Regulatory Compliance Consulting

The Takeover Code or substantial acquisition of shares.

Name: Sukant Vikram

Class: 5th year BBA LLB

Symbiosis Law School

Introduction —-

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.

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 which were done through -:

1.Enactment of SEBI Act, 1992
2.Enactment of SEBI (Substantial acquisition of shares and takeover) Regulations, 1992.

In the light of then present circumstances, the need for some law to regulate takeover was strongly felt. Moreover to achieve its objectives as stated in SEBI Act, 1992, SEBI enacted SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1994 in exercise of powers conferred under section 30 of the Act which laid down a procedure to be followed by an acquirer for acquiring majority shares or controlling in another company, so that process of takeover is carried out in a fair and transparent manner.

Thereafter, these regulations have been amended a number of times to address the changing circumstances and needs of corporate sector. In 1997 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.

Merger&Acquisition Trends in Current Scenario —- Structured Reconstruction

In India it was only in 20th century that the concept of takeover took birth but even then the concept of hostile takeovers was not known to anybody. This concept emerged when Swaraj Paul started efforts to takeover Escorts Ltd. and DCM Ltd. He was the first hostile raider among the raiders of Indian stock market. Although Paul could not succeed in his efforts because the incumbents fend him off by using the technicalities of rules governing non-residents but this created a need for a takeover code.

This need was further accentuated in 1990s when the government initiated the policy of liberalization and globalization which resulted in growth of Indian economy at an increased pace, and it created a highly competitive business environment, which motivated many companies to restructure their corporate strategies by including the tools of mergers and takeovers.

In the meantime, SEBI was established in 1992 as a body corporate under the SEBI Act, 1992 with the main objectives to- i) protect the interest of investors in securities market, and ii) to provide for the orderly development of securities market. Thus while the possibility of takeover of a company through share acquisition is desirable in new competitive business environment for achieving strategic corporate objectives, there has to be well defined regulation so that the interest of all concerned are not jeopardized by sudden takeover threats.

In the light of then present circumstances, the need for some law to regulate takeover was strongly felt. Moreover to achieve its objectives as stated in SEBI Act, 1992, SEBI enacted SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1994 in exercise of powers conferred under section 30 of the Act which laid down a procedure to be followed by an acquirer for acquiring majority shares or controlling in another company, so that process of takeover is carried out in a fair and transparent manner.

Thereafter, these regulations have been amended a number of times to address the changing circumstances and needs of corporate sector. In 1997 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.

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

Meaning of substantial quantity of shares or voting rights

 The said Regulations have discussed this aspect of ‘substantial quantity of shares or voting rights’ separately for two different purposes:

(I) For the purpose of disclosures to be made by acquirer(s):

(1) 5% or more shares or voting rights:
A person who, along with ‘persons acting in concert’  (“PAC”), if any, acquires shares or voting rights (which when taken together with his existing holding) would entitle him to more than 5% or 10% or 14% shares or voting rights of target company, is required to disclose the aggregate of his shareholding or voting rights to the target company and the Stock Exchanges where the shares of the target company are traded within 2 days of receipt of intimation of allotment of shares or acquisition of shares .

2) More than 15% shares or voting rights:
An acquirer who holds more than 15% shares or voting rights of the target company, shall within 21 days from the financial year ending March 31 make yearly disclosures to the company in respect of his holdings as on the mentioned date.

The target company is, in turn, required to pass on such information to all stock exchanges where the shares of target company are listed, within 30 days from the financial year ending March 31 as well as the record date fixed for the purpose of dividend declaration.

(II) For the purpose of making an open offer by the acquirer

(1) 15% shares or voting rights:
An acquirer who intends to acquire shares which along with his existing shareholding would entitle him to more than 15% voting rights, can acquire such additional shares only after making a public announcement (“PA”) to acquire at least additional 20% of the voting capital of the target company from the shareholders through an open offer.

(2) Creeping limit of 5%:
An acquirer who is having 15% or more but less than 75% of shares or voting rights of a target company, can consolidate his holding up to 5% of the voting rights in any financial year ending 31st March. However, any additional acquisition over and above 5% can be made only after making a public announcement. However in pursuance of Reg. 7(1A) any purchase or sale aggregating to 2% or more of the share capital of the target company are to be disclosed to the Target Company and the Stock Exchange where the shares of the Target company are listed within 2 days of such purchase or sale along with the aggregate shareholding after such acquisition /sale. An acquirer who has made a public offer and seeks to acquire further shares under Reg. 11(1) shall not acquire such shares during the period of 6 months from the date of closure of the public offer at a price higher than the offer price.

(3) Consolidation of holding:
An acquirer who is having 75% shares or voting rights of target company, can acquire further shares or voting rights only after making a public announcement specifying the number of shares to be acquired through open offer from the shareholders of a target company .

In order to appreciate the implications arising here from, it is pertinent for us to consider the meaning of the term ‘public announcement’..

Penal Provisions

In the event of non-compliance of the provisions of SEBI (Substantial Acquisition of Shares & Takeover) Regulations, 1997, commonly known as Takeover Code, the acquirer is liable for the penal provisions contained in the code itself. Regulation 45 of SEBI (Substantial Acquisition of Shares & Takeover) Regulations, 1997 is dealing with the penal provisions for the non-compliance of the obligations contained in the Regulations.

As per regulation 45 of the Regulations, for failure to carry out obligations under the regulations, following consequences may follow:

1. The acquirer faces the consequences of the escrow amount being forfeited besides penalties.
2. The Board of Target Company shall be liable for action in terms of regulation and Act.
3. The intermediary would face suspension or cancellation of registration.

The penalties stated above may include:

1. Criminal prosecution under section 24 of the SEBI Act.

In addition to any award of penalty by the Adjudicating Officer under the Act, if any person contravenes or attempts to contravene or abets the contravention of the provisions of this Act or of any rules or regulations thereof., he shall be punishable with imprisonment for a term which may extend to one year, or with fine or with both. Further, non compliance of the directions of the Adjudicating Officer shall be punishable with imprisonment for a term which shall not be less than one month, but which may extend to three years or with fine which shall not be less than two thousand rupees, but which may extend to ten thousand rupees or with both.

1. Monetary penalties under section 15H of the SEBI Act.

If a person fails to disclose the aggregate of his shareholding in the body corporate before he acquires any shares of that body corporate, or make a public announcement to acquire shares at a minimum price, he shall be liable to a penalty of twenty-five crore rupees or three times the amount of profits made out of such failure, whichever is higher

1. Directions under section 11B of the SEBI Act.

The Board may, in the interest of securities market, give directions, without prejudice to its right to prosecute under section 24 of the SEBI Act including:

a.) Directing the person concerned not to further deal in securities.
b.) Prohibiting disposal of securities acquired in violation of these regulations.
c.) Direct sale of securities acquired in violation of these regulations.

1. Directions under section 11(4) of the Act;

The authority may give the directions to the person in default & the directions may include the following:

1.  
   1. Suspend the trading of any security in a recognised stock exchange;
   2. Restrain persons from accessing the securities market and prohibit any person associated with securities market to buy, sell or deal in securities;
   3. Suspend any office-bearer of any stock exchange or self-regulatory organisation from holding such position;
   4. Impound and retain the proceeds or securities in respect of any transaction which is under investigation
   5. Attach bank accounts of persons involved in violation for a period not exceeding one month.
   6. Direct any intermediary or any person associated with the securities market in any manner not to dispose of or alienate an asset forming part of any transaction which is under investigation

1. Cease and desist order in proceedings under section 11D of the Act;

A Cease and desist order can also be passed under section 11D of the SEBI Act from committing or causing any violation of the SEBI (Substantial Acquisition of Shares & Takeover) Regulations, 1997.

1. Adjudication proceedings under section 15HB of the Act.

A residual clause has been provided in the Act, wherein it is mentioned that if any violation act is not specifically covered under the provisions, then the person may be held liable for a penalty which may extend to one crores rupe

Perceived pros and cons of takeover

Perceived pros and cons of a takeover differ from case to case but still there are a few worth mentioning.

Pros:

1. Increase in sales/revenues (e.g. Proctor & Gamble takeover of Gillette)
2. Venture into new businesses and markets
3. Profitability of target company
4. Increase market share
5. Decrease competition (from the perspective of the acquiring company)
6. Reduction of overcapacity in the industry
7. Enlarge brand portfolio (e.g. L’Oréal’s takeover of Bodyshop)
8. Increase in economies of sale 

Cons:

1. Reduced competition and choice for consumers in oligopoly markets. (Bad for consumers, although this is good for the companies involved in the takeover)
2. Likelihood of job cuts.
3. Cultural integration/conflict with new management
4. Hidden liabilities of target entity.

Mergers and Acquisitions are a natural process of economy. There is no point in fighting about them in a free economy. At the same time, the basic point that it thwarts or in a way hampers the substantial growth of the small retail businesses is also very true.

Too much of centralization of economic activities is bad either by government or Private individuals and companies.  It may give us the efficiency of economy to give additional benefits or facilities when buying from large conglomerates , but will kill the effectiveness of economy that allows many people to participate, thereby depriving them of livelihood.

In fact it would turn a huge amount of people into bio-mass of bigger businesses used and thrown at will, killing the entreprenuership of people that is needed to sustain a large economy such as ours.

Hence the solution is to exercise care and concern on which sectors efficiency is important and in which sectors effectiveness is important.

Today’s two big parties do not have that sense. They simply try to go the easy route