The New Regulations have made, inter alia, three fundamental modifications to the Takeover Code, which experts believe will substantially affect merger and acquisition activity in the Indian market. The first change has been to increase the initial open offer threshold, which triggers the application of the Takeover Regulations, from 15% to 25% of the shareholding or voting rights in a company. The second change has been to prohibit the payment of separate non-compete fees to the controlling promoters in the acquired company. The third change has been to increase the minimum offer size provided by the acquirer to public shareholders of the target company from 20% to 26%. While most of the Committee’s recommendations have been approved by SEBI in their entirety, a few have been modified to accommodate the views of Indian chambers of commerce, such as FICCI, ASSOCHAM and CII and of industry experts and professionals on the Committee’s report. Two notable proposals of the Committee which were rejected were the proposal of 100% minimum offer size and the proposal of automatic delisting of shares on a particular level of shareholding being reached by the acquirer. Merger & Acquisition in India has been governed by the age-old takeover rules. It seems that now, the Securities and Exchange Board of India (SEBI) has realized that these rules need to be revamped to keep them in line with the ever-changing global scenario. On September 2011, the SEBI amended the new set of takeover rules i.e.; the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. The main purpose is to prevent hostile takeovers and at the same time, provide some more opportunities of exit to innocent shareholders who do not wish to be associated with a particular acquirer. With these rules coming into force, both promoter and public shareholders of a listed company would now get the same price for their shares being purchased by an acquirer. In another shareholder-friendly move, SEBI has scrapped the non-compete fee or control premium, which were being paid to only the promoters earlier and could have been as much as 25% of the public offer price. The SEBI has successfully done one part of the reform process by preparing the new takeover code, the other part requires its successful implementation.
Provisions and Recent changes in the code
One of the biggest advantages of acquiring shares in, and/or control over, a listed company pursuant to a scheme of arrangement is that such an acquisition is exempt from the requirements of making a mandatory open offer under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Regulations), subject to certain conditions being met. Until the recent amendment to the Takeover Regulations (as discussed later), Regulation 10(1)(d)(ii) of the Takeover Regulations exempted acquisitions pursuant to a scheme of arrangement or reconstruction directly involving the target company and approved by an order of a court or tribunal or a competent authority under any law or regulation, Indian or foreign, from the obligation to make an open offer under the Takeover Regulations. Regulation 10(1)(d)(iii) of the Takeover Regulations exempted acquisitions pursuant to a scheme of arrangement or reconstruction not directly involving the target company and approved by an order of a court or a tribunal or a competent authority under any law or regulation, Indian or foreign, subject to: The component of cash and cash equivalents in the consideration paid to be less than 25% of the consideration paid under the scheme.
Where after implementation of the scheme of the arrangement, persons directly or indirectly holding at least 33% per cent of the voting rights in the combined entity are the same as the persons who held the entire voting rights before the implementation of the scheme. The rationale for exempting schemes of arrangement, whether involving the target company directly or not, has been to facilitate genuine transactions. While assessing genuineness may be simpler in the case of schemes involving the target company directly, in respect of exemption for mergers not involving or dealing with the target company. However, the committee concluded that such an elimination of the exemption may not be equitable in the case of transactions that are genuine mergers (which several other laws including the Income Tax Act, 1961 also recognize as deserving special treatment). A court, tribunal, or a competent authority acts as a watchdog, and acquisitions pursuant to an order passed by them were deemed to be genuine transactions, thereby being exempted from mandatory open offer obligations under the Takeover Regulations. The Takeover Regulations, 1997, in fact, did not mandate for the scheme to be approved by an order of a court, tribunal or competent authority, and this condition was brought in the Takeover Regulations in 2011. Recently, the Securities and Exchange Board of India (SEBI) has, pursuant to the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Amendment Regulations, 2019, deleted the references to ‘competent authority’ in both Regulation 10(1)(d)(ii) and Regulation 10(1)(d)(iii) of the Takeover Regulations (the Amendment), with effect from March 29, 2019.
Prior to the Amendment, the Takeover Regulations did not define the term ‘competent authority’ nor did the regulations provide any guidance on it. Schemes of arrangement in India need to mandatorily be approved by the NCLT (which took over the historical jurisdiction of high courts post the effectiveness of the Companies Act, 2013). Globally, however, the merger process varies vastly across jurisdictions, with many jurisdictions not requiring any formal sanction/ order of a court or any other regulatory authority for effecting a merger. Despite the detailed process prescribed under the laws of the relevant jurisdictions, SEBI had, in each of the above cases, stated that given that the mergers would be not approved by an order of a court or tribunal or a competent authority, acquisition of shares/control in the listed Indian companies pursuant to such mergers would not be exempt under Regulation 10(1)(d)(iii) of the Takeover Regulations. From an analysis of the relevant interpretative letters, it appears that SEBI looks for whether there is due consideration given by a court or regulatory authority (and the possibility of a rejection of merger by them) in the relevant jurisdiction in question while analyzing whether an overseas merger would be exempt from the requirement to make an open offer in India. With the Amendment, SEBI has laid to rest any scope of reading the process, and filings made with relevant regulatory authorities overseas within the ambit of ‘competent authority’. The rationale for the Amendment, however, remains unclear.
The global effect of takeovers
Global transactions involving the position of shares in, or control over, Indian listed companies will be significantly impacted with the Amendment, if the laws of the relevant jurisdiction do not require procuring an order of a court or tribunal to approve the merger. Moreover, even if such scheme is approved by a regulatory authority or statutory authority (such as registrar of companies or securities exchange regulator), who has the authority to reject the scheme unless such scheme is approved by a court/ tribunal, no exemption would now be available under Regulation 10(1)(d)(iii) of the Takeover Regulations. SEBI should re-consider its approach in light of global transactions, specifically restructurings in large groups – given that the larger rationale for providing an exemption in schemes of arrangement is to facilitate genuine commercial transactions. If a transaction is being undertaken in compliance with the laws of the relevant jurisdictions, SEBI should exempt such acquisitions from the requirement of making a mandatory open offer under the Takeover Regulations in India.
Safeguards to protect shareholder’s interests
Before making the Public Announcement the acquirer has to create an escrow account having 25% of total consideration payable under the offer of size Rs. 100 crores (Additional 10% if offer size more than 100 crores). The Escrow could be in the form of cash deposited with a scheduled commercial bank, bank guarantee in favour of the Merchant Banker or deposit of acceptable securities with an appropriate margin with the Merchant Banker. The Merchant Banker is also required to confirm that firm financial arrangement are in place for fulfilling the offer obligations. In case, the acquirer fails to make a payment, Merchant Banker has a right to forfeit the escrow account and distribute the proceeds in the following way-
1/3 of the net to the et company 1/3 to regional Stock Exchanges, for credit to investor protection fund etc. 1/3 to be distributed on pro-rata basis among the shareholders who have accepted the offer.
Disclosure of Acquisition or disposal
An Acquirer making an Acquisition under the Takeover Code, 2011 in a Target Company where the acquired shares and voting rights together with any existing shares or voting rights of the Acquirer and PAC amount to 5% or more of the shareholding of the Target Company, shall make disclosures of their aggregate shareholding and voting rights in such Target Company and every Acquisition or disposal of shares of such Target Company representing 2% or more of the shares or voting rights in such Target Company. The disclosure required under the Takeover Code, 2011 shall be made within 2 working days of the receipt of intimation of allotment of shares, or the acquisition of shares or voting rights in the Target Company to: • Every stock exchange where the shares of the Target Company are listed; and • The Target Company at its registered office. The Takeover Code, 2011 provides for more frequent and stringent disclosures on the part of the Acquirer. There has been a significant amendment in the previous Regulation 7 of the Takeover Code, 1997 that dealt with the Acquisition of 5% and more shares or voting rights of a company. Erstwhile Regulation 7 stipulated that disclosures of shareholding have to be made on the Acquisition of more than 5% 10%, 14%, 54% and 74% shares in the Target Company. The Takeover Code, 2011 removes the disclosure in 5 stages. Regulation 28 of the Takeover Code, 2011 states that a disclosure will be made at the time of the Acquisition of 5% of the shares or voting rights in the company.
Minimum public shareholding
Acquirer cannot delist voluntarily for a year from open offer, if his shareholding exceeds maximum permissible limit. The acquirer is not entitled to acquire or enter into any agreement to acquire shares or voting rights exceeding maximum permissible non-public shareholding (generally 75%). • If maximum permissible non-public shareholding exceeds, say 75%, pursuant to open offer – the acquirer is required to bring down his or her shareholding to 75% within the time specified as per SCRR. • The acquirer, whose shareholding exceeds 75% pursuant to an open offer, cannot make a voluntary • Delisting offer under the SEBI. Delisting Regulations, for one year from the date of completion of open offer.
The underlying vein of all changes recommended by the Committee, which SEBI has eventually accepted, is that of promotion of the welfare of public shareholders. The major change that the New Regulations have brought about is that there now exits parity in the benefits accruing on exit from a company to the controlling shareholders and the ordinary shareholders. With every amendment, SEBI has endeavoured to make the Code more efficient and effective. This amendment has also been made with the purpose of streamlining and balancing the code and making it wider in its application. SEBI has been in itself one of the best regulators of the rities market in the world. Its efforts in making the securities market more advanced, sophisticated yet fair and clean are commendable. Though the new takeover code has increased the threshold limit and the minimum offer size, it is also felt that the RBI should do away with the restriction on banks to fund domestic acquisitions. The SEB has successfully done one part of the reform process by preparing the new takeover code; the other part requires it successful implementation./This has been brought about through the abolition of non-compete fees, and to some extent by the raising of the minimum public offer level to 26%. We believe that these are welcome changes, which shift the balance of convenience away from the acquirers in whose favour they were heavily tilted under the previous code. On the whole, there are two major advantages that have been brought about by the New Regulations. First, SEBI has opened the gates for greater investments through a higher trigger threshold, which has the potential to positively affect our sluggish capital markets. Second, the process of acquisitions has now become more meaningful and refined, with the Takeover Regulations now being used by only those acquirers who wish to control management of the company, as opposed to merely enjoying a high level of shareholding and substantial voting power. I believe that the New Regulations will incentivize merger and acquisition activity in the country, with the additional benefit of equal treatment of public and controlling shareholders. For the above reasons, we believe that the aggregate effect of the New Regulations on the Indian capital market will be a positive one, for the reasons abovementioned. We also believe that there are some inconsistencies in SEBI’s handling of the issue of separate non-compete fees. There are three primary reasons why there might be a need for SEBI to reconsider its stance on non-compete fees. First, there is a strong possibility of an increase in the cost of takeovers, as non-compete fees which were previously only paid to promoters will now accrue to all shareholders. With promoters wanting reasonable consideration for their agreement not to compete with the target company, there will be an upward revision of the price at which shares are tendered. The second reason makes a more fundamental attack at SEBI’s approach to confer maximum benefits to shareholders at the expense of acquirers. The critique lies in the fact that SEBI has sought to confer upon shareholders a benefit that they do not deserve. The fact remains that it is only the promoters who are capable of harming the prospects of a target company, and to distribute their non-compete fees among ordinary shareholders would seem unfair on the promoters. Third, SEBI’s handling of the issue of non-compete fees is questionable, as it has completely turned around its stance from accepting non-compete payments to an outright rejection of the same. We advocate that a phased removal of such separate fees would have ensured a smoother transition. In totality, we believe that the New Regulations have introduced important benefits for shareholders, thereby shifting the balance away from the acquirers to a certain extent.