Necessity of Takeover Code
The twentieth century began with the process of transformation of entire business scenario. The economy of India which was hitherto controlled and regulated by the Government was set free to seize new opportunities available in the world. With the announcement of the policy of globalization, the doors of Indian economy were opened for the overseas investors. But to compete at the world platform, the scale of business was needed to be increased. In this changed scenario, mergers and acquisitions were the best option available for the corporates considering the time factor involved in capturing the opportunities made available by the globalization.
This new weapon in the armory of corporates though proved to be beneficial but soon the predators with huge disposable wealth started exploiting this opportunity to the prejudice of retail investor. This created a need for some regulation to protect the interest of investors so that the process of takeover and mergers is used to develop the securities market and not to sabotage it. In the year 1992, with the enactment of SEBI Act, SEBI was established as regulatory body to promote the development of securities market and protect the interest of investors in securities market. Further it got the power to make regulations for the above objectives. Thus SEBI appointed a committee headed by P.N. Bhagwati to study the effect of takeovers and mergers on securities market and suggest the provisions to regulate takeovers and mergers.
In its report, the committee stated the necessity of a Takeover Code on the following grounds:
The confidence of retail investors in the capital market is a crucial factor for its development. Therefore, their interest needs to be protected.
An exit opportunity shall be given to the investors if they do not want to continue with the new management.
Full and truthful disclosure shall be made of all material information relating to the open offer so as to take an informed decision.
The acquirer shall ensure the sufficiency of financial resources for the payment of acquisition price to the investors.
The process of acquisition and mergers shall be completed in a time bound manner.
Disclosures shall be made of all material transactions at earliest opportunity.
Thereafter, these regulations have been amended a number of times to address the changing circumstances and needs of corporate sector. In 1994 SEBI came out with SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1994. Later SEBI Takeover Code has been rechristened by enacting SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 substituting SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1994.
Thereafter, in September 2009, the Takeover Regulations Advisory Committee (TRAC) under the chairmanship of Mr. C Achuthan was constituted by SEBI with the mandate to examine and review the SEBI Takeover Regulations of 1997 and to suggest suitable amendments, as deemed fit. Later in June 2010, the Committee came out with the TRAC Report proposing some sweeping changes on critical issues, including the open offer trigger, offer size, indirect acquisitions, exemptions from open offer obligations, offer price calculations and competing offers which was then open for public comments.
The fundamental objectives of the Proposed Takeover Regulations were:-
- To provide a transparent legal framework for facilitating takeover activities;
- To protect the interests of investors in securities and the securities market, taking into account that both the acquirer and the other shareholders or investors and need a fair, equitable and transparent framework to protect their interests;
- To balance the conflicting objectives and interests of various stakeholders in the context of substantial acquisition of shares in, and takeovers of, listed companies.
- To provide each shareholder an opportunity to exit his investment in the target company when a substantial acquisition of shares in, or takeover of a target company takes place.
- To provide acquirers with a transparent legal framework to acquire shares in or control of the target company and to make an open offer;
- To ensure that the affairs of the target company are conducted in the ordinary course when a target company is subject matter of an open offer;
- To ensure that fair and accurate disclosure of all material information is made by persons responsible for making them to various stakeholders to enable them to take informed decisions;
- To regulate and provide for fair and effective competition among acquirers desirous of taking over the same target company; and
- To ensure that only those acquirers who are capable of actually fulfilling their obligations under the Takeover Regulations make open offers.
After considering the public comments and further to discussion, the report has been modified to the present form i.e. SEBI (SAST) Regulations, 2011 substituting the SEBI (SAST) Regulations, 1997.