JUSTICE P.N.BHAGWATI COMMITTEE REPORT ON TAKEOVERS

Substantial Acquisition of shares and acquisition of control of the company

6 Substantial Acquisition of shares and acquisition of control of the company (Reference : Part II of the Report - Chapter III)

6.1 Acquisition of shares or voting rights (Reference : Part II of the Report- Regulation 10)

6.11 Negotiated vs. open market acquisition

The provisions in Regulations 9 & 10 of the existing Regulations differentiate between the manner of acquisition of shares - i.e. either by way of negotiations or through open market transactions. This distinction is however without much significance as it exists only in the manner of the initial acquisition. There is hardly any distinction between the procedure to be followed for making public offers and compliance with the remaining provisions of the Regulations in both these cases. The Committee considered this matter and felt that keeping separate regulatory provisions for the two modes of acquisition served no purpose.

The Committee recommends that

• as the manner of initial acquisition which would trigger public offer has no relevance as far as performance of obligations under the Regulations are concerned, the two provisions should be combined into a single provision. (Reference : Part II of the Report- Regulation 10)

6. 12 Threshold Limit for Mandatory Public Offer

The Committee examined the question of raising of the threshold limit for public offer from the current level of 10%. It was noted that the threshold limit varied from country to country, and depended on the corporate shareholding pattern prevailing in the country and minimum holding which would traditionally be likely to give control of a company in the country. For example, in UK the threshold limit was set at 30%, in Hongkong at 35% and in Singapore at 25%. In the USA, acquisitions beyond 5% may be made by way of tender offers under the Williams Act.

In the draft Report, the Committee had decided to retain the present threshold of 10%. The rationale which has been explained in the Preface to the Report was accepted by the Committee and it was decided to retain this threshold. A large number of public comments received supported retention of this threshold, though there were a few who suggested the raising of the threshold to at least 26%. It was felt that under Indian conditions hardly any person as investor would invest in more than 10% in any company unless he has an intention of taking over the company at some point of time and the Committee therefore decided to retain the existing threshold limit of 10%.

The Committee recommends that

• having regard to the Indian situation in which it is possible to acquire control of a company with a lower percentage of holding, the present threshold of 10% for public offer be retained;
• the present ambiguity about the applicability of the Regulations to persons who acquire shares beyond the threshold limit of 10% without initially holding any share be removed by adding the words "together with shares or voting rights held, if any". (Reference: Part II of the Report - Regulation 10)

6. 2 Consolidation of holdings (Reference: Part II of the Report -Regulation 11)

The Committee noted that the existing Regulations do not give any scope for consolidation of holdings by person(s) who already hold more than 10% of the shares or voting rights of the company without attracting the mandatory public offer. The Committee appreciated the fact that in a competitive environment, it may become necessary for person(s) in control of the company to consolidate their holdings either suo moto or to build their defences against takeover threats.

The Committee also recognised the need to harmonise consolidation of holdings by persons already holding substantial shares with the need to protect the interest of shareholders in a competitive, free market environment. Indeed, for the same reason, Regulations of other countries do not trigger mandatory public offers for all acquisitions and provide for consolidation of shareholdings within a band in a specified period. This only allows for consolidation in a regulated manner without unduly affecting the interest of the shareholders.

The draft Report had proposed a graduated limit of acquisition - depending upon whether the acquirers existing holding was between 10% and 25% or between 25% and 50%. The Committee felt that introducing such differential limits would not be in the interest of the shareholders and moreover would not be justifiable on any rational basis. It was therefore decided to remove this differentiation and permit acquisitions upto 2% in any 12 month period, to all persons who hold shares above the threshold limit of 10%.

The draft report had also contained a proposal for clarification to the effect that the provisions of the Regulations will not be applicable to any person who holds 50% or more. But reservations were expressed from some quarters about this exclusion clause on the ground that if the Regulations are intended to safeguard shareholders interest even in the event of substantial acquisition of shares not involving a takeover, there is no justification for excluding substantial acquisition by acquirers holding more than 50%. The question which arose in this regard is upto what point of time substantial acquisitions not involving takeovers need to be regulated. The Committee decided that substantial acquisition till an acquirer gains absolute control level of 75% may be brought within the scope of the Regulations.

The Committee recommends that

• person(s) holding not less than 10% but not more than 75% may acquire upto 2% shares in any period of twelve months, without attracting the mandatory public offer requirement. (Reference: Part II of the Report - Regulation 11).

The percentage of acquisition referred to above is on absolute basis i.e. there should be no netting of acquisition and disinvestment during the said period. In other words if a person acquired x% during a period of 12 months, sold y% and acquired z% his aggregate acquisitions of (x% + z%) would be reckoned for the purpose of the Regulation and not (x% - y% + z%).

• The Committee also felt that it would be desirable to clarify that the provisions of these Regulations will not be applicable to any person who holds 75% or more at the time of notification of these Regulations and also to any acquirer who has reached the level of 75% without any breach of the provisions of the Regulations in force from time to time.

6.3 Takeovers
(Reference: Part II of the Report - Regulation 12)

The question of defining takeovers was discussed. It was noted that though the concept of takeovers was easily comprehensible, it eluded precise definition. It is perhaps for this reason why regulations in most countries have not defined it. While takeover is taken to be synonymous with acquisition of control over the company, opinions vary on what constitutes change of control. According to industrialists and professionals who have involved themselves in takeovers, management control ultimately manifests itself through control over the board of directors of the company, whatever be the manner in which such change of control may be achieved.

The Committee agreed that attempting a precise definition of takeover would not only be counter productive but also limit the scope of the Regulations, and it should be left to SEBI to decide whether there has been a violation of regulations in a given situation of a takeover, through investigation if necessary, and enforce the Regulations. The Committee was of the view that the Regulations should nonetheless contain an inclusive definition of the term ‘control’ which would serve to indicate the circumstances when compliance with the provisions of the Regulations would be necessitated, even where there has been no acquisition of shares, so that SEBI would not be on an uncharted sea in investigating whether there has been change in control.

On the issue of change in control of a company attracting the provisions for public offer, the Committee felt that control of a company is interlinked with its fortunes and any change in control could not be without impact on company's policies and business prospects and is thus linked to investors interest. And given that investor protection is a mandate of SEBI, takeover which entails change in control should necessarily be the concern of SEBI. This is all the more necessary because under clause (h) of sub section (2) of Section 11 of SEBI Act, SEBI is empowered to regulate not only substantial acquisition of shares but also takeovers. This was also the overwhelming view of all professionals, intermediaries and financial journalists who made submissions before the Committee. The Committee also noted that though the existing Regulations did not include change in control as triggering of a public offer, SEBI has placed continued reliance on Clause 40 A and B of the Listing Agreement in such cases where the acquisition of shares has been less than the threshold limit of 10%. The Committee recognised that the Regulations should, as far as possible, be comprehensive and self contained and SEBI should not have to rely on outside rules and regulations to implement its objective.

On the above considerations and given on the one hand that it would be difficult, if not impossible, to attempt at a precise and comprehensive definition of takeover, and on the other hand that takeover does ultimately result in change in control of the company, howsoever such control may be exercised, the Committee felt that change in control of a company, as opposed to change in management of a company, should be made a condition requiring a public offer to be made. When there is change in control, the shareholders must be afforded an opportunity to exit from the company if they do not want to continue under the new acquirers. This will also obviate the need for SEBI to fall back upon Clause 40 A & B of the Listing Agreement, which could now be repealed. The Committee originally thought that it would be advisable to refrain from defining "control of a company" and allow time and practice to craft a well accepted definition of control. The above decision of the Committee was incorporated in the draft report of the Committee. But, as already discussed in para 2.2 of this Report, the Committee received numerous comments advocating the need to define at least the parameters of control. Having regard to the feed back received, the Committee felt that a term of such critical relevance to the Regulations should not be left undefined.

The Committee, therefore, agreed to define control. The Committee also felt that concept of joint control which is often seen in practice should also be recognised. The Regulations should make it explicit that cessor of any one person from joint control, thus giving the remaining person or persons sole control or taking of any person or persons in joint control by a person having sole control shall not be construed as ‘change in control over the company’ attracting the Regulations.

The Committee recommends that

• the term ‘control, may be defined by giving an inclusive definition and also, the consequences of change in control be included in the substantive portion of the Regulations, through provision for disclosure of person(s) in control of the company at periodical intervals which could indicate change in control over the company, when it occurs; (Reference : Part II of the Report- Regulations 2 (1) (c), 6 & 8)
• mandatory public offer consequent upon change in control over the company be also provided (Reference : Part II of the Report - Regulation 12).

6.4 Relevance of Clause 40 A & B of the Listing Agreement

The Committee noted that SEBI has enforced public offer relying on Clause 40 A and B of the Listing Agreement where takeover has been evidenced through changes in management control, though the acquisition of shares has been less than the threshold limit of 10%. The Committee recognised that the Regulations should, as far as possible, be comprehensive and self contained and SEBI should not have to rely on outside rules and regulations to implement its objective. As discussed in Para 6.3 above, the Committee decided to strengthen the regulations by defining ‘control’ and requiring mandatory public offer upon change in control over the company. The Committee noted that the changes in the Regulations would render clause 40A & B of the listing agreement redundant.

The Committee recommends that

• clause 40 A & B of the listing agreement may be replaced by a clause requiring compliance with the SEBI Regulations on Takeovers.

6.5 Appointment of Merchant Banker
(Reference: Part II of the Report - Regulation 13)

The Committee envisaged a far more crucial role for the Merchant Banker with additional responsibilities under the revised Regulations, which would require the merchant banker to be an independent and responsible person, so that he can exercise due diligence independently of the acquirer in the discharge of his responsibilities and at the same time be accountable to SEBI. It was, therefore, decided to allow only Category I merchant banker to act as merchant banker to a takeover offer. The Committee received comments for allowing other categories of merchant bankers to play a role in takeovers, but the Committee felt that the provision be retained in view of the added responsibilities and obligations cast on merchant bankers under the revised Regulations. It was also felt necessary to prohibit a firm which is an associate of or belongs to the group of the acquirer or the target company from acting as a merchant banker.

The Committee recommends that

• only a Category I Merchant Banker, not being a group company or associate of the acquirer or the target company, be appointed for the purpose. (Reference : Part II of the Report - Regulation 13)

6.6 Timing of public announcement of offer
(Reference: Part II of the Report- regulation 14)

It proved difficult to make the public announcement of offer within four days of agreement if there are intervening holidays. Besides, the existing Regulations did not specify when the public announcement of offer is to be made in case of acquisition of shares through securities like convertible debentures, global/ American depository receipts etc., which would entitle the holder to receive shares with voting rights at a later date. This needed to be clarified.

The Committee recommends that

• the public announcement of offer be made not later than four working days of the agreement.
• in case of acquisition of securities (including GDRs / ADRs) which would entitle the acquirer to voting rights at a later date, the public announcement be made not later than four working days before conversion, or exercise of option, as the case may be leading to acquisition of shares with voting rights exceeding the threshold limit. (Reference : Part II of the Report - sub- regulation (2) of Regulation 14)

6.7 Public announcement of offer
(Reference : Part II of the Report - Regulation 15)

Under the existing provisions, an acquirer is required to make public announcement in atleast one national English daily and in regional language newspaper of the place where the shares of the company are listed and most frequently traded. It has been the experience of SEBI that acquirers pay lip service to compliance with these provisions by releasing the public announcements in obscure dailies with very limited circulation. This defeats the very purpose of releasing public announcement as it hardly comes to the notice of any shareholder. Fairness and equity also demand that the Board of Directors of the target company should know about the impending takeover from the acquirer. It should be an obligation for the acquirer to inform the Board of the target company about his intention. Another important point is that the announcement of substantial acquisition of shares or takeover of a company by an acquirer is a market sensitive information and should become publicly available through communication to the stock exchanges as well.

An issue which often came up before SEBI in the course of administering the existing Regulations was when an offer could be said to have been made. Related to this was the issue whether the public announcement of an offer would constitute an offer or could be considered merely as a declaration of intention to make an offer. There have been several cases before SEBI in which the acquirers have sought to withdraw their offers after making the public announcement on the basis of a contention that public announcement by itself does not constitute an offer. These issues need to be clarified.

The Committee was of the view that, as the release of a public announcement has its impact on the market, it would stand to reason that it should necessarily be followed by the mailing of a letter of offer and hence, the acquirer should make a public announcement only after satisfying himself that he would be able to implement the offer. It is for this reason that the offer period has been defined to commence from the date of public announcement.

In view of the above, the Committee recommends that

• Public announcement be released in all editions of an English national daily with wide circulation, one Hindi national daily with wide circulation and a regional language daily having 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. (Reference : Part II of the Report - sub regulation (1) of Regulation 15).
• Public announcement be submitted to SEBI two working days in advance of its release. (Reference : Part II of the Report - sub regulation (2) of Regulation 15).
• Public announcement be sent to all the stock exchanges on which the shares of the company are listed and to the target company at its registered office. (Reference : Part II of the Report - sub-regulation (3) of Regulation 15).
• Once the public announcement is made, the public offer shall be deemed to have been made. (Reference : Part II of the Report - sub regulation (4) of Regulation 15)

6.8 Contents of public announcement of offer
(Reference: Part II of the Report - Regulation 16)

The Committee noted that the existing regulations spell out in detail the contents of public announcement. Nevertheless, going by the experience of SEBI, there was room for bringing about further clarity in the contents of the public announcement to make them more comprehensive.

To give a few examples: the Committee observed that if the acquirer had acquired shares in the open market prior to the date of public announcement, information on price at which such acquisition was made would be material for the shareholder and the market and should be provided. The public announcement should also contain disclosure in regard to availability of financial resources required to implement the offer and future plans of the acquirer, if any, for the target company, including, inter alia, whether the acquirer proposes to strip or dispose of or otherwise encumber any assets of the target company. Disclosure of future plans of the acquirer in relation to the target company is important information with which shareholders of the target company would be seriously concerned and hence there is need to make such information available to them. The Committee also felt that if the disclosure regarding future plans is to be meaningful, responsibility must be cast on the acquirer and he should be debarred from engaging in disposing of or otherwise encumbering the assets of the target company unless he has made such disclosure.

The question of allowing conditional offer was debated; namely, whether an offer could be subject to minimum level of acceptances. While conceding that in a hostile takeover situation, the bidder might like to reserve the right to retract from the offer if acceptances as would give him absolute control over the target company are not forthcoming, the Committee felt that without proper checks and balances, such a provision could lead to frivolous offers and might be misused to prejudicially affect the target company’s operations. It would also inconvenience the shareholders and destabilise the market, as they have to part with the shares and forego the right to deal with the shares for a period of at least two to three months. The Committee therefore was of the opinion that if at all conditional offers which are subject to minimum level of acceptances are to be permitted, it should be subject to checks and balances.

In this context, the Committee felt that in addition to the requirement of escrow deposit, an acquirer should be allowed to make conditional offer only subject to minimum acceptance of 20% and whatever be the extent of the conditional offer, the acquirer, having made such an offer, must be required to accept at least upto 20%. This would imply that if an acquirer has made an offer to acquire (20 + x)% and the acceptances received by him are more than 20% but less than his desired level, then he would be required to accept at least 20% and would have the option to return the rest. At the same time, the Committee also recognized that it may not be fair to a genuine acquirer to saddle him with a shareholding less than his desired level, because the object for which the offer was made by him would be frustrated. Moreover, such shareholding arising out of failure of the acquirer to acquire desired shareholding, may also result in the existing company being subject to "green mail" by the acquirer. The Committee, therefore, thought that to be fair to an acquirer making conditional offer, he should be permitted to have dual pricing for his offer i.e. a higher price for acquisition of desired level may be offered vis a vis the price for minimum mandatory acceptances. Thus, this provision, while being fair to the acquirer, would also not be contrary to the interest of shareholders.

The Committee also observed that at times, the takeover offer could be challenged on the ground that various requisite statutory approvals have not been obtained. It is for the acquirer to ascertain which are the approvals required to be obtained for giving effect to the takeover offer and state them clearly in the public announcement. While the Regulations specify certain illustrative approvals that may be necessary, there could be other approvals too, all of which may not be known to SEBI. The Committee, therefore, felt that the acquirer should be required to make a distinct statement that no other approvals other than those mentioned in the public announcement are required for giving effect to the offer.

The Committee also felt that persons holding unregistered shares, though may not get a copy of letter of offer, should be enabled to participate in the offer.

The Committee recommends that

• The highest and average price paid by the acquirer or persons acting in concert with him for acquisition, if any, of shares of target company during the twelve month period prior to the date of the public announcement be disclosed in public announcement (Reference : Part II of the Report - Regulation 16 (viii)).
• The future plans of the acquirer, if any, for the target company, including whether the acquirer proposes to strip or dispose of or otherwise encumber any of the assets of the target company during the next succeeding 2 years be disclosed in the public announcement and in the absence of such disclosure, the acquirer shall be debarred from doing so. Where the public announcement sets out future plans, the acquirer shall also state how he proposes to implement such future plans. (Reference : Part II of the Report - Regulation 16 (ix) and 22 (18)).
• Public announcement should contain disclosure on financial arrangements for implementing the offer. (Reference : Part II of the Report - Regulation 16 (xiv)).
• Persons holding unregistered shares should be enabled to participate in the offer (Reference : Part II of the Report -Regulation 16 (xv)).
• The statutory approvals required to give effect to the offer be spelt out, with a declaration that no other approvals other than those mentioned in the public announcement are required for giving effect to the offer. (Reference : Part II of the Report- Regulation 16(xvi)).
• Offer conditional as to minimum level of acceptances may be allowed, subject to checks and balances. (Reference : Part II of the Report - Regulation 16(xviii)).
• The acquirer should be required to accept minimum of 20% irrespective of whether the conditional offer has elicited response to the level of acceptances desired by the offeror, but a lower price, which shall not be less than the minimum offer price as per the Regulations, can be offered for the minimum mandatory acceptances. (Reference : Part II of the Report - Regulation 16 (xviii) and Explanation 4 to Regulation 20 and sub-regulation (8) of Regulation 22).

6.9 Approval of Board for Letter of Offer
(Reference: Part II of the Report - Regulation 18)

Hitherto all offer documents were to be submitted to SEBI within fourteen days of the public announcement for approval. The Committee discussed the merits of this requirement and noted that for primary issues, SEBI gradually moved away from a system of vetting prospectuses to a system of filing. This trend was also noted in the offer documents for mutual funds, where SEBI proposed to give up vetting.

The Committee desired that the merchant banker should assume greater responsibility for ensuring proper disclosures and SEBI should give up the requirement of prior approval of offer documents and move into a filing oriented system. Once an offer document is filed with SEBI, it would be up to SEBI to offer comments, if any, within a specified time period of say twenty one days. If comments are offered by SEBI, those comments are to be taken note of and in cases requiring a refiling, the twenty one days period will commence once again from the date of refiling. This will bring discipline among the acquirers and merchant bankers to do the necessary due diligence with utmost care without SEBI undertaking any responsibility in that behalf.

The Committee recommends that

• disclosure requirements be clearly and elaborately specified by the Board (Reference : Part II of the Report - sub-regulation (1) of Regulation 18)
• offer document be filed with SEBI within fourteen days of public announcement and if no comments are communicated within twenty one days, the offer document may be circulated to the shareholders. (Reference : Part II of the Report - sub-regulations (1) and (2) of Regulation 18)

6.10 Specified Date
(Reference : Part II of the Report - Regulation 19)

The existing Regulations require a "Record Date" to be specified for the purposes of determining the shareholders to whom the Letter of Offer is to be sent. As this record date was not defined in the Regulations, it took on the meaning it already had in the stock exchange parlance, i.e. the date as fixed by the stock exchange for the purposes of entitlement of bonus, rights etc. This posed several practical problems, especially when a book closure or a date for rights issue for example were near to the date of the public offer. The Committee observed that the stock exchange rules for fixation of record date namely request from the board of directors of the listed company, a minimum notice period, minimum ninety days gap between two record dates etc. have not only contributed to delaying the whole process but were also found to be impracticable, especially in a hostile takeover situation, where the co-operation of the present management may not be forthcoming.

As speed and secrecy are essential in takeovers, the acquirer should have the freedom to fix the cut off date for the purposes of mailing the letters of offer; besides, a detailed procedure for fixation of record date in which more than one party is involved would apart from engendering delay, result in leakage of information and speculation on the target company's shares. While the shareholders whose names appear in the books of the company on the specified date would receive the offer, there should be no bar on a person holding unregistered shares from participating in the open offer.

The Committee also observed that the present sixty day period for fixation of record date is too long and leads to delay in completion of formalities and could be reduced, especially when the concept of ‘record date' is being done away with.

The Committee recommends that

• concept of ‘record date' may be replaced with ‘specified date', which can be any date as may be decided by the acquirer and indicated in the public announcement subject to the condition that such date shall not be later than the thirtieth day from the date of public announcement. (Reference : Part II of the Report - Regulation 19)

6.11 Minimum offer price and payment of consideration other than in cash
(Reference: Part II of the Report - Regulation 20)

The existing Regulations have three stipulations about pricing of an offer. First, it specifies the minimum offer price to be paid by an acquirer to those to whom the offer is being made. This price is the higher of the weekly highs and lows of the twenty six weeks immediately prior to the date of public announcement and the price paid by the acquirer in the negotiated transactions. Second, this price could be paid in cash or by way of exchange of shares. In other words, share swap is permitted with the stipulation that if the negotiated price paid by the acquirer is in cash, the offer must also be a cash offer. Third, if the shares of the target company are infrequently traded, the price would have to be approved by SEBI. Infrequent trading has not been defined in the Regulations.

The Committee agreed that there should be a principle setting down the minimum level of offer price as in the existing Regulations. Laying down this minimum level of offer price was, in the opinion of the Committee, necessary to protect the interest of investors and not discordant with the free pricing regime.

The Committee felt that while cash offers and exchange offers are already permitted under the present Regulations, there was need to extend the manner of payment of consideration to include other securities including debt instruments. This need to encourage payment of consideration other than by way of cash must be balanced with the need to protect the interest of shareholders. The Committee, therefore, agreed to modify the earlier recommendations in the draft Report and recommend that even where payment in cash has been made to any class of shareholders for acquisition of their shares under any agreement or through open market purchases or otherwise, the acquirer might be allowed to make payment in cash or by way of exchange of securities. However, in such cases, an option should be given to the investor. This would imply that if a shareholder desires the payment of consideration in cash only, the acquirer would have to make the payment in cash. In the case of exchange offers, the merchant banker should be responsible for ensuring that the swap ratio fixed for the exchange is in conformity with the principles for determining the minimum offer price laid down in the Regulations. The Committee also felt that subject to compliance with minimum offer price requirements, in the case of exchange offer or conditional offer, the acquirer may be permitted to have dual pricing for his offer i.e. the cash offer can be at a price lower than that for securities exchange offer. Similarly, the price for minimum mandatory acceptances may be lower than the price for targeted full acceptances. The Committee was of the view that such provisions, while being fair to the investors, would also balance the need of the acquirers. Adjustments in price would also have to be made for market quotations on cum/ex-rights or cum/ex-bonus basis.

Additionally, the Committee recommended that the highest price paid by an acquirer for any acquisition of shares of the target company in the last twelve months prior to the date of public announcement be also taken as a parameter for deciding the minimum offer price. In regard to infrequently or thinly traded shares for which quotations were not available, the Committee felt that SEBI

should not be involved in approving the offer price in infrequently traded shares and should leave it to the acquirer and merchant bankers to determine the offer price and disclose the basis on which it is determined.

The Committee recommends that

• the acquirer be permitted to pay consideration by way of cash or by exchange of securities, (Reference : Part II of the Report - sub-regulation (1) of Regulation 20)
• The existing formula for minimum offer price be retained with the additional parameter namely the highest price paid by the acquirer for any acquisition of shares of the target company during the twelve months prior to the date of public announcement. (Reference : Part II of the Report sub-regulation (2) of Regulation (20).
• Where a preferential offer is made to an acquirer during the twelve month period ending with the date of closure of the offer , the price at which the preferential allotment has been made will also be taken into account in determining the offer price. (Reference : Part II of the Report - sub-regulation (2) of Regulation 20)
• The minimum offer price shall be fixed in consultation with the merchant banker in case of infrequently traded shares, to be justified on parameters specified in the regulations. (Reference : Part II of the Report - sub-regulation (3) of Regulation 20)
• Infrequent trading be defined. (Reference : Part II of the Report -sub-regulation (3) of Regulation (20)
• In case of acquisitions made by the acquirer during the offer period in any manner either from the market or from any particular investor(s), the highest price paid for such acquisition be paid to the shareholders under the public offer, unless it is less than the minimum offer price. (Reference : Part II of the Report - sub-regulation (4) of Regulation 20)

6.12 Minimum Offer and Minimum Holding after the Offer
(Reference : Part II of the Report - Regulation 21)

In the existing Regulations, there are provisions which require that 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%.

The above provisions raised some issues. First, in companies in which 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 second requirement of maintaining a minimum level of post offer public holding. There are likely to be more such cases in the future. The two provisions could thus conflict with each other. Further, 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. Thirdly, 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.

The Committee considered various points such as - revision of the percentage of public offer; mandatory requirement of making a full offer as prevails in some countries instead of a minimum offer of only 20%; increasing the minimum post offer public holding requirement to 25% level so as to be harmonious with the condition for initial listing; whether, an acquirer be forced to buy out the entire holding if, by virtue of public offer, the public shareholding does indeed fall below 20%; and whether he should be required to make an offer for sale to the public within a specified timeframe, so as to bring the public shareholding level upto a minimum level of 25%.

Some of the comments received by the Committee have argued strongly against partial offers, as they do not effectively protect the interest of the shareholders and are not in consonance with established international practice. The UK City code was often cited in which 100% public offer was mandatory. While taking note of the suggestions and the provisions of regulations in some other countries, the Committee felt that it was necessary to be alive to the ground realities in our country. In all developed markets, public offers are financed very often by banks. Financing of takeovers is not a critical issue in developed markets because there multiple sources of finance are available to an acquirer. In India, however, this is a critical issue as bank finance to fund securities business, let alone takeovers, is now hard to come by and there is no other organised source of funding for such operations. Under these conditions, to prescribe a requirement of a full offer would not only be too onerous and virtually stop takeover activities or make it possible only for a handful of cash rich Indian companies or foreign companies with unlimited resources to takeover other companies and consequently there would be no level playing ground between Indian companies and foreign companies who would always be at an advantage if the requirement of a full offer is introduced.. The Committee was, therefore, of the opinion that there is merit in prescribing a minimum level of offer, as it would ensure a minimum level of participation by the shareholders consistent with the existing economic ground reality. Besides, prescribing a minimum would not debar an acquirer from making an offer for higher percentage of shares.

The Committee also considered the suggestions received from certain quarters that persons presently in control of the Company should be permitted to make an open offer for such percentage of shares as may be decided by them for consolidation of their holding either suo moto or in defence of a hostile bid. In other words, the minimum public offer requirement of 20% should not be made applicable to consolidation of holdings through public offer by existing management. The Committee, while taking the view that there is merit in the argument, agreed that the minimum offer requirement, even in such cases, cannot be totally done away with but could be lowered to 10%.

As regards minimum public holding after the public offer, the Committee recognised that it would be desirable to stipulate a minimum percentage of public holding at all times, if a company were to retain the character of a listed public company, but such a stipulation should be a part of the listing requirement, rather than of takeover regulations.

In the case of substantial acquisition of shares and takeovers, the Committee’s concerns were as follows :

• The takeover should not lead to a situation of minority oppression and therefore, the Regulations must have a provision requiring the acquirer to buy out the remaining shares if the public shareholding were to fall below 10% consequent upon a public offer;
• Impossibility of performance on the basis that the public holding left would be low cannot be a ground for not making mandatory minimum offer to the shareholders, in a takeover situation.

The Committee also observed that with respect to the paid up capital on the basis of which the specified percentages are to be worked out, the existing regulations do not take into account conversion of securities into shares. This raises doubts whether conversions due after the date of public announcement should also be reckoned. The Committee felt that paid up equity capital as would emerge at the closure of offer should be reckoned for the purpose.

The Committee recommends that

• The minimum offer as stipulated in the present regulations may continue but with a proviso allowing minimum offer of only 10% for consolidation of holdings by persons presently in control of the company. (Reference : Part II of the Report- sub-regulation (1) of Regulation 21).
• An offer may be made for 100% of the shares of the target company (Reference : Part II of the Report - sub-regulation (2) of Regulation 21).
• The acquirer may be given an option to buy out the remaining shares if the public shareholding were to fall below 10% consequent upon a public offer which would have the effect of deemed delisting; or
• Alternatively, the acquirer may undertake to bring the public shareholding to a level as would satisfy the listing requirements through an offer for sale, with suitable disclosure in the offer document. (Reference : Part II of the Report- sub-regulation (2) of Regulation 21).

6.13 General Obligations of the Acquirers
(Reference: Part II of the Report- Regulation 22)

The existing Regulations do not clearly specify obligations on the part of the acquirer, the board of directors of the target company and the merchant banker. The Committee was of the view that these obligations should be specified clearly in the Regulations.

6.131 Participation in the open offer by outgoing management

The Committee noted that questions were raised whether the persons who had entered into MOU for selling part of their equity may participate in the open offer for offloading their remaining holdings (not forming part of the negotiated sale).

The Committee recommends that

• persons other than parties to the agreement, in the case of negotiated takeovers, may participate in the open offer. (Reference : Part II of the Report - sub-regulation (3) of Regulation 22)

6.132 Offer to GDR / ADR holders and holders of convertibles or warrants

In response to the comments received on the draft report , the Committee agreed that the rights of holders of Global Depository Receipt/ American Depository Receipt and other convertibles need to be clarified in the Regulations.

The Committee recommends that

• the letter of offer should be sent to the custodians of GDR / ADR holders;
• the letter of offer should also be sent to the holders of warrants or convertibles issued pursuant to a domestic issue, where the period for exercise of option or conversion falls within the offer period. (Reference : Part II of the Report - Explanation to sub-regulation (3) of Regulation 22)

6.133 Offer to be completed within specified time

The Committee observed that there are certain inadequacies in the existing regulations, which could be taken advantage of to delay or prolong the open offer. For example, the Regulations do not specify the date when the offer has to open for acceptance. Similarly, the outer time limit for which the offer can be kept open is left to the discretion of the acquirer.

The Committee also felt that there might be genuine reasons for delay in receipt of some of the statutory approvals by the acquirer. SEBI could, under these circumstances, after examining the bonafides, extend the time period for completion of the offer, provided the acquirer agrees to pay interest to the shareholders for the delayed period. If there is willful default on the part of the acquirer in obtaining statutory approvals, the amount lying in the escrow account shall be liable to be forfeited.

The Committee recommends that

• the time limit for each activity should be spelt out, as an obligation of the acquirer, so that the takeover process is completed promptly. These are –
• Filing of offer document with SEBI within fourteen days of the date of public announcement (Reference : Part II of the Report - sub-regulation (2) of Regulation 22)
• Mailing of letter of offer so as to reach the shareholders, within forty five days of the date of public announcement (Reference : Part II of the Report - sub-regulation (3) of Regulation 22)
• Offer to open within sixty days of the date of public announcement (Reference : Part II of the Report - sub-regulation (4) of Regulation 22)
• Offer to close within a maximum of 105 days of the date of public announcement (Reference : Part II of the Report - sub-regulation (5) of Regulation 22)
• Consideration to be mailed within thirty days of the date of closure (Reference : Part II of the Report - sub-regulation (12) of Regulation 22 )
• SEBI may permit extension of time limit under certain circumstances, subject to acquirer agreeing to pay interest for delayed period ((Reference : Part II of the Report - sub-regulation (12) of Regulation 22 )

6.134 Acquisitions during offer period

The wording of the existing provisions of the Regulations would lend to an interpretation that further acquisitions outside of public offer, from the market or otherwise, may be permitted, once the public announcement of offer has been made. The Committee recalled that this point had come up before SEBI in some of the cases dealt with by SEBI. The Committee noted that the views of the market participants on the issue varied from ‘yes but with prior approval of the Board and best price to all shareholders who have tendered shares in the public offer', to a complete ‘no'.

The Committee observed that allowing purchases by the acquirer during the offer period is likely to have a positive impact on the price which would be in the interest of investors, besides allowing the acquirer to defend himself in competitive offers. So long as the acquirer is required to pay to the shareholders of the target company the highest price paid by him for his acquisitions during the offer period, there should be no objection to allowing such acquisitions. In case there is an attempt to create a false market, SEBI can always check through its other Regulations.

The Committee recommends that

• 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 (Reference : Part II of the Report - sub regulation (4) of Regulation 20 and sub-regulations (8) and (17) of Regulation 22).

6.135 Escrow Account

The Committee noted that the extant Regulations do not have any stringent monetary penalties which could discipline delinquent acquirers to fulfill their obligations on time. The Committee felt that the prospect of monetary loss in the event of non fulfillment of obligation is likely to spur him into timely completion of all activities connected with the offer. It would also act as a check against frivolous offers. The Committee was of the opinion that requiring cash deposit in an escrow account before the public announcement and forfeiture thereof if the acquirer fails to discharge his obligations under the offer may be a step forward in the interest of investors. While ideally such escrow should be for full value of the offer, the Committee noted that such a stiff stipulation would act as a disincentive for takeover activities. Moreover, the Committee observed that for financing the takeover, the Indian bidder has to essentially rely on his own resources, as line of credit from banks or other reliable financial sources would not be easily forthcoming for such purposes. The Committee therefore felt that it would be desirable to allow the acquirer to provide the escrow in a form other than cash at the option of the acquirer.

In its draft Report, the Committee had proposed a uniform deposit of 10% of the value of the public offer towards the escrow account. Based on the comments received and upon further deliberations, the Committee veered round to the view that while escrow account was certainly desirable to prevent frivolous offers and to test the seriousness of the acquirer, at the same time prescribing an uniform rate for all takeovers may not be desirable and might militate against takeover activity itself. For example, if the target is a large company, the takeover consideration will also be high, and 10% of the offer would also be proportionately higher. This will not be so for takeover of smaller companies in which case, 10% may be a very small amount for the acquirer. The Committee, therefore, decided to have a graded escrow account for offers of value equal to or less than Rs.100 crore. and more than Rs.100 crore. The Committee also felt that in case of forfeiture of the escrow account, the amount should be equally distributed between the shareholders of the target company, the target company and 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.

The Committee recommends that

• an escrow deposit as under shall be made for the value of the public offer
• For consideration payable under the public offer upto and including Rs.100 crore - 25%; and for consideration exceeding Rs.100 crore - 25% upto Rs.100 crore and 10% thereafter.
• amount to be adjusted whenever there is a revision in offer price;
• the amount will be used for payment of consideration to shareholders or refunded upon timely fulfillment of the obligations and forfeited, if not.
• to ensure that this escrow account which is in the interest of investors does not become too onerous a burden on the acquirer especially where the acquisition could involve large sums, the acquirer should also be allowed the option of depositing the escrow amount otherwise than in cash i.e. by way of bank guarantee or approved securities with appropriate margin as determined by the merchant banker. (Reference : Part II of the Report - sub-regulation (10) of Regulation 22 and Regulation 28.)

6.136 Financial arrangements for fulfillment of obligations

The Committee noticed that often arrangements for finance required to fulfill the obligations under the offer are not put in place while making the offer leading to delay in payment of consideration to the shareholders.

The Committee recommends that

• the acquirer shall make firm arrangements for finance required and disclose full details of the arrangements both in the public announcement and in the letter of offer. (Reference : Part II of the Report - Regulation 16 (xiv) and sub- regulation (11) of Regulation 22)

6.137 Procedure for payment of consideration to shareholders

The Committee noted that the existing Regulations merely state that payment of consideration is to be effected within thirty days of closure of the offer. The Committee was of the opinion that in the interest of investors, it would be worthwhile to standardise mode of payment of consideration in the same manner as the refund account procedure for primary issues, so that the full amount of consideration payable to the shareholders may be deposited in a separate bank account within a period of twenty one days from the date of closure of the offer and which should lie there for a minimum period of three years, after which unclaimed balance, if any, in such account may be transferred to investor protection fund.

The Committee recommends that

• an obligation to open a separate bank account may be cast on the acquirer and the procedure for payment of consideration may be laid down in the Regulations (Reference : Part II of the Report - sub-regulation (12) of Regulation 22 and Regulation 29)

6.138 Cooling Period

The Committee recommends that

• if an offer made by an acquirer has been withdrawn, the acquirer should not be allowed to make a bid for the same company within a period of 6 months from the date of the public announcement or withdrawal or closure of the offer. (Reference : Part II of the Report - sub-regulation (14) of Regulation 22).
• In the event of non-fulfillment of obligations under Chapter III or IV of the Regulations, the acquirer shall not make an offer for acquisition of shares of any company or a period of twelve months from the date of closure of the offer. (Reference : Part II of the Report - sub-regulation (15) of Regulation 22).

6.14 Obligations of the target company

The Regulations, as currently worded, would enable an acquirer to acquire the shares, have them transferred in his name and enter the management too, once the public announcement is made, especially in a negotiated takeover. The Committee noted that once the acquirer is firmly saddled in the target company, he would have very little incentive to complete the offer formalities. Delays in fulfillment of the obligations under the offer are therefore very common. Besides, once the seller has sold his shares and acquirer has entered the company, it would be difficult to roll back the transaction as a penalty for non fulfillment of his obligations by the acquirer. Allowing a negotiated bidder to enter the management before completion of formalities can also discourage competitive bids, because the negotiated bidder would be privy to information about the target company which is not available to the competitive bidder and moreover the competitive bidder, if successful, would have considerable difficulty in dislodging the negotiated bidder and during the period that he is in the saddle, the negotiated bidder might enter into irreversible transactions. It is therefore necessary to prevent this situation by introducing appropriate provisions in the regulations. It may be pointed out that such provisions are there even in other international codes.

At the same time, the Committee also recognised that the management of the target company could also resort to methods for stalling the takeover bid by not allowing transfer of shares and/ or not ceding representation on the board of directors or control over the company, even after the acquirers have fulfilled the obligations cast on them under the regulations. The Committee therefore desired that the regulations should have definite provisions making it obligatory for the target company to transfer the shares and /or allow changes in the board of directors once the acquirers have fulfilled their obligations under the Regulations.

The draft Report had proposed that the Board of Directors of the target company may if they so wish, send their unbiased comments on any bid to their shareholders, as obtaining in developed markets. A few had opined that this provision should be made mandatory and not at the option of the directors of the target company. The Committee while agreeing that while agreeing that such a mandatory provision should be our ultimate goal, a beginning is being made now by providing for a voluntary requirement., which can be reviewed later and made mandatory if found necessary.

The Committee recommends that

• till the offer formalities are completed, the target company shall be precluded from inducting any person or persons nominated by the acquirer or belonging to his group into the board of the target company or in management of the target company during the offer period (Reference : Part II of the Report - sub regulation (7) of Regulation 22 and sub-regulation (3) of Regulation 23).
• the target company shall exclude any person or persons connected with the acquirer from participating in any matter(s) relating to or arising from the offer (Reference : Part II of the Report - sub-regulation (9) of Regulation 22 and sub-regulation (3) of Regulation 23)
• management changes can be made after closure of the offer and deposit of full amount in a special account with the bank. (Reference : Part II of the Report - proviso to clause (a) of sub-regulation (3) of Regulation 23).
• to begin a healthy trend as obtaining in developed markets, the board of directors of the target company, if they so wish, may send their unbiased comments on any bid to their shareholders keeping in view the fiduciary responsibility of the directors and for that purpose, seek the opinion of an independent merchant banker or a committee of independent directors. The directors of the target company shall be liable for any mis-statement or concealment of material information in the discharge of this function. (Reference : Part II of the Report - sub-regulation (4) of Regulation 23 and sub-regulation (6) of Regulation 45)
• the board of directors of the target company shall facilitate the acquirer in verification of securities tendered for acceptances. (Reference : Part II of the Report - sub-regulation (5) of Regulation 23).
• once the acquirer fulfills his obligations under the regulations as certified by the merchant banker, the target company shall–
• transfer the shares in the name of the acquirer;
• llow proportional representation on the board to the acquirer or give control over the company, as the case may be . (Reference : Part II of the Report - sub-regulation (6) of Regulation 23)

6.15 Obligations of merchant bankers

The Committee noted that while the extant Regulations required appointment of a merchant banker, no specific responsibilities were cast on him nor is there any provision to take action against him for non-compliance. The Committee felt that merchant bankers have a crucial role to ensure that the takeover process is smoothly completed with least inconvenience to shareholders. The Committee also envisaged a greater role to the merchant bankers under the revised Regulations in matters such as fixation of offer price, acceptance of

securities in lieu of cash escrow, verification of financial resources of the acquirer, certification of completion of formalities etc. The Committee also desired that in order to ensure that the merchant bankers exercise caution and discretion and provide adequate margin while accepting securities as escrow, liability must be cast upon the merchant banker to make good the shortfall in escrow amount, if, upon realisation of securities, the escrow amount fall short of requirement.

The Committee recommends that

• obligations of the merchant bankers be specifically laid down in the Regulations and penalties for non-compliance by the merchant bankers be provided. (Reference : Part II of the Report, Regulation 24 and sub-regulation (5) of Regulation 45).
• Merchant banker shall be liable to make good the shortfall, if any, in the escrow account. (Reference : Part II of the Report, sub-regulation (7) of Regulation 28).

6.16 Competitive bid

The Committee noted that the position of the existing Regulations on the competitive bids was not very clear. First, there was the question of definition of a competitive bid. Second was the position of the first bid if the acquirer did not want to compete in the offer.

The Committee believed that the word competition is widely and commonly understood; ordinarily, any bid for the shares of the same target company and addressed to the same body of shareholders would be construed as a competitive bid; and merely because there is variation in the number of shares to be acquired or the price is different, the bid cannot lose its competitive nature. A precise definition of what constitutes a competitive bid may not, therefore, be necessary and the import of what constitutes a competitive bid can be brought forth in the substantive part of the regulations itself. While making the recommendations, the Committee took into account the recommendations of the market participants that the time limit of 14 days is too short to evaluate the target and make a competitive bid and there should be provision for upping the offers by bidder(s).

The draft report envisaged that all competing bids shall close on the date of closure of the first offer. However, many had commented that such a requirement would squeeze the time available to the subsequent competitive bidder(s), as also to the shareholders to evaluate and participate in the competing bids. There was, however, unanimity of opinion that all competitive offers should close on the same date to facilitate exercise of option by the shareholders. The Committee therefore decided that in case there are more than one subsisting offer, the date of closure of the earlier offer(s) may stand extended to the date of closure of the last subsisting offer. This provision, while ensuring that all offers close on the same date, also allow sufficient time to all the offerors as well as the shareholders as envisaged in the Regulations.

The Committee recommends that

• A competitive bid can be for some or all of the shares of the target company the outer time limit within which a competitive can be made may be increased to 21 days . (Reference : Part II of the Report - sub-regulation (1) of Regulation 25)
• No bid for the target company can be made during the offer period, after twenty one days from the date of public announcement of the first offer. (Reference : Part II of the Regulation - sub-regulation (2) of Regulation 25)
• Subject to minimum offer requirement, any competitive offer by an acquirer shall be for such number of shares which, when taken together with shares held by him shall be at least equal to the number of shares for which the first public announcement has been made.(Reference : Part II of the Report - sub-regulation (3) of Regulation 25)
• Consequent upon a competing bid or bid(s), the acquirer(s) under the earlier offer should have the freedom either to revise their terms of offer or withdraw from the offer with the prior approval of the Board, within fourteen days of the announcement of the competing bid and if no such announcement is made, the offer on original terms shall subsist and be binding the acquirer. (Reference : Part II of the Report - sub-regulation (4) of Regulation 25)
• The competing bidders shall have the freedom to revise their offer price upwards anytime upto seven working days prior to the date of closure of the offer. (Reference : Part II of the Report - sub-regulation (6) of Regulation 25)
• If more than one bid subsist at the end of thirty five days from the date of public announcement of the first offer, it would be the shareholders' prerogative to choose one over another and to facilitate shareholders exercise of option in such an event, the competing offers shall close on the same date (Reference- Part II of the Report : sub-regulation (7) of Regulation 25)

6.17 Revision of offer

The Committee noted that the 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. The regulations also require approval of SEBI for revision in the terms of offer.

But it might be plausible that even in the absence of a competing bid, the acquirer may like to or may have genuine reason to revise his offer, if he finds that acceptances to the offer on original terms are poor. The Committee, therefore, desired that flexibility should be built into the Regulations to allow an acquirer to revise his price, if he so desires any time before the closure of the offer period. The Committee, however, acknowledged that in the interests of the investors, such revision should only be in terms of number of shares to be acquired and the price offered and that too only upwards.

The Committee recommends that

• upward revision in price and number of shares sought to be acquired may be permitted, irrespective of whether or not there is a competitive bid, upto seven working days prior to the date of closure of the offer, subject to public announcement in respect of such changes and consequent changes in the escrow. (Reference : Part II of the Report - Regulation 26)

6.18 Withdrawal of Offer

The Committee recommends that

• the circumstances under which withdrawal of offer can be made could be clearly spelt out. (Reference: Part II of the Report - Regulation 27).