ITM BUSINESS SCHOOL

SEBI TAKE OVER CODE

Submitted to Prof.Bharat Shah
By: Moiz Zakir [GLC-IB(09-11) ROLL NO. 40]
 INDIAN TAKEOVER CODE
ABSTRACT

M&A and Takeovers are the powerful ways to achieve corporate growth, but because of their
complex nature, to protect the interest of all the parties, curb the malpractices and to facilitate
orderly development these activities are regulated by a takeover code in most part of the world.
In India after liberalization Govt. started to regulate these activities by introducing a takeover
code. This code has gone through various major and minor changes since then to respond the
challenges it faced during implementation and also to overcome its shortcomings.

INTRODUCTION

Business combination, corporate restructuring and corporate reorganizations are terms used to
cover mergers, acquisitions, amalgamations and takeovers. M & A are very important tools of
corporate growth and thus used worldwide.

INDIAN SCENARIO

Mergers and takeovers are prevalent in India right from the post independence period. But
Government policies of balanced economic development and to curb the concentration of
economic power through introduction of Industrial Development and Regulation Act-1951,
MRTP Act, FERA Act etc. made hostile takeover almost impossible and only a very few M&A
and Takeovers took place in India prior to 90s. But policy of decontrol and liberalization coupled
with globalization of the economy after 1980s, especially after liberalization in 1991 had exposed
the corporate sector to severe domestic and global competition. Companies started to consolidate
themselves in areas of their core competence and divest those businesses where they do not have
any competitive advantage. It led to an era of corporate restructuring through Mergers and
Acquisitions in India.

MEANING OF MERGERS AND AMALGAMATION

According to section 2(1A) of Income Tax Act, 1961 amalgamation is the merger of one or more
companies with another company OR merger of two or more companies (amalgamating
companies) to form a new company (amalgamated company) in such a way that all the assets and
liabilities of amalgamating companies becomes assets and liabilities of the amalgamated
company and shareholders holding not less than 9/10 th in value of the amalgamating companies
becomes shareholding of amalgamated company.
Sections 391 to 394 of the Companies Act, 1956, govern the process of mergers or
amalgamations

MEANING OF ACQUISITION/TAKEOVER

Acquisition refers to the process in which a person or firm acquires controlling interest in another
firm. Acquisition can be friendly or hostile. A friendly acquisition is one in which management
of the target company or controlling group sells its controlling shares to another group at its
accord. Acquisition can take market route also. If management of the target company is unwilling
 to negotiate a contact with prospective acquirer, it can approach directly to the shareholders of
the target company by making an open offer. This is known as Hostile takeover. Takeovers are
governed by ‘SEBI Regulation for Substantial Acquisition of Shares and Takeover’ (most
popularly known as Takeover code)

NEED FOR TAKEOVER CODE

Because of the complexity of the nature of takeover, to protect the interest of small investors as
well as the target company a need was felt to develop a code to regulate the whole process of
acquisition and takeovers based on the principle of transparency, fairness and equal opportunity
to all. The impact of the SEBI’s initiative on the takeover code in the interest of investors seems
to be visible. According to a presentation made by SEBI in 2001, introduction of takeover code
has been resulted in a benefit of Rs. 4250 crores to the shareholders of various companies.

SOME IMPORTANT DEFINITIONS

 Threshold limit:

It is the level of holding when holders have to observe certain provisions. Threshold limit is
defined for two purposes.
(A) For the purpose of Disclosure; if a person holds 5%, 10% or 14% then at each level, he
has to inform to concerned company and stock exchange about the level of his holding.

(B) As the trigger point for open offer; it shows the level of holdings beyond which acquirer
have to make open offer for further acquisition of shares or voting right.

 Open Offer:

An invitation to the shareholders of the target company to surrender/sell their shares to acquirer
at a specified price on or before of the closure of the offer period.

 Conditional offer:

An open offer to the shareholders where acquirer makes a provision that he will accept the shares
only if response is beyond a certain limit.

 Trigger Point:

Level of holdings under various circumstances beyond which the provisions of takeover code
will be applicable.

 Negotiated Offer:

Friendly takeover where shares are acquired from substantial holder (either promoters,
management, Banks and FIs etc.) on negotiation basis.
 Bail -Out Takeover

It refers to the process of rehabilitation of a financially weak company by a public financial

institution or Bank.

 Creeping Facility:

A facility provided to the promoters of the company to increase their stake each year by a certain
maximum limit.

 Person acting in concern:

It can be a person or firm or merchant banker or other who together works for a common cause
of acquiring stake.

EVOLUTION OF TAKEOVER CODE:-

􀂃PRIOR TO 1990

The first attempts at regulating takeovers were made in a limited way by incorporating a clause, viz.
Clause 40, in the listing agreement, which provided for making a public offer to the shareholders of a
company by any person who sought to acquire 25% or more of the voting rights of the company.
Before 1990s M&A and takeovers were regulated by Companies Act, 1956, IDRA 1951, MRTP Act,
1969, FERA, 1973, and SCRA, 1956 (with respect to transfer of shares of listed companies vide
clauses 40A and 40B).

Problems:
In the due course Govt. found that the companies circumvented the threshold limit of 25% for
making a public offer, simply by acquiring voting rights a little below the threshold limit of 25%.
Besides it noted that it was possible to acquire control over a company in the Indian context with
even holding 10% directly. Existing provisions were also not sufficient to consider issues like pricing
and change in the management and control.

􀂃IN 1990

Govt. in consultation with SEBI made following amendments in the Clause 40: -

1. Lowering the threshold acquisition level for making a public offer by the acquirer, from 25% to
10%.
2. Bringing within its fold the aspect of change in management and control (even without
acquisition of shares beyond the threshold limit), as a sufficient ground for making a public offer
3. Introducing the requirement of acquiring a minimum of 20% from the shareholders
4. Stipulating a minimum price at which an offer should be made
5. Providing for disclosure requirements through a mandatory public announcement
6. Requiring a shareholder to disclose his shareholding at level of 5% or above to serve as an
advance notice to the target company about the possible takeover threat
Problems:
These changes helped in making the process of acquisition of shares and takeovers transparent,
provided for protection of investors interests in greater measure and introduced an element of equity
between the various parties concerned by increasing the disclosure requirement. But the clause
suffered from several deficiencies - particularly in its limited applicability and weak enforceability.
Being a part of the listing agreement, it could be made binding only on listed companies and could
not be effectively enforced against an acquirer unless the acquirer itself was a listed company. The
penalty for non-compliance was one common to all violations of a listing agreement, namely,
delisting of the company's shares, which ran contrary to the interest of investors. The amended clause
was unable to provide a comprehensive regulatory framework governing takeovers.

􀂃 IN 1994

In 1992 SEBI was given statutory power to regulate the substantial acquisition of shares and
takeovers. In November 1994 SEBI issued ‘Substantial Acquisition of Shares and Takeovers
Regulation, 1994’ The Regulations preserved the basic framework of Clause 40 (A & B) by retaining
the requirements of - initial disclosure at the level of 5%, threshold limit of 10% for public offer to
acquire minimum percentage of shares at a minimum offer price and making of a public
announcement by the acquirer followed by a letter of offer. Several new provisions were introduced
enabling both negotiated and open market acquisitions, competitive bids, revision of offer,
withdrawal of offer under certain circumstances and restraining a second offer in relation to the same
company within 6 months by the same acquirer, post offer public holding etc. The take-over code
covers three types of takeovers-negotiated takeovers, open market takeovers and bailout takeovers (to
help financially weak companies which do not fall under the purview of BIFR)

Features:

1. Requiring a shareholder to disclose his holding at 5%

2. Threshold limit at 10% for making public offer
3. Changes in management and control dropped as a requirement for making open offer
4. If holding crosses to15% than open offer compulsory (No creeping facility for promoters).
5. Min. price offered to shareholders through open offer will be average of 26weeks high and low
6. Price can be paid either in cash or through exchange of shares
7. If a person were to cross the threshold of 10%, he must make a public offer to acquire a
minimum of 20% of the share capital of the company, and consequent upon such offer, the public
share holding must not fall below 20%. In addition, if a person holding more than 10% shares in
a company, and who has not made any public offer before, were to acquire any further shares, the
public offer will have to be made to the extent of the difference between his present holding and
30%.
8. Acquisition of shares in companies pursuant to a scheme of arrangement or reconstruction
including amalgamation or merger or demerger under any law or regulation, whether Indian or
foreign has been exempted from the public offer provisions. However, prima facie it does not
exempt international acquisitions or mergers carried out under normal course of business as a
result of which there is a change in control of an Indian listed company. For that matter, the Code
defines control very broadly to include both direct and indirect control.
Problems:
1. In companies where public holding was less than 20%, or might fall below that level to comply
with the minimum public offer requirement, it was not possible to comply with the requirement
of maintaining a minimum level of post offer public holding. The two provisions was thus
conflicting with each other.
2. A harmonious construction of all the three provisions implied that if a person was holding more
than 30%, no public offer was required to be made by him, for further acquisition of shares in the
company, even though he has not made any public offer earlier to reach his present holding.
3. It was not clear from the three provisions whether full offer for a company could be made, i.e. a
bid for 100% shares of the company could be made. It does not clearly specify obligations on the
part of the acquirer, the board of directors of the target company and the merchant banker.
Regulations do not specify the circumstances and the time limit within which a revised offer can
be made; nor do the Regulations specify whether revision of all the terms of offer, upward or
downward, is permissible, and circumstances under which withdrawal of offer can be made.

SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVER CODE 1997

MAIN FEATURES

1. Compulsory disclosure:-New regulation made it compulsorily to disclose holdings at the levels

of 5%. So any person whose total holding in the company (Inclusive of shares and voting right
already held) reaches to this limit has to compulsorily disclose his level of holding to the
concerned company and stock exchange.

2. Continual disclosures:- If a person held more than 10% shares or voting right in a company, He
has to disclose his holding within 21 days from the financial year ending on 31 march. (Note:
This limit was revised to 15% in Oct. 98)

3. Trigger of takeover code: - If a person wants to increase his holding beyond 10% (this 10%
would be inclusive of the rights or shares already held by the acquirer or by the persons acting in
concert with him), he has to do make an open offer.

4. Consolidation of holdings/Creeping Acquisition: - If a person hold more than 10% but less
than 51% shares or voting right in a company and want to acquire more than 2% in a financial
year can do only through public offer. (Note: In Oct. 98, 10%, 51 % and 2% limits were
revised as 15%, 75 % and 5% respectively) Acquisition of any additional shares or voting
rights when the acquirer already Have 51 % of the shares or voting rights of the company can be
done through open offer only. (Note: in oct.98, this limit was revised to 75 %)

5. Minimum number of shares to be acquired: - The public offer made by the acquirer to the
shareholders of the target company shall be for a minimum ten per cent of the voting capital of
the company.)(Revised in Feb 98 as 20%)

6. Minimum Price: - Minimum price to be offered to shareholders will be average of Highest and
lowest in the preceding 26 weeks. 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, make an offer to buy the outstanding shares remaining with the
shareholders OR 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 the public
offer, such number of shares so as to satisfy the listing requirements .

7. Offer conditional upon level of acceptance: - an acquirer may make an offer conditional as to
the level of acceptance which may be less than twenty per cent: Conditional offer will be for
minimum 20% percent, although Acceptance level may be less than 20%.

8. Competitive bid: - Any person other than the acquirer can made a competitive offer within 21
days of the public announcement of the offer. Competitive offer shall be at least for the number
of shares for which first public announcement has been made. In case of a competitive bid, the
acquirer who made the first announcement shall have the option to revise his original offer within
14days of such competitive offer, if no such announcement is made by acquirer within 14 days
than original offer will be continue to be valid. 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 up to seven working days prior to the date of closure of the offer

9. Withdrawal of Offer: - Withdrawal of offer can be made consequent to competitive offer or

under following circumstances: - (1) the statutory approval(s) required have been refused; (2) the
sole acquirer, being a natural person, has died; (3) such circumstances as in the opinion of the
Board merits withdrawal.

10. Bail out takeovers: - Separate provisions are given for 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. The Financial
institution shall be responsible for ensuring compliance with the provisions of this Chapter.

11. Exemptions from open offer: - The public offer provisions of the Takeover Code will not be
apply in the following cases:

 Allotment in pursuance of an application made to a public issue

 Allotment pursuant to an application made by the shareholder for rights issue, Subject to such
rights issue not resulting in change in control and management of the company
 Preferential allotment of shares, subject to the condition that at least 75% of the shareholders of
the company shall have approved the preferential allotment and that sufficient disclosures
relating to the post-allotment shareholding pattern, offer price etc., have been made to the
shareholders
 Allotment to the underwriters pursuant to any underwriting agreement
 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.
 Shares held by banks and financial institutions by way of security against loans
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
have approved the acquisition by the acquirer after being made aware that such acquisition would
result in change in control and management.

12. Preferential Offers: - Companies adopt the preferential offer route in varied situations for the
purpose of consolidation of stake by the existing Indian or foreign promoters, induction of
foreign collaborators with foreign technology, gaining management control of the company,
injection of fresh funds for turning around sick companies., Regulations provides that the Board
resolution is to be sent to the stock exchanges, SEBI will grant exemption on case to case basis
under the powers granted to it under section 4 of the regulation.

13. Acquisitions during offer period : except where an offer is made conditional as to minimum
level of acceptances, the acquirer may be allowed to make acquisitions during offer period
subject to the condition that highest price paid for such acquisition be paid to the shareholders
under the public offer, unless it is less than the minimum offer price. are silent on this issue. Such
cases are referred to the takeover panel to decide on case-to-case basis

SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVER CODE 2002

MAIN FEATURES:
(Where changes were made)
1. Creeping acquisition:- Educing the creeping acquisition limit from 10 per cent to 5 per cent
with effect from October 1, 2002.Also, that to calculate this limit financial year ending on 31 st
march will be considered instead of existing 12 month period.

2. Preferential allotments: SEBI has done well to remove the exemption altogether. Hereafter, all
preferential allotment of shares aggregating to an equity stake of 15 per cent or more will be
automatically referred to the Takeover Panel for applicability of open offers.

3. Offer Price: - offer price should be the average of past 26 weeks prices or average of past 2
weeks preceding the date of the public announcement, whichever is higher". Thus it dropped the
concept of average of high and low for last 26 weeks.

4. Consolidation of holdings: Acquirers who already hold 75 per cent in a company and wish to
increase their stake further will have to make a minimum offer of 20 per cent, as against the
earlier provision allowing them to make an offer of less than 20 per cent.

5. Inter-se transfer: A share transfer among different promoters or groups will not attract the
provisions of the code if it is made at a price above less than 25 per cent of that arrived at by the
SEBI formula. However, if the price exceeds 25 per cent, it will attract the provisions of the
code. Inter-se transfers are transfers between shareholders who have been promoters for at least
three years and hold over 5% in the target company. So far, transfer of stakes between promoters
was fully exempt from the Takeover Code.

6. Indirect acquisition: indirect acquisitions were brought under the purview of takeover code.
Any indirect acquisition of over 5% will trigger an open offer. Earlier this was applicable (with a
limit of 15%) only for listed companies.
7. Conditional Offer: 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: only in case the
acquirer.
 Has deposited in escrow account in cash a sum of fifty per cent of the consideration payable
under the public offer;
 Only if he binds himself to rescind the acquisition under the Memorandum of Understanding, in
case the desired level of acceptance is not received.”

8. Competitive Bid: Here a change made in the manner that competitive bid shall be for such
number of shares which will make the total holding of the bidder at least equals to the holding of
the original acquirer together with the shares or voting power already held.

9. Withdrawal of Offer: No public offer, once made, shall be withdrawn except under the
following circumstances: -
 The statutory approval(s) required have been refused
 The sole acquirer, being a natural person, has died
 Such circumstances as in the opinion of the Board merits withdrawal. .

10. Exemptions from code (New Added): If shares are transferred from state level financial
corporations or its subsidiaries to the co-promoters or their successors or assignee(s) or acquirer
who has substituted erstwhile promoter. Investors have been given the freedom to withdraw
shares already tendered in an open offer. On the other hand, if competitive bids exist, the code
has removed the facility of the first acquirer withdrawing from the offer. The code has done away
with the need for acquirers to inform SEBI and the stock exchanges two days prior to a public
announcement. A newspaper advertisement would suffice. The capital markets regulator has also
amended the takeover code to stipulate that an "acquirer" who has made a public offer and
seeking to acquire further shares under the creeping acquisition route cannot acquire shares at a
price higher than the offer price during the period of six months from the date of closure of
public offer. This stipulation, however, will not be applicable in cases where the acquisition is
made through the stock exchanges.

11. Disclosure of holdings: Three-stage disclosure — at 5 per cent, 10 per cent and 14 per cent of
equity to the target company and the stock exchanges.

12. Minimum offer: Minimum size of the offer kept at existing 20%.

13. Mode of Payment: Acquirer can pay either in cash or in terms of exchange of shares

14. Changes in control: change in control" is possible only when a special resolution (as against a
general resolution applicable currently) is passed by shareholders in a general meeting. In
addition, postal ballots are to be allowed at such meetings.

15. Direct acquisitions/global level arrangement: in the case of indirect acquisition or change in
control, a public announcement has to be made by the acquirer within three months of the
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."
LIST OF REFERENCES

1. S. Ramanujam, MERGERS et al, 2000, Tata McGRAW HILL, New Delhi

2. H.R. Machiraju, Mergers, Acquisitions and Takeover, 2003, New Age International Publishers,
New Delhi
3. Ch. Rajeshwer, Mergers and Amalgamation: New Perspective, 2001, ICFAI Press, Hyderabad-
India
4. www.sebi.gov.in, SEBI Substantial Acquisition of Shares and Take over code, 1997
5. www.sebi.gov.in, Bhagwati Committee Report
7. Business Line: various issues year 2002 viewed on net
8. ‘Corporate governance structure, mergers and takeovers in India in the post liberalization
regime-proposals and policies’ By Nandita Das Gupta
9. www.capital market.com on various dates
11. Economic Reviews: Various issues
15. Takeovers in India-An overview By Vijay sambamurthi& siddarth Shah, at