the new promoters pursuant to such
scheme.
Explanation: For the purpose of this chapter, the expression "financially weak company" means a
company, which has at the end of the previous financial year accumulated losses, which has resulted in
121(MMS)

erosion of more than 50% but less than 100% of its networth as at the beginning of the previous financial
year, that is to say, of the sum total of the paid-up capital and free reserves.
Manner of acquisition of shares
(1) Before giving effect to any scheme of rehabilitation the lead institution shall invite offers for
acquisition of shares from atleast three parties.
(2) After receipt of the offers under sub-regulation (1), the lead institution shall select one of the parties
having regard to the managerial competence, adequacy of financial resources and technical capability of
the person acquiring shares to rehabilitate the financially weak company.
(3) The lead institution shall provide necessary information to any person intending to make an offer to
acquire shares about the financially weak company and particularly in relation to its present
management, technology, range of products manufactured, shareholding pattern, financial holding and
performance and assets and liabilities of such company for a period covering five years from the date of
the offer as also the minimum financial and other commitments expected of from the person acquiring
shares for such rehabilitation.
Manner of evaluation of bids
(1) The lead institution shall evaluate the bids received with respect to the purchase price or exchange of
shares, track record, financial resources, and reputation of the management of the person acquiring
shares and ensure fairness and transparency in the process.
(2) After making evaluation as provided in sub-regulation (1), the offers received shall be listed in order
of preference and after consultation with the persons in the affairs of the management of the financially
weak company accept one of the bids.
Person acquiring shares to make an offer
The person acquiring shares who has been identified by the lead institution under sub-regulation (2) of
Regulation 32, shall on receipt of a communication in this behalf from the lead institution make a formal
offer to acquire shares from the promoters or persons in charge of the affairs of the management of the
financially weak company, financial institutions and also other shareholders of the company at a price
determined by mutual negotiation between the person acquiring the shares and the lead institution.
Explanation: Nothing in this regulation shall prohibit the lead institution offering the shareholdings held
by it in the financially weak company as part of the scheme of rehabilitation.
Person acquiring shares to make public announcement
(1) The person acquiring shares from the promoters or the persons in charge of the management of the
affairs of the financially weak company or the financial institution shall make a public announcement of
his intention for acquisition of shares from the other shareholders of the company.
(2) Such public announcement shall contain relevant details about the offer including the information
about the identity and background of the person acquiring shares, number and percentage of shares
proposed to be acquired, offer price, the specified date, the date of opening of the offer and the period for
which the offer shall be kept open and such other particulars as may be required by the board.
(3) The letter of offer shall be forwarded to each of the shareholders other than the promoters or the
persons in charge of management of the financially weak company and the financial institutions.
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(4) If the offer referred to in sub-regulation (1) results in the public shareholding being reduced to 10%
or less of the voting capital of the company, the acquirer shall either (a) within a period of three months from the date of closure of the public offer, make an
offer to buy out the outstanding shares remaining with the shareholders at the same offer
price, which may have the effect of delisting the target company; OR
(b) undertake to disinvest through an offer for sale or by a fresh issue of capital to the
public which shall open within a period of 6 months from the date of closure of public
offer, create such number of shares as would bring the public shareholding to a minimum
of 25% or more of the voting capital of the target company so as to satisfy the listing
requirements.
(5) The letter of offer shall state clearly the option available to the acquirer under sub-regulation (4).
(6) For the purposes of computing the percentage referred to in the sub-regulation (4), the voting rights
as at the expiration of thirty days after the closure of the public offer shall be reckoned.
(7) While accepting the offer from the shareholders other than the promoters or persons in charge of the
financially weak company or the financial institutions, the person acquiring shares shall offer to acquire
from the individual shareholder his entire holdings if such holding is upto hundred shares of the face
value of rupees ten each or ten shares of the face value of rupees hundred each.
Competitive Bid
No person shall make a competitive bid for acquisition of shares of the financially weak company once
the lead institution has evaluated the bid and accepted the bid of the acquirer who has made the public
announcement of offer for acquisition of shares from the shareholders other than the promoters or the
persons in charge of the management of the financially weak company.
Exemption
Offers made in pursuance of bailout takeovers can be exempted by SEBI from provisions of substantial
acquisition of shares But the lead institution or the acquirer , as far as may be possible , should adhere
to time limits specified for various activities of public offers.
Acquisition of shares by a state level public financial institution
Where proposals for acquisition of shares in respect of a financially weak company is made by a state
level public financial institution, the provisions of these Regulations in so far as they relate to scheme of
rehabilitation prepared by a public financial institution, shall apply except that in such a case the
Industrial Development Bank of India, a corporation established under the Industrial Development Bank
of India Act, 1964 shall be the agency for ensuring the compliance of these Regulations for acquisition
of shares in the financially weak company.
INVESTIGATION AND ACTION BY THE BOARD
Board's right to investigate
The Board may appoint one or more persons as investigating officer to undertake investigation for any
of the following purposes, namely:(a) to investigate into the complaints received from the investors, the intermediaries or any other
person on any matter having a bearing on the allegations of substantial acquisition of shares and
takeovers;
121(MMS)

(b) to investigate suo-moto upon its own knowledge or information, in the interest of securities
market or investors interests, for any breach of the Regulations ;
(c) to ascertain whether the provisions of the Act and the Regulations are being complied with
Notice before investigation
(1) Before ordering an investigation the Board shall give not less than 10 days notice to the acquirer, the
seller, the target company, the merchant banker, as the case may be.
If the Board is satisfied that in the interest of the investors no such notice should be given, it may, by an
order in writing direct that such investigation be taken up without such notice.
(3) During the course of an investigation, the acquirer, the seller, the target company, the merchant
banker, against whom the investigation is being carried out shall be bound to discharge his obligation as.
(detailed below)
Obligations on investigation by the Board
(1) It shall be the duty of the acquirer, the seller, the target company, the merchant banker whose affairs
are being investigated and of every director, officer and employee thereof, to produce to the investigating
officer such books, securities, accounts, records and other documents in its custody or control and
furnish him with such statements and information relating to his activities as the investigating officer
may require, within such reasonable period as the investigating officer may specify.
(2) The acquirer, the seller, the target company, the merchant banker and the persons being investigated
shall allow the investigating officer to have reasonable access to the premises occupied by him or by any
other person on his behalf and also extend reasonable facility for examining any books, records,
documents and computer data in the possession of the acquirer, the seller, the target company, the
merchant banker or such other person and also provide copies of documents or other materials which, in
the opinion of the investigating officer are relevant for the purposes of the investigation.
(3) The investigating officer, in the course of investigation, shall be entitled to examine or to record the
statements of any director, officer or employee of the acquirer, the seller, the target company, the
merchant banker.
(4) It shall be the duty of every director, officer or employee of the acquirer, the seller, the target
company, the merchant banker to give to the investigating officer all assistance in connection with the
investigation, which the investigating officer may reasonably require.
121(MMS)

Submission of Report to the Board
The investigating officer shall, as soon as possible, on completion of the investigation, submit a report to
the Board: Provided that if directed to do so by the Board, he may submit interim reports.
Communication of findings
(1) The Board shall, after consideration of the investigation report referred to in Regulation 41,
communicate the findings of the investigating officer to the acquirer, the seller, the target company, the
merchant banker, as the case may be, and give him an opportunity of being heard.
(2) On receipt of the reply if any, from the acquirer, the seller, the target company, the merchant banker,
as the case may be, the Board may call upon him to take such measures as the Board may deem fit in the
interest of the securities market and for due compliance with the provisions of the Act and the
Regulations.
Appointment of Auditor
Notwithstanding anything contained in this Regulation, the Board may appoint a qualified auditor to
investigate into the books of account or the affairs of the person concerned: Provided that the auditor so
appointed shall have the same powers of the investigating authority as stated in Regulation 38 and the
obligations of the person concerned in Regulation 40 shall be applicable to the investigation under this
Regulation.
Directions by the Board.

Without prejudice to its right to initiate action under Chapter VIA and section 24 of the Act, the Board
may, in the interest of securities market or for protection of interest of investors, in addition to initiate
action including criminal prosecution can issue such directions as it deems fit including: (a) directing appointment of a merchant banker for the purpose of causing
disinvestment of shares acquired in breach of regulations relating to (i)acquisition of 15%
or more shares/ voting rights of any company (ii)consolidation of holdings (iii)acquisition
of control over a company, either through a public auction or market mechanism, in its
entirety/in small lots, or through an offer for sale;
(b) directing transfer of any proceeds or securities to the investors protection Fund of a
recognized stock exchange;
(c) directing the target company or depository to cancel the shares where an
acquisition of shares pursuant to an allotment is in breach of regulations (a);
(d) directing the target company or the depository not to give effect to transfer or further
freeze the transfer of any such shares and not to permit the acquirer or any nominee or
any proxy of the acquirer to exercise any voting or other rights attached to such shares
acquired in violation of regulations (a);
(e) debarring any person concerned from accessing the capital market or the Board may
determine dealing in securities for such period as;
121(MMS)

(f) directing the person concerned to make public offer to the shareholders of the target
company to acquire such number of shares at such offer price as determined by the
Board;
(g) directing disinvestment of such shares as are in excess of the percentage of the
shareholding or voting rights specified for disclosure requirement under the regulations
relating to (i) holding / acquisition of 5% and more share / voting rights (ii) continual
disclosures ;
(h) directing the person concerned not to dispose of assets of the target company contrary
to the undertaking given in the letter of offer;
(i) directing the person concerned, who has failed to make a public offer or delayed the
making of a public offer in terms of these Regulations, to pay to the shareholders, whose
shares have been accepted in the public offer made after the delay, the consideration
amount along with interest at the rate not less than the applicable rate of interest payable
by banks on fixed deposits.]
Penalties for non-compliance

(1) Any person violating any provisions of the Regulations shall be liable for action in 0terms of the
Regulations and the Act.
(2) If the acquirer or any person acting in concert with him, fails to carry out the obligations under the
Regulations, the entire or part of the sum in the escrow amount shall be liable to be forfeited and the
acquirer or such a person shall also be liable for action in terms of the Regulations and the Act.
(3) The board of directors of the target company failing to carry out the obligations under the
Regulations shall be liable for penal action in terms of the Regulations and Act.
(4) The Board may, for failure to carry out the requirements of the Regulations by an intermediary,
initiate action for suspension or cancellation of registration of an intermediary holding a certificate of
registration under section 12 of the Act.
Provided that no such certificate of registration shall be suspended or cancelled unless the procedure
specified in the Regulations applicable to such intermediary is complied with.
(5) For any mis-statement to the shareholders or for concealment of material information required to be
disclosed to the shareholders, the acquirers or the directors where he acquirer is a body corporate, the
directors of the target company, the merchant banker to the public offer and the merchant banker
engaged by the target company for independent advice would be liable for action in terms of the
Regulations and the Act.
(6) The penalties referred to in sub-regulation (1) to (5) may include (a) criminal prosecution under section 24 of the Act;
(b) monetary penalties under section 15 H of the Act;
(c) directions under the provisions of Section 11B of the Act.
121(MMS)
Chapte
r
10
METHODS FOR
MERGER OR TAKEOVER
Transaction structures:
Stock purchase vs Asset purchase
Target
Sharehold
er
Target
Corporatio
n
Target stock
Acquirer
Cash
Target
Assets
DESCRIPTION
STEPS
A Straightforward stock acquisition

Target shareholder own 100% of
Occurs when the acquiring corporation
the stock of target corp.
Purchases the stock of the Target Company
From its shareholders and does nothing else Acquirer purchases 100% of the
Stock of target corp. in exchange
for cash.
121(MMS)

ASSET PURCHASE
Target
Sharehold
er
Target
Corporatio
n
Acquirer
Shareholder
s
Cash
Acquirer
Target Asset Corp.
Target
Assets
DESCRIPTION
STEPS
In a Straightforward asset acquisition,

the acquiring company purchases part or all
the target companys assets. The acquiring
stock of
Company pays cash or other consideration.
After the acquisition the target Company
Remains in existence.
Target shareholder own 100% of

the stocks of target corp. Acquirer
stockholders own 100% of the
Acquirer corp.
Acquirer corp. purchases all assets
of
Target corp. in exchange for cash.
REVERSE MERGER
121(MMS)

Transaction structures
Target
Shareholder
Target
Corp.
Acquirer
Shareholder
Acquirer
Corp.
DESCRIPTION
A reverse merger is merely a
statutory merger
accomplished by merging the
acquiring company
Into the target company.
For tax purpose, the
transaction
Is treated as a sale &
purchase of
Target
Assets
Cash
Stock,with the acquiring

company
Merged downstream into
target.
POST-TRANSACTION
Target
Shareholder
Cash
Acquirer
Shareholder
Target
Corp.
Target
Assets
Acquirer
comp.
&
Assets
(merged &
121(MMS)
disclosed)

STEPS
Target shareholders own100% of the stock of target corp.; Acquirer
shareholders
own 100% for the stocks of acquirer corp.
Acquirer corp. is merged into target corp. The stock of p is canceled and
the
Corporate existence of acquirer corp. is terminated.
By the terms of the merger agreement, target shareholder receive cash
from
Acquirer Corp. and acquirer shareholders receive the stock of the target
corp.
121(MMS)
Chapte
r
10
DEFENSES
DEFENSES: PRE- BID

Companies watch stock accumulation or stock price movements that reflect an impending takeover
attempt, Tracks trading patterns in company's stock.
Pre-bid defenses consist of
Casual pass
Silence
Poison pills
Back end plans
Poison put'
Anti-green mail provisions
Fair price provision
Parachutes
Casual pass Call to a board member or executive at the target firm the individual caught off guard and
is ill prepared to respond. Best response is strong reaction to discourage any would be suitor.
Silence- Most do not come out until an agreement has been signed. Fear of putting themselves in play
inhibits the target management.
The prevalence and sophistication of such measures as poison pills, shark repellants and golden
parachute has increased substantially since 1980in lock step with the proliferation and effectiveness of
takeover tactics.
Poison Pills: Represent a new class of securities issued by a company to its shareholders which has no
value unless an investor acquires a specific percentage of the firms voting stock. If this threshold
percentage is exceeded the poison pill securities are activated in such a way so to dilute the value of
investors' stake in the company. Poison pill securities alter the relationships between shareholders,
managers and the hoard of directors when a control-related event occurs. They alter the company to
make it unpalatable to an acquirer. The managers and the board who are agents acquire the right to
unilaterally change critical control aspects of the contract of the right to prevent the firing of agents.
Poison pill transaction was used by Rasi Cement to thwart the takeover by ICL.
There exist poison pills of three generations.
First Generation: Developed by Mary Lipton, Wall Street Attorney in 1982, involved issuing preferred
stock in the form of a dividend to shareholders convertible into common stock of the acquiring company
121(MMS)

following a takeover. This dilutes acquirers ownership interest
Second Generation: Rights plan or flip over pill involves issuance of rights to the firms shareholders to
buy a specific amount of stock in the acquiring company at a particular price for specified time period.
The target company's shareholders were said to flip over and become acquirer shareholders. The
ownership position of the acquiring company would be diluted.
Third Generation: Flip-in, flip-over pill- Under the arrangement, shareholders receive a special dividend
of one stock purchase right for each share they own. If an investor acquires a certain percentage of the
stock of the company issuing rights, the rights are activated without board approval. Holders of rights
can buy stock in the issuing company at a substantial discount. This is flip in.
In certain circumstances the rights enable the holder to buy stock in the stock of the bidding company at
a discount. This is the more traditional flip over effect commonly used today.
Back end Plans: Shareholders receive a dividend of rights which gives then the option of exchanging
the rights along with a share of target stock for cash or senior debt securities for a specific price set by
the target's board. This price is usually set above the current market price of the target company's shares.
It is the asking price determined by target's board.
Poison Put: Target issues bonds containing a put option exercisable if and only if an unfriendly takeover
occurs. The holders can cash their bond, placing a cash demand on the acquiring company
Poison pills slow down but rarely prevent takeovers. They delay and increase expanse but do not prevent
a firm from being acquired. Escape clauses are put in pill that issuing company board can redeem them
through a nominal payment. This avoids dilution of bidders ownership position in the event acquiring
company is considered friendly.
Anti-green mail provisions: During '80s many raiders profited by taking an equity position in target
company threatening takeover and subsequently selling their ownership position to tile target firm at a
premium over premium. what they paid fix the targets shares, Companies removed the incentive for
greenmail by amending their articles of association/charter to restrict the firm's ability to repurchase
shares.
Fair Price Provision: Acquirer may be required to pay a fair market price to minority shareholders to
amend its charter\articles of association. Fair price provisions are most effective when the target firm is
subject to a two tiered offer. Acquirer has to pay target shareholders who tender their stock in second tier
on the same terms offered to those tendering their stock in the first tier.
Parachutes: Golden, Silver and Tin: Golden parachutes (several years pay) are employee severance
agreements which are triggered whenever a change in control takes place. A change in control is usually
defined to occur whenever an investor accumulates more than a fixed percentage of a company's voting
stock. The purpose of golden parachutes is generally to retain key employees who may feel threatened
by a pending change in control. Silver parachutes (6 months to 1 year pay) are severance agreements that
cover far more employees and are also triggered in the same manner as golden parachutes. Tin
parachutes cover virtually all employees and consist of very modest severance payment.
121(MMS)

Excess parachute payments (exceeding 3 times the employees average compensation over the last 5
years) arc penalized in USA under tax legislation. It is not tax deductible by paying corporation.
Employees have to pay a surcharge of 20% in addition to normal tax on excess parachute payments.
DEFENSES POST- BID

Post-bid defenses consist of
Greenmail
White Knights
White Squires
ESOPS
Recapitalization
Buyback
Restructuring
Going Private
Sale of assets
Liquidation
Litigation
Just say no
Greenmail: Greenmail is the practice of paying a potential acquirer to leave you alone. It consists of a
payment to buyback shares of a premium price in exchange for the acquirer's agreement not to undertake
a hostile takeover. In exchange the potential acquirer signs a stand still agreement which specifies the
amount of stock that the investor can own, the circumstances under which the raider can sell stock
currently owned and the term of the agreement.
White Knights: A company seeking to avoid being taken over by specific hidden may try to be acquired
by another firm, a white knight, which is viewed as a more appropriate suitor. White knight should offer
better terms than original bidder. Motivation for white knight is generally more mercenary than
chivalrous. White knight often demands protection in the form of lock-up in an agreement of purchase
and sale eventually signed with the target.
The lock up may involve giving the white knight options to buy stock till the target that has not yet been
issued at a fixed price or to acquirer at a fair price target assets that are viewed as strategic by tile white
knight Lock-ups render the target less attractive to the original bidder. In the event a bidding war
ensures, the knight may exercise the stock options and sell the shares at a profit to the acquiring
company.
White Squires: White squires are firms that agree to purchase a large block of the target stock which is
121(MMS)

often convertible preferred, approved but not issued, of the target company. Shareholder approval to sell
stock to white squire is necessary in case of listed companies.Approva1 is also necessary if such shares
are issued to officers/directors or number issued equa1s 20% of target's outstanding shares.
ESOPS: They are trusts that hold firm's stock as an investment for their employees retirement program.
They are an alternative to a white knight or white squire. They can be established quickly with the
company either issuing shares directly to ESOP or having an ESOP purchase shares on the open market.
Any impact on earnings per share of issuing the stock to ESOP can be offset by the firm repurchasing
shares on the open market.
Recapitalization: Recapitalization depends on articles of association charter. New debt may be issued
for buy-back of shares. Target becomes less attractive to the bidder. Additional shares may be issued to
make it difficult for the bidder to gain controlling interest. Increase in shares dilutes earnings per share
and reduces the targets share price.
Buyback:. Buyback reduces the number of shares that could he purchased by a potential buyer or by
arbs who will sell to the highest bidders. Reduction of shares may make it easier for the buyer to gain
control.
Buy-back in combination with white squire strategy in which the target can place stock in friendly
hands is considered effective defense. Buy-back by targeting specific shareholders who may sell to the
hostile bidder and self tender offer in which the target buys its own shares are effective defenses.
Restructuring: Public limited companies can convert into private company by sale of attractive assets,
undertaking a major acquisition or even liquidating the company.
Going Private: Management must purchase bulk of shares at a price higher than market.
Sale of assets: Sell what bidder wants to make the target unattractive and use cash for buy-back or
dividend to special stockholders.
Liquidation: In case of liquidation, liquidating dividend should exceed what shareholders would have
received from the bidder.
Another anti-takeover device is a fair merger price provision. Here the bidder must
pay non controlling shareholders a price at least equal to a "fair price," which is
established in advance. Usually, this minimum price is linked to earnings per share
through a price/earnings ratio, but it may simply be a stated market price. Often the
fair price provision is coupled with a supermajority provision. If the stated minimum
Price is not satisfied; the combination can only be approved if a supermajority of
Shareholders vote in favor of it. The fair price provision is also frequently accompanied
by a freeze-out provision, under which the transaction is allowed to proceed at a
"fair price" only after a delay of anywhere from two to five years.
121(MMS)

Still another method used to thwart potential acquirers is the leveraged recapitalization.
This calls for the current management to load the balance sheet with new debt and use the proceeds to
pay a huge, one-time cash dividend to shareholders. Taking on all this debt acts to discourage the
acquirer, who can no longer borrow against the firm's assets to help finance the acquisition. The
company continues to be publicly held, because stockholders retain their common shares, known as
"stub" shares. Obviously the shares now are worth much less because of the huge cash dividend.
In this type of transaction, management and other insiders do not participate
in the cash payout; instead, they take additional shares of common stock. As a result,
their proportional ownership of the corporation increases substantially, which further discourages a
potential acquirer. In effect, leveraged recapitalization allows a
company to act as its own "white knight."
Takeover Defenses : Advantages and Disadvantages for Target Firm

Type
Defense
Greenmail
Standstill
agreement
of
Advantages
Disadvantages
Encourages raider to go away

Reduces risk 10 raider of losing
(usually
accompanied by a standstill
money on a takeover attempt;
agreement)
unfairly discriminates against nonparticipating shareholders;
often generates litigation.
Prevents raider from returning
Exacerbates negative returns to
for a
specific period of time.
target shareholders and increases
amount of greenmail paid to get
raider to sign standstill.
White
May be a preferable alternativeNecessarily involves loss of targets
knights/White
to the hostile blacer.
Indepedence
squires
ESOP
Alternative to white knight
Support of employees is not

guaranteed. Target must be carefull
121(MMS)

ESOP does not overpay for stock
RecapitalizatioMakes target less attractive to
As a takeover defense, it may
n
bidder
and may increase target
generates substantial negative impact
shareholder
value
if
incumbent
on returns 10 target shareholders
management
motivated
to
improve
and increased leverage reduces
performance
target's debt capacity,
Buy-back of
Reduces number target shares A reduction in the shares
shares
available for purchase
outstanding may facilities bidder's
by bidder, arbs, and others
gaining control.
who may sell to bidder
Company
Going private may be attractive Going, private, sale of attractive
Restructuring alternative to bidder's offer for assets, making defensive
target shareholders
acquisitions, or liquidation may
and
for
incumbent
substantially reduces
management.
target's shareholder venue vs,
bidder
May buy time for target 10
Litigation
Negative impact on target shambuild
defenses and increases takeoverholder returns
cost 10 the bidder.
Buys time to build defenses
Just say no
Must satisfy conditions established
and
determine appropriate response by the courts.
121(MMS)
Chapte
r
11
CASE-STUDY
CASE STUDY-1
L&T Grasim Deal
DEMERGER AND ACQUISITON
L&T is the largest engineering, procurement and construction company in India. It is a leader in cement
industry with 16.29mn tones installed capacity.
Grasim is the domestic producer of viscose staple fibre and one of the largest producers of cement.
Chennai based Chartered accountant Mr S Gurumurthy played a major role in the settlement between
L&T and Grasim deal which resulted in L&T deciding to demerge its cement business to be acquired by
Grasim Industry.
The board of L&T has decided to demerge its cement business into separate cement company called
Cemco, in which L&T will remain 20 %of the equity. Balance will be distributed to its shareholders in
proportion to their holding.
The board of Grasim also gave its approval to this transaction and Cemco will be listed in NSE &BSE.
Shareholders of L&T will get :
The shares of L&T will be divided into two parts one in L&T Engineering and one for Cement Co. But
20 % stake would be retained by L&T Eng. Its a part of the deal. L&T ha put forth this condition to
Grasim & Grasim gave an approval for the same.
So shareholder of 100 shares of L&T will get 100 shares in Engineering and 80 shares in Cement Co.
and 20 shares will be retained with the L&T Eng.
Before Deal :
This was shareholding pattern of L&T:
Earlier Reliance had 10% stake in L&T and around 31% - 40% with FIs and balance with others.
Now these 10% shares were bought by Grasim from Reliance @ 307/- per share in November 2001
These shares were bought by RIL in 1991 and Dhirubhai Ambanis main purpose was to acquire cement
plant.
121(MMS)

Out of 7 directors, 2 directors were appointed by Reliance in L&T. Every time they forced L&T to
demerge cement co.
So Grasim had to pay to acquire 10% stake from RIL. The deal struck between RIL &Grasim was at a
very high rate i.e. Rs 307/-. This price was 47% more than the market price .The market price at that
time was Rs 208/-. It had happened becoz Grasim had to pay for control premium. And second reason
was that Grasim could not get such a huge volume in the open market and second reason was that if
Grasim would have gone to purchase share in the open market than RIL also could come in the market
and every one knows that RIL does not have fund problem.
Grasims next move was to increase its stake in L&T. So Grasim started cripping acquisition in the open
market and gradually Grasim acquired 5 % stake in the open market at a market rate.
When Grasim crossed 15 % limit in L&T ,so according to SEBI guidelines Grasim had to give an open
offer to the public at the market rate and that time market rate was 190/But Grasim did not get any response because most of the holding in L&T was with the Financial
Institutions and they were not ready to sale at this price. So Grasim acquired .74 % only through open
offer. After this Grasims total stake was 15.74 % in L&T.
After Demerging the shareholding pattern would be like this: L&T Engineering would have 20% stake in Cemco Ltd. And Grasim will have 15.74% stake in L&T
Eng. according to their proportion and other 84.26%
This Grasims stake in L&T Eng. would be sold to L&T Employees Trust @ 120/- per share by Grasim.
Create a L&T Trust this idea came during a discussion .The purpose to create L&T Trust is to protect
L&T from any further takeover attempts in future.and also by doing so , the entity would have
substantial voting rights.
In case of Cemco Company :
Grasim would get 12.59% stake in Cemco according to their proportionate holding in L&T. Grasim will
then acquire 8.5% stake in Cemco Co. from L&T Eng. Out of 20 % stake @ 171.30 per share. So L&T
Eng would have 11.5 % stake in Cemco Co which can be sold by L&T at the time of open offer. Grasim
will also make an open offer for buying an additional 30% stake from public at the same price.
Total cost of the Deal
Particulars
Cost
(Amt. In Crs.)
Initial Acquisition of 10 % from Reliance
766
Open Market Acquisition of 3.74 %
169
Open Offer Acquisition of 2%
95
Acquisition of 8.5% of L&T stake
363
Open offer for 30 % in new cement Co.
1280
TOTAL
2670
Less- Sale 15.74 % stake in L&T Eng to Employees 470
trust
Total Cost
2200
Price (Rs.)
307.60
181.50
190.00
171.30
171.30
121(MMS)

Calculation of Goodwill of Cemco
Particulars
Net Worth ( including DTL ) of Cemco Co. as on 31.03.2003
Less Deferred Tax Liability
Actual Net Worth (A)
Actual Net consideration paid by Grasim (B)
Goodwill (B-A)
Amt. In Crs.
1540
550
990
2200
1210
Valuation of L&Ts Cement Business

Capacity as per CMA as on31.03.2003
Integreted Unit
Grinding Unit
Total Capacity
Capital Cost of Maratha Unit of GACL
Capicity GACL ( as per CMA)
Capital cost /Tonne of GACL
Replacement Cost of Cement unit of L&T
ACC Trading unit of Takaria
Capital Cost
Cost / Tonne Rs. 1180
Replacement Cost
B*E
Total Cost
Cost per Tonne Rs. Rs. 2959.70
Exchange Rate Rs/US$ 46.30
Cost / Tonne US$ 63.91
Valuation of Equity
Price Per Tonne
Exchange Rate
Price Per Tonne
Total Capicity
Total Value of Plant
Total Estimated Debt
Total Value of Equity
No. of Shares
Value/Share
Million
12.28
4.02
16.30
7080.00
2.00
3541.23
43470
1.00
1180
Tonne
Tonne
Tonne
Rs.
Tonne
Rs
A*C
Tonne
Rs.
Rs.
Rs.
Rs.
Rs.
A
B
A+B
B * E (F)
F+D
4743.60
48213.60
$
$
Rs.
Mn Tonne
Rs. Mn.
Rs. Mn.
Rs, Mn.
Mn.
Rs
A
B
A*B
81.07
46.40
3761.64
16.29
61277.24
18680
42597.24
249
171.30
C
D
121(MMS)
Cement plant can be evaluated on the basis of replacement cost. Grasim did evaluations on the basis of
replacement cost.
Grasim took GACLs plant as a base and arrived at a price $ 64, the base selected was GACL and it was
not similar as L&T . At this price the deal was not possible because 3 years back Lafarge had offered
price $ 65 per tonne and financial institutions insisted on a higher valuation for cement business because
credit rating agency ICRAs recommendations was that the benchmark valuation of cement merger and
acquisition should be around $ 85 per tonne.
Kumar Mangalam Birla decided finally to take undisputed control of L&T cement business. After
several proposals and protected negotiations, L&T cement demerger plan was finally agreed between
Grasim and L&T @$81.07 per tonne.
Advantages of Grasim
25 % market share & 31% MT capacity: - The acquisition of cement plant propels Grasim to the
top of the leadership position in the cement market. It will have 31mt capacity and the market
share of 25% and Grasim will gain a strong foothold in all the important western market. The
Andhra Pradesh unit of L&T supplies more to Karnataka than to Andhra Pradesh and its plant is
located to Bangalore city. In Karnataka the combined entity will enjoy more than 1/3 of the
market share.
Value of Synergy: - synergy for the combined entity would be huge. Grasim has indicated that
savings in freight cost alone would be in the region of Rs 100 crore annually because Grasims
plant is situated in Madhya Pradesh. Grasim has to sent the goods from Madhya Pradesh to
Gujarat that is why Grasim had to pay for transportation charges to cover the Gujarat market
share. Now to cover this market share goods (cement) will be supplied from L&Ts plant which
is situated in Gujarat only. So this entire transportation cost will be saved by Grasim. Alongwith
this Grasim will be able to cover the northern market also. Thirdly, in order to cover the L&Ts
market share & Grasims market share, the goods will be sent from L&Ts plant. So if there will
be more production, than per unit cost will be reduced.
Pricing power: - Grasim will be able to gain a strong foothold in all the important western
market. It will have a price determining power in the western & southern market through its huge
market share in cement market.
According to the Grasims calculation company would save around Rs 7-8 per bag and more
production at L&Ts plant will lead to a reduction in price per bag. So obviously the company
will get a pricing power.
Revenue worth of Rs.2820 crore: - according to the FY03at the current level o production of the
L&T plant, the company will be able to generate a revenue of Rs 2820 crore, with an operating
profit of Rs 392 crore.
121(MMS)
Sales tax deferred: - In Maharashtra, L&T is a dominant player and it gets sales tax exemption
for its Maharashtra unit for sale within the state.
Industry future outlook: - Due to good monsoons during the current year, the construction
industry will receive a boost in the coming months.
At present cement plants are running at 75-80% capacities because of less demand because of
which per unit cost is also very high. But with the surge in demand, this also seems to increase.
So there is a chance that cement prices may also increase.
In addition this year and next year is an election year, so cement demand will be increased in the
pre-election period because there will be more construction activity for creating vote bank.
Disadvantages of Grasim
Myth: - pricing power: - Grasim will acquire 25% market share & 31mt capacity, but the major
issue is that Grasim will acquire bulk of L&Ts capacity in Gujarat & Andhra Pradesh, where
these two states are already surplus capacity states. GACL & ACC are also major player in
Gujarat market. If Grasim will increase the price than GACL has capacity of production that its
plant alone can feed the entire Gujarat market. Whereas Gujarat market is also impacted by
Rajasthan players, which itself is a surplus state. Rajasthan players are having 25% market share
in Gujarat.
Clinker Exports: - L&T exports clinker from Gujarat unit and no price increase over the
prevailing international price is estimated.
Cement Grade: - Grasim cement grade is not the same grade as L&T or GACL.
Control Cement Plant: - legally & operationally, Grasim will acquire control of L&T cement
division in Q1 FY 2004-05, but the effective date is 1 st April 2003. Till Grasim legally acquires
control of CEMCO, it will be run in trust by L&T. in other words for any material decision
Grasim will be consulted.
Sales tax deferred: - In Andhra Pradesh, L&T avails sales tax deferral and this has a direct impact
on profitability because other competitors are getting sales tax exemption in that area and L&T
and Grasims market share is approximately 10% which is a negligible share in that market.
Debt Liability: - Debt liability worth Rs 1868 crore, with the acquisition which will add to the
existing liability of Grasim of Rs 2096 crore, taking the total debt to Rs 3964 crore. This will
give interest burden to the company and it would affect the EPS of the company.
As far as Grasim is concerned it will have to arrange funds of Rs 1176 crore for completing the
acquisition.
Overpaid: - Grasim has overpaid for the acquired cement capacity even if valued at replacement
cost.
121(MMS)
Fails to meet the key criteria: - The acquisition fails to fulfill the key criteria of ROCE accretion.
Consolidated ROCE of Grasim in FY05 is lower than the ROCE of standalone Grasim in FY05.
Here it is clear that acquisition does not add value till FY05 at the least. According to research
analyst report, Grasims expected unconsolidated ROCE in FY05 will be 14.74% and
consolidated will be 12.66% in FY05. This is the situation before writing off goodwill.
Advantages of L&T
Back to core competencies: - After the Demerger process is completed, L&T would be a pure
engineering company which is the core business of L&T. The engineering division reported
revenues of Rs 7445 crore and an operating profit of Rs 559 crore. The company has an order
book position of around Rs 144440 crore. The gain from the power sector would also be huge for
the engineering division.
Large size project order: - Exit from the cement business will help L&T to focus on its core
competence. It would also be able to undertake large size mega project which it was not doing
earlier.
Debt of L&T: - Further the debt of L&T will go down by half to around Rs 1800 crore after the
sale of cement division to Grasim. The swap of high cost debt with low cost debt will help to
save the interest cost. The savings in interest cost itself is going to add significantly to the
bottom-line this year.
Shareholders of L&T: - Shareholders of L&T will also get shares of Cement Company which are
worth another Rs 171.30 as per the Open Offer Price.
Taxation benefit u/s 80 IA & 80 HHB: - Now the companys core business is engineering,
construction etc, so if any infrastructure project executed in India than entire profit on such
project is exempted from tax. But there are certain provision which is to be satisfied U/s 80IA of
Income Tax Act.
Similarly, any project executed outside India, exemption of 20% on profit is applicable. But there
are certain provisions which are to be satisfied U/s 80 HHs
121(MMS)

CASE STUDY-2
Merger of ICICI Bank and BOM:
The ICICI, one of largest financial institutions in India had an asset base of Rs.582 bn in 2000. It is an
integrated wide spectrum of financial activities, with its presence in almost all the areas of financial
services, right from lending, investment and commercial banking, venture capital financing, consultancy
and advisory services to on-line stock broking, mutual funds and custodial services. In July 1998, to
synergize its group operations, restructuring was designed, and as a result ICICI Bank has emerged.
On April 1, 1999, in order to provide a sharp focus, ICICI Bank restructured its business into three SBUs
namely, corporate banking, retail banking and treasury. This restructured model enabled the bank to
provide cross-selling opportunities through ICICIs strong relationships with 1000 corporate entities in
India.
The bank pioneered in taking initiatives and providing one stop financial solutions to customers with
speed and quality. In a way to reach customers, it has used multiple delivery channels including
conventional branch outlets, ATMs, telephone call-centers and also through Internet. The bank also
ventured into a number of B2B and B2C initiatives in the last year to maintain its leadership in India.
The B2B solution provided by the bank is aimed at facilitating on-line supply chain management for its
corporate clients by linking them with their suppliers and dealers in a closed business loop. The bank is
always ahead in advanced IT, and used as a competitive tool to lure new customers.
In February 2000, ICICI Bank was one of the first few Indian banks to raise its capital through American
Depository Shares (ADS) in the international market, which has received an overwhelming response for
its issue of $175 mn, with a total order book of USD 2.2 bn. At the time of filling the prospectus, with
the US Securities and Exchange Commission, the Bank had mentioned that the proceeds of the issue will
be used to acquire a bank.
As on March 31, 2000, bank had a network of 81 branches, 16 extension counters and 175 ATMs. The
capital adequacy ratio was at 19.64 percent of risk-weighted assets, a significant excess of 9 percent over
RBIs benchmark.
ICICI Bank has been scouting for a private banker for merger, with a view to expand its asset and client
base and geographical coverage. Though it had 21 percent of stake, the choice of Federal bank, was not
lucrative due to the employee size (6600), per employee business is as low at Rs.161 lakh and a snail
pace of technical upgradation. While, BOM had an attractive business per employee figure of Rs.202
lakh, a better technological edge and had a vast base in southern India when compared to Federal bank.
While all these factors sound good, a cultural integration would be a tough task ahead for ICICI Bank.
ICICI Bank has announced a merger with 57-year-old Bank of Madura, with 263 branches, out of which
82 of them are in rural areas, with most of them in southern India. As on the day of announcement of
merger (09-12-00), Kotak Mahindra group was holding about 12 percent stake in BOM, the Chairman
BOM, Mr. K.M. Thaiagarajan, along with his associates was holding about 26 percent stake, Spic group
has about 4.7 percent, while LIC and UTI were having marginal holdings. The merger will give ICICI
Bank a hold on South Indian market, which has high rate of economic development.
121(MMS)
The board of Directors at ICICI has contemplated the following synergies emerging from the
merger:
Financial Capability: The amalgamation will enable them to have a stronger financial and
operational structure, which is suppose to be capable of greater resource/deposit mobilization.
And ICICI will emerge as one of the largest private sector banks in the country.
Branch network: The ICICIs branch network would not only increase by 264, but also
increases geographic coverage as well as convenience to its customers.
Customer base: The emerged largest customer base will enable the ICICI bank to offer banking
and financial services and products and also facilitate cross-selling of products and services of
the ICICI group.
Tech edge: The merger will enable ICICI to provide ATMs, Phone and the Internet banking and
financial services and products to a large customer base, with expected savings in costs and
operating expenses.
Focus on Priority Sector: The enhanced branch network will enable the Bank to focus on
micro-finance activities through self-help groups, in its priority sector initiatives through its
acquired 87 rural and 88 semi-urban branches.
Source: Report submitted at EGM on January 19, 2001.
The swap ratio has been approved in the ratio of 1:2 two shares of ICICI Bank for every one share of
BOM. The deal with BOM is likely to dilute the current equity capital by around 12 percent. And the
merger is expected to bring 20 percent gains in EPS of ICICI Bank. And also the banks comfortable
Capital Adequacy Ratio (CAR) of 19.64 percent has declined to 17.6 percent.
Financial Standings of
ICICI Bank and Bank of
Madura
(Rs. in crore)
Parameters
ICICI
Bank
Bank of
Madura
19992000
1998-99
1999-2000 1998-99
Net worth
1129.90
308.33
247.83
211.32
Total Deposits
9866.02
6072.94
3631.00
3013.00
Advances
5030.96
3377.60
1665.42
1393.92
Net profit
105.43
63.75
45.58
30.13
121(MMS)

Share capital
196.81
165.07
11.08
11.08
Capital Adequacy Ratio
19.64%
11.06%
14.25%
15.83%
Gross NPAs/ Gross

Advances
2.54%
4.72%
11.09%
8.13%
Net NPAs /Net Advances
1.53%
2.88%
6.23%
4.66%
Source: Compiled from

Annual reports (March
2000) of ICICI Bank and
BOM
Will the merger of 57-year old BOM, south based old generation bank with a fast growing tech savvy
new generation bank, help the latter? For sure, the stock merger is likely to bring cheer to shareholders
and bank employees of BOM, and some amount of discomfort and anxiety to those of ICICI Bank.
The scheme of amalgamation will increase the equity base of ICICI Bank to Rs. 220.36 cr. ICICI Bank
will issue 235.4 lakh shares of Rs.10 each to the shareholders of BOM. The merged entity will have an
increase of asset base over Rs.160 bn and a deposit base of Rs.131 bn. The merged entity will have 360
branches and a similar number of ATMs across the country and also enable the ICICI to serve a large
customer base of 1.2 million customers of BOM through a wider network, adding to the customer base
to 2.7 million.
Crucial
Parameters:
How they
stand
Book value
of Bank on
Name of the the day of
Bank
merger
announceme
nt
Market price
on the day of Earnings per Dividend
P/E ratio
announceme share
paid (in %)
nt of merger
Profit per
employee
(in lakh)
1999-2000
Bank of
Madura
131.60
38.7
55%
3%
1.73
ICICI Bank 58.0
169.90
5.4
15%
7.83
Global Trust
28.0
Bank
98.40
10.4
22%
9%
12.00
183.0
121(MMS)

UTI Bank
53.8
18.00
3.9
12%
6.91
Source:
Business
Line,
December
10, 2000and
January 28,
2001.
Managing Client base:

The client base of ICICI Bank, after merger, will be as big as 2.7 million from its past 0.5 million, an
accumulation of 2.2 million from BOM. The nature and quality of clients is not of uniform quality. The
BOM has built up its client base for a long time, in a hard way, on the basis of personalized services. In
order to deal with the BOMs clientele, the ICICI Bank needs to redefine its strategies to suit to the new
clientele. The sentiments or a relationship of small and medium borrowers is hurt, it may be difficult for
them to reestablish the relationship, which could also hamper the image of the bank.
121(MMS)
121(MMS)

Merger and Aquisition

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What are some of the key factors that management must consider before approving a merger?

What are some of the key factors that management must consider before approving a merger?

What are some potential benefits and challenges of merging ICICI Bank with Bank of Madura?

What are some potential benefits and challenges of merging ICICI Bank with Bank of Madura?

Mergers And Acquisitions

- 1 PRASHANT NARKHEDE 121(MMS)

Mergers And Acquisitions

- 2 PRASHANT NARKHEDE 121(MMS)

Mergers And Acquisitions

Chapter 1. Introduction to Mergers and Acquisition.

Chapter 2. Purpose of merger and acquisition.

Chapter 3. Types of Mergers.

Chapter 4. Advantages of mergers and takeovers.

Chapter 5. Consideration of Merger and Takeover.

Chapter 6. Reverse Merger.

Chapter 7. Procedure of Merger and Acquisition.

Chapter 8. SEBI takeover code & Regulations.

- 3 PRASHANT NARKHEDE 121(MMS)

Mergers And Acquisitions

Mergers And Acquisitions

Equity shares in the transferee company,

Debentures in the transferee company,

A mix of the above modes.

- 5 PRASHANT NARKHEDE 121(MMS)

Mergers And Acquisitions

- 6 PRASHANT NARKHEDE 121(MMS)

Mergers And Acquisitions

to achieve economies of scale by amalgamating production facilities through more

(3) Market expansion and strategy:

Mergers And Acquisitions

to improve liquidity and have direct access to cash resource;

(5) General gains:

- 8 PRASHANT NARKHEDE 121(MMS)

Mergers And Acquisitions

- 9 PRASHANT NARKHEDE 121(MMS)

Mergers And Acquisitions

Mergers And Acquisitions

(for example, sugar and artificial

Mergers And Acquisitions

Motivations for mergers and acquisitions

Mergers And Acquisitions

(2) From the standpoint of managers

Mergers And Acquisitions

Mergers And Acquisitions

Minority shareholders rights

Mergers And Acquisitions

Mergers And Acquisitions

Alternative modes of acquisition

Mergers And Acquisitions

Mergers And Acquisitions

Mergers And Acquisitions

Reverse Merger under Tax Laws

Mergers And Acquisitions

Mergers And Acquisitions

(2) Reverse merger

Mergers And Acquisitions

Mergers And Acquisitions

Mergers And Acquisitions

Mergers And Acquisitions