Substantial acquisition of shares and takeover are governed by the guidelines issued by SEBI even before sec 12A of SEBI Act, 1992 was introduced. These regulations are called “ SEBI ( Substantial Acquisition of Shares and Takeover) Regulations”. It is also known as Takeover Regulations. The authority for framing such regulations was granted by Section 11 (2)(h) of the SEBI Act.
Initially, the regulations on substantial acquisition of securities were laid down in November 1994. But on the basis of the recommendations stated in the report of the committee under the leadership of Justice P N Bhagwati, the above-mentioned guidelines got repealed and were replaced in 1997. Prior to the introduction of 1994 regulations, clause 40 of the Listing Agreement provided the authority to make attempts to regulate the substantial acquisition of shares or controlling them. Though clause 40 got amended, later on, the implementation of the process prescribed under it is not difficult to follow.
OBJECTIVES OF SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVER) REGULATIONS
The Takeover Regulations thrive to achieve some objectives as per the report of the Bhagwati Committee. They are as follows:
- All shareholders should be treated equally and equal opportunities should be made available to them.
- Interests of shareholders should be protected.
- The acquirer should fairly and truthfully disclose all material information in all offer documents and public announcements.
- Acquirer or any other party should not furnish any information to an offer exclusively to any one group of shareholders.
- Shareholders will be provided with sufficient time to make an informed decision.
- An offer will be announced only after considering it very carefully and responsibly.
- Highest standard of accuracy and care has to be exercised by the acquirer and all other intermediaries while preparing the offer documents.
- Recognition by all those persons who are connected with the process of substantial acquisition of shares that there are bound to be limitations on their freedom of action and on the matter in which the pursuit of their interests can be carried out during the offer period.
- Refraining all the parties to an offer from leading to the creation of a false market in securities of the target company.
- The target company is not in a position to take any action which can frustrate an offer without the approval of shareholders.
Typically with the help of Takeover Regulations of SEBI, it is to be ensured that in all the matters of acquisition of control or acquisition of shares beyond stipulated limit, an opportunity to exit at a fair price that is determined by the Regulations has to be provided to all the public shareholders, as well as the public disclosures which are made as regards changes in shareholdings, both periodically as well as on event basis. However, Subsection (f) of Section 12A looks over only the first aspect i.e. acquisition beyond stipulated limits.
PUBLIC OFFER/ OPEN OFFER
Takeover Regulations (SEBI (Substantial Acquisition Of Shares And Takeover) Regulations) of 1997 provides the base for the introduction of the framework used for the indirect and direct acquisition of shares (voting rights) or getting the control of the company that has its shares listed on any of the recognized stock exchanges of India.
The company which is listed on any of the stock exchanges in India and whose control or shares have become the subject matter of the acquisition is termed as target company. The main motto of the Takeover Regulation is to inter alia ensure a timely and fair opportunity of exit to the shareholders as well as the transparency during the process of acquisition of shares of a listed company in all the matters of substantial acquisition of control or shares that provide voting rights in a company.
The opportunity of timely exit is made available to the shareholders in the form of a public offer. There has to be an announcement in the public through any leading newspaper for a public offer. Takeover Regulations lays down the list prescribing the prices at which the public offers have to be made. The manner to calculate the public offer, as well as the minimum size of the offer, is also prescribed by the Takeover Regulations.
The shareholders of the target company are also made aware of the public offer by the acquiring company and all other persons who are acting in the concert. Those promoters of the company, who are not acting in concert with the acquirer, are also allowed to take part in the open offer/ public offer and can do exit by tendering the shares owned by them. This is not subject to the fact that small shareholders may be deprived of their chance of full exit due to the participation of the promoters in the public offer and it is so because the regulations ensure equality to all the shareholders even without making any differentiation between small shareholders and large shareholders.
There are two major limitations that are imposed on a company when there is an offer period. Firstly, during the offer period, any director who is representing the acquirers can never be appointed as a director on the board of the target company. This is done so that the acquirer may not lose his interest in completing the offer period. However, there is an exception to this limitation. For instance, when the waiting period that is mandatory for a competitive offer gets lapsed, the entire consideration for getting the open offer completed has to be deposited with the escrow account.
Secondly, the board of directors of the target company is provided with the flexibility to take measures during the offer period. The reason for the same is to reduce the probability of any depletion that can take place in the value of the target company, which generally neither takes place in the ordinary course of a business nor does it get restricted until and unless they seek the approval of shareholders.
This provision was made with the main motive of getting the interests of the acquirers protected pursuant to which it cannot be subjected to any kind of waiver by the acquirer. Moreover, any company cannot withdraw any public offer if it is made. This mandate is subject to some exception. For instance, if the acquirer of the company dies or the approval of the necessary regulator has not been received prior to making the offer or any other exceptional circumstances that may demand withdrawal in the opinion of SEBI.
It is a mandate provided by Takeover Regulations to disclose the control and acquisition of shareholdings in a company periodically. There are many non- institutional lenders in the market who lends money on the basis of the pledge. The main idea behind the inclusion of these non- institutional lenders is to prevent any situation arising due to takeover or surreptitious acquisition in the disguise of the enforcement of the pledge.
The disclosures required by Regulations 7(1) and 7(1A) has to be made to both the stock exchanges and the target company within a time period of not more than two days pursuant to Regulation 7(2). In addition to this, Regulation 7(3) lays down another mandate for target companies to disclose to the stock exchanges within a time limit of a week from the date of receiving any information under Regulation 7(1) and Regulation 7(1A).
It was observed by the SAT that the failure to comply with Regulation 7 is not merely of technical nature. Along with this, it was held that the Regulation 7, in line with the recommendations provided by Bhagwati Committee, strives for the conversion of the object of transparent transactions provided by the Takeover Regulations into reality. The disclosures extend support to the regulators so that they can monitor the transaction taking place in the market effectively.
According to the report submitted by Bhagwati Committee, the disclosures not only proves to be a help for enhancement of transparency in the dealings by acquirer but also proves to be a warning system for the management of the target company. It has been seen that Regulation 7 also fulfils the object of providing necessary information to the company for taking any pre-emptive steps in order to prohibit any takeover of hostile nature. In addition to this, it also helps the investors to reach an informed decision relating to remain invested or to step out of the company. This finds its roots in the perception that are framed about the possible changes that may take place in the management of the company during the takeover.
In the wake of the Satyam Crisis, Regulation 8A got introduced. It provides another mandate of disclosing the details of all those persons who form a part of the group of promoters as well as the pledge of shares of the promoters. Pledged shares per se indicate that such shares are likely to be sold by pledgee on the event of any default. Due to this reason, it is very vital to disclose the same and Regulation 8 provides it to ascertain the contingent and real nature of the interest of promoter and their group.
TAKEOVER REGULATION AMENDMENT COMMITTEE REPORT (TRAC REPORT)
This committee was formed under the leadership of Shri C Achuthan and the report was submitted by this committee in July 2010. The committee recommended for completely re-writing of the regulations and almost all the suggestions, after scrutinizing the public comments, barring a few have been approved by SEBI with some modifications.
Some of the major recommendations made by the committee which got included in the Regulations are as follows:
- To increase the limit for the open offer trigger from 15% to 25%.
- As long as the minimum public sharing threshold is not violated, the annual creeping acquisition of 5% should be permitted above the 25% threshold.
Indirect acquisitions should be treated as a direct acquisition where the target company is a part of the predominant part of the acquired business.
 Justice P N Bhagwati Report on Takeovers.
 Para v, Justice P N Bhagwati Report on Takeovers.
 Para 1.2, Justice P N Bhagwati Report on Takeovers.
 Regulation 2(1)(o) of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997
 Regulation 14 and 15 of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997
 Regulation 20 of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997
 Regulation 21 of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997
 M/s Modipon Ltd. v SEBI, Appeal No. 34/ 2001, SAT Order dated 31.07.2001; See also, Modi Spinning and Weaving Mills Co. Ltd. v SEBI, Appeal No. 43/ 2001, SAT Order dated 09.11.2001.
 Regulation 22(7) and 23(3) of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997
 Regulation 23(1) of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997
 Regulation 27 of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997
 Para 16.1, Report on Reconvened Committee on Substantial Acquisition of Shares and Takeovers
 Milan Mahindra Securities Pvt Ltd v SEBI, Appeal No. 66/ 2003, SAT Order dated 15. 11. 2006.
 Para 15, Report on Reconvened Committee on Substantial Acquisition of Shares and Takeovers
 AO Order, Against M/s Laffan Software Ltd, dated 30.12.2004. SAT modified the penalty which was imposed in M/s Laffan Software Ltd v SEBI, Appeal No. 44/ 2005, SAT Order dated 12.09.2006. See also, Megha Resources Ltd v SEBI, Appeal No. 49/ 2001, SAT Order dated 19. 03. 2002, wherein it was held that ‘the idea behind mandating the timely disclosures to the company is to inform it about the concerning/ concentration of shares by others so as to empower it to take preventive measures, if it so desires, to ward of the entry of the potential raiders and strengthen the position held by the management.
 Report of the Takeover Regulations Advisory Committee.
 Agenda note for item no. 13, in respect of 138th meeting of the SEBI Board, dated 28.07.2011 read with the SEBI press release No. 119/ 2011 dated 28.07.2011
 Nizam pasha, Putting Trac Report under Scanner, Business Standards, 24.11. 2010