What is meant by Takeovers & Substantial acquisition of shares?
When an “acquirer” takes over the control of the “target company”, it is termed as takeover. When an acquirer acquires “substantial quantity of shares or voting rights” of the Target Company, it results into substantial acquisition of shares. The term “Substantial” which is used in this context has been clarified subsequently.
What is a Target Company?
A Target Company is a company whose shares are listed on any stock exchange and whose shares or voting rights are acquired/being acquired or whose control is taken over/being taken over by an acquirer.
Who is an Acquirer?
An acquirer means any individual/company/any other legal entity which intends to acquire or acquires substantial quantity of shares or voting rights of target company or acquires or agrees to acquire control over the target company. It includes persons acting in concert (PAC) with the acquirer.
What is meant by the term “Persons Acting in Concert (PACs)”?
PACs are individual(s)/company(ies)/ any other legal entity(ies) who are acting together for a common objective or for a purpose of substantial acquisition of shares or voting rights or gaining control over the target company pursuant to an agreement or understanding whether formal or informal. Acting in concert would imply co-operation, co-ordination for acquisition of voting rights or control, either direct or indirect.
The concept of PAC assumes significance in the context of substantial acquisition of shares since it is possible for an acquirer to acquire shares or voting rights in a company “in concert” with any other person in such a manner that the acquisition made by them may remain individually below the threshold limit but collectively may exceed the threshold limit. Unless the contrary is established certain entities are deemed to be persons acting in concert like companies with its holding company or subsidiary company, mutual funds with its sponsor / trustee / asset management company, etc.
How substantial quantity of shares or voting rights is defined?
The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 has defined substantial quantity of shares or voting rights distinctly for two different purposes:
(I) Threshold of disclosure to be made by acquirer(s):
1) 5% or more but less than 15% shares or voting rights: A person who, alongwith PAC, if any, (collectively referred to as “Acquirer” hereinafter) acquires shares or voting rights (which when taken together with his existing holding) would entitle him to exercise 5% or 10% or 14% shares or voting rights of target company, is required to disclose the aggregate of his shareholding to the target company within 2 days of acquisition or within 2 days of receipt of intimation of allotment of shares.
2) More than 15% shares or voting rights: (a) Any person who holds more than 15% shares but less than 75% or voting rights of target company, and who purchases or sells shares aggregating to 2% or more shall disclose such purchase/sale along with the aggregate of his shareholding to the target company and the stock exchanges within 2 working days. (b) Any person who holds more than 15% shares or voting rights of target company or every person having control over the Target Company within 21 days from the financial year ending March 31 as well as the record date fixed for the purpose of dividend declaration, disclose every year his aggregate shareholding to the target company. The target company, in turn, is required to inform all the stock exchanges where the shares of target company are listed, every year within 30 days from the financial year ending March 31 as well as the record date fixed for the purpose of dividend declaration.
(II) Trigger point for making an open offer by an acquirer
1) 15% shares or voting rights: An acquirer who intends to acquire shares which alongwith his existing shareholding would entitle him to exercise 15% or more voting rights, can acquire such additional shares only after making a public announcement (PA) to acquire atleast additional 20% of the voting capital of Target Company from the shareholders through an open offer. 2) Creeping acquisition limit: An acquirer who is having 15% or more but less than 75% of shares or voting rights of a target company, can acquire such additional shares as would entitle him to exercise more than 5% of the voting rights in any financial year only after making a public announcement to acquire atleast 20% shares of target company from the shareholders through an open offer. 3) Consolidation of holding: An acquirer, who is having 75% shares or voting rights of a target company, can acquire further shares or voting rights only through an open offer from the\ shareholders of the target company.
What is the meaning of “control”?
Control includes the right to appoint directly or indirectly or by virtue of agreements or in any other manner majority of directors on the Board of the target company or to control management or policy decisions affecting the target company.
What is a Public Announcement (PA)?
A public announcement is an announcement made in the newspapers by the acquirer primarily disclosing his intention to acquire shares of the target company from existing shareholders by means of an open offer.
What information do I get in the Public Announcement?
The disclosures in the announcement include the offer price, number of shares to be acquired from the public, identity of acquirer, purpose of acquisition, future plans of acquirer, if any, regarding the target company, change in control over the target company, if any, the procedure to be followed by acquirer in accepting the shares tendered by the shareholders and the period within which all the formalities pertaining to the offer would be completed.
What is the objective of Public Announcement?
The Public Announcement is made to ensure that the shareholders of the target company are aware of an exit opportunity available to them through ensuing open offer.
Who is required to make a Public Announcement and when is the Public Announcement required to be made?
The Acquirer is required to make PA through the Merchant Banker (MB) within four working days of the entering into an agreement to acquire shares or deciding to acquire shares/voting rights of target company or after any such change or changes as would result in change in control over the target company. Incase of indirect acquisition or change in control, acquier can make public announcement within three months of consumnation of acquisition or change in control or restructuring of the parent or the Company holding shares of or control over the target Company in India.
What is a letter of offer?
A letter of offer is a document addressed to the shareholders of the target company containing disclosures of the acquirer/PACs, target company, their financials, justification of the offer price, the offer price, number of shares to be acquired from the public, purpose of acquisition, future plans of acquirer, if any, regarding the target company, change in control over the target company, if any, the procedure to be followed by acquirer in accepting the shares tendered by the shareholders and the period within which all the formalities to the offer would be completed.
Does SEBI “approve” the draft letter of offer?
No. SEBI does not clear, vet or approve the Letter of Offer. While the acquirer is primarily responsible for the correctness, adequacy and disclosure of information in the Letter of Offer, the Merchant Banker is expected to exercise due diligence to ensure that the Acquirer duly discharges its responsibility.
When can I, as a shareholder of Target Company, expect to get the letter of offer?
The MB will send the letter of offer within 45 days from the date of PA alongwith the blank acceptance form, to all the shareholders whose names appear in the register of the company on the specified date.
Within what period I can accept the offer?
The offer remains open 30 days. You are required to send your share certificate(s) / related documents to registrar or MB as specified in PA and letter of offer so as to ensure delivery/credit latest within the last date. You are advised to send such documents under registered post.
Under no circumstances such documents should be sent to the acquirer.
Within what period would I be paid for shares accepted in the offer?
The acquirer is required to pay consideration to all those shareholders whose shares are accepted under the offer, within 30 days from the closure of offer.
How is the price determined in an open offer?
SEBI does not decide or approve the offer price. The acquirer/Merchant Banker is required to ensure that all the relevant parameters are taken in to consideration for fixing the offer price and that justification for the same is disclosed in the letter of offer. The relevant parameters are:
a. negotiated price under the agreement which triggered the open offer.
b. highest price paid by acquirer or persons acting in concert with him for any acquisitions, including by way of allotment in public or rights or preferential issue during the 26 week period prior to the date of the PA.
c. average of weekly high and low of the closing prices of shares as quoted on the stock exchanges, where shares of the target company are most frequently traded during 26 weeks or average of the daily high and low prices of shares during the 2 weeks prior to the date of the Public Announcement. In case the shares of Target Company are not frequently traded then instead of point (c) above, parameters based on the fundamentals of the company such as return on net worth of the company, book value per share, EPS etc. are required to be considered and disclosed. Any amount paid in excess of 25% of the offer price towards noncompete agreement, shall be added to the offer price.
What are the criteria for determining whether the shares of the Target Company are frequently or infrequently traded?
The shares of the target company will be deemed to be infrequently traded if the annualised trading turnover in that share during the preceding 6 calendar months prior to the month in which the PA is made is less than 5% (by number of shares) of the listed shares. If the
said turnover is 5% or more, the shares will be deemed to be frequently traded.
Are only those shareholders whose names appear in the register of Target Company on a specified date, eligible to tender their shares in the open offer?
No. Any shareholder who holds the shares on or before the date of closure of the offer is eligible to participate in the offer.
What is a competitive bid?
Competitive bid is an offer made by a person, other than the acquirer who has made the first public announcement.
In case of a competitive offer, can I switch my acceptance to a better offer after I have availed the first offer at a lower price?
Yes, switching of acceptances between different offers is possible. The shareholder has the option to withdraw acceptance tendered by him up to three working days prior to the date of closure of the offer. To enable the shareholders to be in a better position to decide as to which of the subsisting offers is better and also not to cause last minute decisions / confusions, the offer price and size are effectively frozen for the last 7 working days prior to the closing date of the offers. You may wait till the commencement of that period to be aware of upward revisions in the offer price and size of the offers, if any.
Can an acquirer withdraw the offer once made?
No, the offer once made can not be withdrawn except in the following circumstances:
_ 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.
How can I avail the offer if I have not received the letter of offer?
The PA contains procedure for such cases i.e. where the shareholders do not receive the letter of offer or do not receive the letter of offer in time. The shareholders are usually advised to send their consent to registrar to offer, if any or to MB on plain paper stating the name, address, number of shares held, distinctive folio no., number of shares offered and bank details alongwith the documents mentioned in the PA, before closure of the offer. The PA and the letter of offer along with the form of acceptance
is available on the SEBI website at www.sebi.gov.in.
Am I compulsorily required to accept the offer?
No. The decision to accept or forgo the offer lies exclusively with you.
How do I decide as to whether I should hold the shares or accept the offer or sell the shares in the share market?
The decision as to whether you should hold your shares or accept the offer or should sell the shares in the share market lies with you. However, you should read the letter of offer and take a decision in this regard after considering various factors such as the price of the offer, number of shares likely to be accepted under the offer, etc.
Will be compensated for delay in getting payment under the offer?
Acquires are required to complete the payment of consideration to shareholders who have accepted the offer within 30 days from the date of closure of the offer. In case the delay in payment is an account of non receipt of statutory approvals and if the same is not due to wilful default or neglect on part of the acquire, the acquires would be liable to pay interest to the shareholders for the delayed period in accordance with Regulations.
If the delay in payment of consideration is not due to the above reasons, it would be treated as a violation of the Regulations and therefore, also liable for other action in terms of the Regulations.
Is the acquirer required to accept all my shares under the open offer?
No, if the shares received by the acquirer under the offer are more than the shares agreed to be acquired by him, the acceptance would be on a proportionate basis.
What are the safeguards incorporated in the takeover process so as to ensure that I get my payment under the offer / receive back my share certificates?
Before making the PA, the acquirer has to open an escrow account in the form of cash deposited with a scheduled commercial bank or bank guarantee in favour of the MB or deposit of acceptable securities with appropriate margin with the MB. The MB is also required to confirm that firm financial arrangements are in place for fulfilling the offer obligations. In case, the acquirer fails to make the payment, MB has a right to forfeit the escrow account and distribute the proceeds equally amongst the target company, regional SEs (for credit to investor protection fund) and the shareholders who have accepted the offer. The MB is required to ensure that the rejected documents which are kept in the custody of the Registrar / MB are sent back to the shareholder through Registered Post.
Whether all types of acquisitions of shares or voting rights over and above the specified limits necessarily require an acquirer to make a public announcement followed up by an open offer?
No. Certain types of acquisitions are specifically exempted from the open offer process subject to the acquirer complying with the requirements/conditions, as may be applicable, for such acquisitions. Such exemptions include acquisitions arising out of firm allotment in public issues, right issues, inter-se transfer amongst group companies, relatives, promoters, etc.
What happens if the acquire/Target Company/Merchant Banker violates the provisions of the Regulations?
The Regulations have laid down the general obligations of acquirer, target company and the MB. For failure to carry out these obligations as well as for failure/non compliance of other provisions of the Regulations, the Regulations have laid down the penalties for noncompliance.
Do mergers and amalgamations of companies also fall under the regulatory purview of SEBI?
No, only takeovers and substantial acquisition of shares of a listed company fall within the regulatory purview of SEBI. Mergers and Amalgamations are outside the purview of SEBI and they are a subject
matter of the Companies Act, 1956.
Whom can I approach for Grievance Redressal/further information?
You should approach the concerned MB in this regard. If you do not get satisfactory response thereto, you may write to SEBI at Mittal Court, B Wing, First Floor, Nariman Point, Mumbai - 400021. You may also refer to SEBI website at www.sebi.gov.in
When an “acquirer” takes over the control of the “target company”, it is termed as takeover. When an acquirer acquires “substantial quantity of shares or voting rights” of the Target Company, it results into substantial acquisition of shares. The term “Substantial” which is used in this context has been clarified subsequently.
What is a Target Company?
A Target Company is a company whose shares are listed on any stock exchange and whose shares or voting rights are acquired/being acquired or whose control is taken over/being taken over by an acquirer.
Who is an Acquirer?
An acquirer means any individual/company/any other legal entity which intends to acquire or acquires substantial quantity of shares or voting rights of target company or acquires or agrees to acquire control over the target company. It includes persons acting in concert (PAC) with the acquirer.
What is meant by the term “Persons Acting in Concert (PACs)”?
PACs are individual(s)/company(ies)/ any other legal entity(ies) who are acting together for a common objective or for a purpose of substantial acquisition of shares or voting rights or gaining control over the target company pursuant to an agreement or understanding whether formal or informal. Acting in concert would imply co-operation, co-ordination for acquisition of voting rights or control, either direct or indirect.
The concept of PAC assumes significance in the context of substantial acquisition of shares since it is possible for an acquirer to acquire shares or voting rights in a company “in concert” with any other person in such a manner that the acquisition made by them may remain individually below the threshold limit but collectively may exceed the threshold limit. Unless the contrary is established certain entities are deemed to be persons acting in concert like companies with its holding company or subsidiary company, mutual funds with its sponsor / trustee / asset management company, etc.
How substantial quantity of shares or voting rights is defined?
The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 has defined substantial quantity of shares or voting rights distinctly for two different purposes:
(I) Threshold of disclosure to be made by acquirer(s):
1) 5% or more but less than 15% shares or voting rights: A person who, alongwith PAC, if any, (collectively referred to as “Acquirer” hereinafter) acquires shares or voting rights (which when taken together with his existing holding) would entitle him to exercise 5% or 10% or 14% shares or voting rights of target company, is required to disclose the aggregate of his shareholding to the target company within 2 days of acquisition or within 2 days of receipt of intimation of allotment of shares.
2) More than 15% shares or voting rights: (a) Any person who holds more than 15% shares but less than 75% or voting rights of target company, and who purchases or sells shares aggregating to 2% or more shall disclose such purchase/sale along with the aggregate of his shareholding to the target company and the stock exchanges within 2 working days. (b) Any person who holds more than 15% shares or voting rights of target company or every person having control over the Target Company within 21 days from the financial year ending March 31 as well as the record date fixed for the purpose of dividend declaration, disclose every year his aggregate shareholding to the target company. The target company, in turn, is required to inform all the stock exchanges where the shares of target company are listed, every year within 30 days from the financial year ending March 31 as well as the record date fixed for the purpose of dividend declaration.
(II) Trigger point for making an open offer by an acquirer
1) 15% shares or voting rights: An acquirer who intends to acquire shares which alongwith his existing shareholding would entitle him to exercise 15% or more voting rights, can acquire such additional shares only after making a public announcement (PA) to acquire atleast additional 20% of the voting capital of Target Company from the shareholders through an open offer. 2) Creeping acquisition limit: An acquirer who is having 15% or more but less than 75% of shares or voting rights of a target company, can acquire such additional shares as would entitle him to exercise more than 5% of the voting rights in any financial year only after making a public announcement to acquire atleast 20% shares of target company from the shareholders through an open offer. 3) Consolidation of holding: An acquirer, who is having 75% shares or voting rights of a target company, can acquire further shares or voting rights only through an open offer from the\ shareholders of the target company.
What is the meaning of “control”?
Control includes the right to appoint directly or indirectly or by virtue of agreements or in any other manner majority of directors on the Board of the target company or to control management or policy decisions affecting the target company.
What is a Public Announcement (PA)?
A public announcement is an announcement made in the newspapers by the acquirer primarily disclosing his intention to acquire shares of the target company from existing shareholders by means of an open offer.
What information do I get in the Public Announcement?
The disclosures in the announcement include the offer price, number of shares to be acquired from the public, identity of acquirer, purpose of acquisition, future plans of acquirer, if any, regarding the target company, change in control over the target company, if any, the procedure to be followed by acquirer in accepting the shares tendered by the shareholders and the period within which all the formalities pertaining to the offer would be completed.
What is the objective of Public Announcement?
The Public Announcement is made to ensure that the shareholders of the target company are aware of an exit opportunity available to them through ensuing open offer.
Who is required to make a Public Announcement and when is the Public Announcement required to be made?
The Acquirer is required to make PA through the Merchant Banker (MB) within four working days of the entering into an agreement to acquire shares or deciding to acquire shares/voting rights of target company or after any such change or changes as would result in change in control over the target company. Incase of indirect acquisition or change in control, acquier can make public announcement within three months of consumnation of acquisition or change in control or restructuring of the parent or the Company holding shares of or control over the target Company in India.
What is a letter of offer?
A letter of offer is a document addressed to the shareholders of the target company containing disclosures of the acquirer/PACs, target company, their financials, justification of the offer price, the offer price, number of shares to be acquired from the public, purpose of acquisition, future plans of acquirer, if any, regarding the target company, change in control over the target company, if any, the procedure to be followed by acquirer in accepting the shares tendered by the shareholders and the period within which all the formalities to the offer would be completed.
Does SEBI “approve” the draft letter of offer?
No. SEBI does not clear, vet or approve the Letter of Offer. While the acquirer is primarily responsible for the correctness, adequacy and disclosure of information in the Letter of Offer, the Merchant Banker is expected to exercise due diligence to ensure that the Acquirer duly discharges its responsibility.
When can I, as a shareholder of Target Company, expect to get the letter of offer?
The MB will send the letter of offer within 45 days from the date of PA alongwith the blank acceptance form, to all the shareholders whose names appear in the register of the company on the specified date.
Within what period I can accept the offer?
The offer remains open 30 days. You are required to send your share certificate(s) / related documents to registrar or MB as specified in PA and letter of offer so as to ensure delivery/credit latest within the last date. You are advised to send such documents under registered post.
Under no circumstances such documents should be sent to the acquirer.
Within what period would I be paid for shares accepted in the offer?
The acquirer is required to pay consideration to all those shareholders whose shares are accepted under the offer, within 30 days from the closure of offer.
How is the price determined in an open offer?
SEBI does not decide or approve the offer price. The acquirer/Merchant Banker is required to ensure that all the relevant parameters are taken in to consideration for fixing the offer price and that justification for the same is disclosed in the letter of offer. The relevant parameters are:
a. negotiated price under the agreement which triggered the open offer.
b. highest price paid by acquirer or persons acting in concert with him for any acquisitions, including by way of allotment in public or rights or preferential issue during the 26 week period prior to the date of the PA.
c. average of weekly high and low of the closing prices of shares as quoted on the stock exchanges, where shares of the target company are most frequently traded during 26 weeks or average of the daily high and low prices of shares during the 2 weeks prior to the date of the Public Announcement. In case the shares of Target Company are not frequently traded then instead of point (c) above, parameters based on the fundamentals of the company such as return on net worth of the company, book value per share, EPS etc. are required to be considered and disclosed. Any amount paid in excess of 25% of the offer price towards noncompete agreement, shall be added to the offer price.
What are the criteria for determining whether the shares of the Target Company are frequently or infrequently traded?
The shares of the target company will be deemed to be infrequently traded if the annualised trading turnover in that share during the preceding 6 calendar months prior to the month in which the PA is made is less than 5% (by number of shares) of the listed shares. If the
said turnover is 5% or more, the shares will be deemed to be frequently traded.
Are only those shareholders whose names appear in the register of Target Company on a specified date, eligible to tender their shares in the open offer?
No. Any shareholder who holds the shares on or before the date of closure of the offer is eligible to participate in the offer.
What is a competitive bid?
Competitive bid is an offer made by a person, other than the acquirer who has made the first public announcement.
In case of a competitive offer, can I switch my acceptance to a better offer after I have availed the first offer at a lower price?
Yes, switching of acceptances between different offers is possible. The shareholder has the option to withdraw acceptance tendered by him up to three working days prior to the date of closure of the offer. To enable the shareholders to be in a better position to decide as to which of the subsisting offers is better and also not to cause last minute decisions / confusions, the offer price and size are effectively frozen for the last 7 working days prior to the closing date of the offers. You may wait till the commencement of that period to be aware of upward revisions in the offer price and size of the offers, if any.
Can an acquirer withdraw the offer once made?
No, the offer once made can not be withdrawn except in the following circumstances:
_ 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.
How can I avail the offer if I have not received the letter of offer?
The PA contains procedure for such cases i.e. where the shareholders do not receive the letter of offer or do not receive the letter of offer in time. The shareholders are usually advised to send their consent to registrar to offer, if any or to MB on plain paper stating the name, address, number of shares held, distinctive folio no., number of shares offered and bank details alongwith the documents mentioned in the PA, before closure of the offer. The PA and the letter of offer along with the form of acceptance
is available on the SEBI website at www.sebi.gov.in.
Am I compulsorily required to accept the offer?
No. The decision to accept or forgo the offer lies exclusively with you.
How do I decide as to whether I should hold the shares or accept the offer or sell the shares in the share market?
The decision as to whether you should hold your shares or accept the offer or should sell the shares in the share market lies with you. However, you should read the letter of offer and take a decision in this regard after considering various factors such as the price of the offer, number of shares likely to be accepted under the offer, etc.
Will be compensated for delay in getting payment under the offer?
Acquires are required to complete the payment of consideration to shareholders who have accepted the offer within 30 days from the date of closure of the offer. In case the delay in payment is an account of non receipt of statutory approvals and if the same is not due to wilful default or neglect on part of the acquire, the acquires would be liable to pay interest to the shareholders for the delayed period in accordance with Regulations.
If the delay in payment of consideration is not due to the above reasons, it would be treated as a violation of the Regulations and therefore, also liable for other action in terms of the Regulations.
Is the acquirer required to accept all my shares under the open offer?
No, if the shares received by the acquirer under the offer are more than the shares agreed to be acquired by him, the acceptance would be on a proportionate basis.
What are the safeguards incorporated in the takeover process so as to ensure that I get my payment under the offer / receive back my share certificates?
Before making the PA, the acquirer has to open an escrow account in the form of cash deposited with a scheduled commercial bank or bank guarantee in favour of the MB or deposit of acceptable securities with appropriate margin with the MB. The MB is also required to confirm that firm financial arrangements are in place for fulfilling the offer obligations. In case, the acquirer fails to make the payment, MB has a right to forfeit the escrow account and distribute the proceeds equally amongst the target company, regional SEs (for credit to investor protection fund) and the shareholders who have accepted the offer. The MB is required to ensure that the rejected documents which are kept in the custody of the Registrar / MB are sent back to the shareholder through Registered Post.
Whether all types of acquisitions of shares or voting rights over and above the specified limits necessarily require an acquirer to make a public announcement followed up by an open offer?
No. Certain types of acquisitions are specifically exempted from the open offer process subject to the acquirer complying with the requirements/conditions, as may be applicable, for such acquisitions. Such exemptions include acquisitions arising out of firm allotment in public issues, right issues, inter-se transfer amongst group companies, relatives, promoters, etc.
What happens if the acquire/Target Company/Merchant Banker violates the provisions of the Regulations?
The Regulations have laid down the general obligations of acquirer, target company and the MB. For failure to carry out these obligations as well as for failure/non compliance of other provisions of the Regulations, the Regulations have laid down the penalties for noncompliance.
Do mergers and amalgamations of companies also fall under the regulatory purview of SEBI?
No, only takeovers and substantial acquisition of shares of a listed company fall within the regulatory purview of SEBI. Mergers and Amalgamations are outside the purview of SEBI and they are a subject
matter of the Companies Act, 1956.
Whom can I approach for Grievance Redressal/further information?
You should approach the concerned MB in this regard. If you do not get satisfactory response thereto, you may write to SEBI at Mittal Court, B Wing, First Floor, Nariman Point, Mumbai - 400021. You may also refer to SEBI website at www.sebi.gov.in
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