DRAFT SEBI TAKEOVER REGULATIONSOVERVIEW AND INDUSTRY PERSPECTIVE

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AGENDA

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1. Need of SEBI Takeover Regulations

2. Salient Features of Proposed Takeover Regulations and Industry Perspective

2.1. Key Definitions

2.2. Initial Threshold and Creeping Acquisition

2.3. Open Offer and its Related Concepts

2.4. Exemptions-Automatic and Approval Route

3. Conclusion

NEED OF SEBI TAKEOVER REGULATIONS

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The concept of takeover emerged in late 19th century in some countries like US, UK etc. when the

first wave of mergers and acquisitions started.

However, in India it was only in 20th century that the concept of takeover took birth;

With the announcement of the policy of globalization, the doors of Indian economy were opened for

the overseas investors;

In this changed scenario, mergers and acquisitions were the best option available for the

corporates;

This created a need for some regulation to protect the interest of Investors and develop the security

market;

In 1994, SEBI enacted SEBI Takeover Regulations, 1994;

In 1997, SEBI Takeover Code has been rechristened by enacting SEBI Takeover Regulations,

1997;

Thereafter, these regulations have been amended a number of times.

SALIENT FEATURES OF PROPOSED TAKEOVER

REGULATIONS

AND

INDUSTRY PERSPECTIVE

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KEY DEFINITIONS

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ACQUIRER

Means any person

who

Directly or indirectly , acquires or agrees to acquire whether

orHimself throughWith person acting in

concert with him

shares or voting rights in, or control over a target company

by

or

The proposed regulations recognize a person as acquirer even where the acquisition whether of shares or voting rights or control has been made by him through person acting

in concert with him i.e. through Special Purpose Vehicle or through the controlling entities.

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CONTROL

“Control” includes the right or the ability

to appoint

•majority of the directors or

•to control the management or

•policy decisions of the target company,

exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner

The scope of term Control has been widen to include not only the right but

also the situations where the persons have the ability to appoint majority of

the directors or to exercise control in any other manner.

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CHANGE IN CONTROL

Regulation 12 of the existing SEBI Takeover Regulations allows for the

change in control without giving the open offer provided that the

approval of shareholders has been obtained by way of special

resolution through postal.

Now the only Route available for Change in Control is way of Open Offer to the

shareholders of Target Company.

In other words, now only the monetary power will help in the acquisition of control i.e. through open offer to the 100% public

shareholders of the Target Company.

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INDUSTRY PERSPECTIVE

•The term “ability” is too vague and would result in unwanted regulatory work of the corporate;

• “Control” should be defined to include not only the acquisition of shares or voting rights but the acquisition of substantial part of business of the company;

•Need to clarify the term “Negative Control”;.

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FREQUENTLY TRADED SHARES

• Replaced with the definition of Infrequently traded shares.

• Trading turnover during the 12 months preceding the month in

which PA is made to be considered instead of 6 months.

• Trading turnover increased from 5% to 10% to consider the

shares as frequently traded shares.

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SHARES

• The scope of definition has been Broadened;

• Inclusion of Depository Receipts within the ambit of term shares.

• Holder of the depository receipts is treated at par with the one who acquired the Equity Shares carrying voting rights.

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IDENTIFIED DATE

Specified Date Identified Date

Means the date falling on the tenth business day prior to the commencement of the tendering period.

Means a date which shall not be later than the thirtieth day from the date of the public announcement.

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INITIAL THRESHOLD

AND

CREEPING ACQUISITION

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INCREASE IN THRESHOLD

• Increase in Threshold limit from 15% to 25%.

• This recommendation is made considering the average

promoters shareholding prevalent in the Listed Companies and

the international practices.

INITIAL THRESHOLD

Malaysia Hong Kong Australia U.K.

33 30 20 30

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INDUSTRY PERSPECTIVE

•The raising of the initial acquisition threshold to 25% is a welcome step and aligns more closely with global practices in other countries;

•The new threshold will support capital inflows from private equity players and is likely to be a stable and important source of capital for Indian businesses in coming years;

•No Transitional Provisions;

•Hostile takeover threat to the listed companies with lower promoter shareholding.;

•Mismanagement of companies - Any large investor can acquire some shares from the market to keep his holding upto 25% which is sufficient to block any Special Resolution and keep a check on the management;

•Reduction in the Number of Open Offers;

•Contradictory with CCI Regulations.

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PROMOTER HOLDING IN LISTED COMPANIES

Total Promoter Holding (%)

Companies With Promoter Holding Between

Market Cap Range (Rs.

Mn)

No. of Compani

es

Mean Median 0-15% 15-20% 20-25% 25-30%

0-500 2,477(61.1%)

45.50% 46.40% 274(11.1%)

87(3.5%)

97(3.9%)

138(5.6%)

500-2,000 649(16.0%)

52.60% 54.90% 34(5.2%)

19(2.90%)

12(1.8%)

19(2.9%)

2,000-5,000 312(7.7%)

54.30% 55.00% 10(3.2%)

8(2.6%)

1(0.3%)

10(3.2%)

5,000-10,000 157(3.9%)

52.20% 54.50% 5(3.2%)

1(0.6%)

3(1.9%)

8(5.1%)

10,000 and above

459(11.3%)

55.20% 54.30% 15(3.3%)

5(1.1%)

11(2.4%)

16(3.5%)

Overall 4,054(100%)

48.90% 50.50% 340(8.4%)

120(3.0%)

124(3.1%)

191(4.7%)

Source: TRAC Report

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CREEPING ACQUISITION

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INDUSTRY PERSPECTIVE

• It will help the promoters in the consolidation of holdings;

•Flexibility to acquire 10% shares or voting rights within 2 days without

triggering the open offer requirement.

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OPEN OFFER

AND

ITS RELATED CONCEPTS

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INCREASE IN OFFER SIZE

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• This would make acquisitions an expensive proposition for companies, while at the same

time ensuring only serious players participate.

• Foreign investors might be in a better position to leverage finance compared to domestic

acquirers.

• Greater clarity is required on how this rule would be applicable in the case of FDI caps in

certain sectors.

• There are tax issues as well for tendering Open Offers.

• Funding is not easily available in India for purchase of shares

• If more companies get delisted, the market cap of India Inc. will get reduced and

investors will have lesser investment opportunities.

• Very few offers get oversubscribed, no need to increase the size.

INDUSTRY PERSPECTIVE

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Offer size (% of total equity capital of Target Company)

FY Total <=20% >20%

2006-07 89 77 12

2007-08 118 100 18

2008-09 113 95 18

2009-10 75 65 10

Total 395 337 58

% of Cases 100% 85.32% 14.68%

OFFER SIZE ANALYSIS

Source: TRAC Report

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VOLUNTARY OPEN OFFER

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FREEDOM TO COMPLETE ACQUISITION UNDER SPA

Existing Regulations Proposed Regulations

Not allowed to complete the acquisition of shares or voting rights in, or control over, the target company under any agreement attracting the obligation to make an open offer for acquiring shares until the completion of offer formalities.

Completion of acquisition under any agreement attracting the obligation to make an open offer for acquiring shares allowed after a period of 21 days subject to acquirer depositing 100% consideration payable under the open offer.

This provision will allow the acquire to have the representation in the Target Company even before the completion of open offer and

to exercise the control over it.

TAKEOVER OF SMALL COMPANY

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In line with Delisting Regulations, there is a need for separate provisions for Takeover of Small Company

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ACQUISITION FROM OTHER COMPETING ACQUIRER

The new provision will help in removing the obstacle which arise in the matter of battle for Great Offshore Limited when ABG Shipyard wants

to sell the shares receive in the offer to Bharati Shipyard.

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NON COMPETE FEES

More beneficial for the shareholders as they will be entitled to get the same price as have been received by the promoters/sellers from the

acquirer.

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INDUSTRY PERSPECTIVE

Shareholder Promoter

Investor Investor + Management+ Control

Thus, Payment of Non compete fees or control premium should be allowed.

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OPTION TO WITHDRAW SHARES

The option available to the shareholders to withdraw the

shares tendered in the Open Offer has been taken back

considering the point that in the proposed regulations, the last

of upward revision by the acquirer is prior to the opening of

Offer Period.

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NO INDUCTION ON BOARD

Prohibition on the Induction of new director on

the board of the Target Company during the

pendency of the competing offer

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RECOMMENDATION BY INDEPENDENT DIRECTORS

Board of Target Company to Constitute a committee of

Independent Directors to provide written reasoned

recommendations on the Open Offer to the shareholders of

the Target Company and publication of such recommendation.

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REDUCTION IN TIME LINE

The timeline for

completion of the open offer

has been reduced from

95 calendar days

To

57 Business Days

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EXEMPTIONS

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WITHDRAWAL OF EXEMPTION

The following exemptions have been withdrawn from

automatic exemption category

•Allotment of shares pursuant to an application made under a Public

Issue;

•Acquisition of shares in the ordinary course of business by a market

maker;

•Acquisition of shares in the ordinary course of business by Public

Financial Institutions on their own account.

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NEW EXEMPTIONS INTRODUCED

Increase in shareholding pursuant to Buy Back

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• Approval of the scheme by shareholders by way of

Special Resolution passed by Postal Ballot; and

• Increase in shareholding has not resulted in change in

control.

NEW EXEMPTIONS INTRODUCED

Increase in shareholding pursuant to CDR Scheme

ISSUE

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Simultaneously with the Buy Back and CDR,

Increase in Shareholding pursuant to Forfeiture

of shares should also be exempted.

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REPORTING OF EXEMPTION AVAILED TO SEBI

•The ambiguity involved in regulation 3(4) of the existing regulations with respect to the fact whether it’s a one time compliance or not has been removed.

•New Regulations requires the reporting in every event whenever the exemption is sought under the sub clauses as mentioned under it.

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EXEMPTION FROM SEBI (APPROVAL ROUTE)

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CONCLUSION

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POSITIVE IMPACT

•Beneficial for the small public shareholder due to:

•Increase in the Offer size which means exit opportunity to all the

shareholders;

•More Stringent and frequent disclosure requirement on the part of

the acquirer.

•More Investment in the shares of listed Indian Company on

account of increase in threshold.

•More clarity in the provisions.

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NEGATIVE IMPACT

• Loss to the shareholders because of the Reduction in Number of

Open Offer on two accounts:

•Increase in threshold limit from 15% to 25%

•Increase in offer size from 20% to 100%.

•Costlier affair for the acquirers.

•Offer to all public shareholders without bank funding will not

possible.

•Complicated Offer Price Determination.

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Pavan Kumar Vijay

Managing Director

Corporate Professionals Capital Private Limited

SEBI Registered Merchant Banker

THANK YOU