Demystifying Takeover Code

DEMYSTIFYING TAKEOVER CODEPavan Kumar Vijay:

KEYWORDS IN TAKEOVER CODEWhen an "acquirer"takes over the “shares” or “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.

LIFTING THE VEIL TSHARES Acquisition CONTROL BOTH SHARES & CONTROLAKEOVER

UNDERSTANDING SHARESReg 2 (k)Shares carrying voting rights & any security which would entitle to receive shares with voting rights in future But shall not include PREFERNCE SHARES REG 2(k)What is the status of partly paid shares under SAST Regulations, 1997?ISSUE The partly paid up shares are also shares under Takeover Code as voting rights is embedded in partly paid up shares.

UNDERSTANDING CONTROL “Control is the right to Appoint majority of the directors

Control the policy decisionsBy virtue ofShareholding or Management rights or Shareholders Agreements or Voting Agreements or in any other manner.REG 2(c)

THRESHOLDS DEFINED FOR COMPLIANCE Acquisition of more than 5%, 10%, 14%, 54% & 74% [Regulation 7]Persons, who are holding between 15% - 55%, acquisition/ sale aggregating more than 2% or more voting rights [Regulation 7(1A)]

THRESHOLDS DEFINED FOR OPEN OFFERAcquisition more than 15% or more voting rights [Regulation 10] Persons, who are holding between 15% - 55%, acquisition more than 5% or more voting rights in a financial year.[Regulation 11(1)]Persons, who are holding more than 55%, acquisition of single share or voting right [Regulation 11(2)]

Reg 3(1)(e)INTER – SE TRANSFER An Insight

Legal Insight: Inter-se Transfer REGULATION 3(1)(e) OF SEBI (SAST) REGULATIONS, 1997 GOVERNS THE ACQUISITIONS THROUGH INTER SE TRANSFERS. EXEMPTION FROM APPLICABILITY OF REGULATION 10,11 & 12 i.e. REQUIREMENT FROM MAKING PUBLIC OFFER.

Categories for Inter-se transferQualifying PromotersGroup under MRTP Act, 1969Categories Relatives under Companies Act, 1956Acquirer & Persons acting in concert

Category I – Inter-se Transfer amongst Group Main Features Group here is signifying the group as defined under MRTP Act, 1959. Another important feature is where persons constituting such group have been shown as group in the last published Annual Report of the Target Company.

Category I – Group… contd Definition of Group SECTION 2(ef) OF MRTP ACT, 1969 DEFINES GROUP INTO TWO PARTS:AssociatedPersons Group of persons having control without exercising controlling interest.

Associated persons such as relatives of director of a company, partner of a firm & any trustee in relation to a trust.

Any associated person in relation to associated person.Two or more Individuals, AOI, firms, trusts, body corporates who are in theposition to exercise control , whether directly & indirectly over any body corporate, firm or trust.

Category II – Inter-se transfer amongst relatives Relatives under this regulation means the Relatives defined under Section 6 & Schedule 1A under Companies Act, 1956. The definition of relative u/s 6 includes

Relative mentioned in Schedule 1A.

Schedule 1A gives a list of 22 persons. Main Features

Category III – Promoters… contd Category III – Inter-se transfer for Qualifying Promoters Qualifying Indian Promoter & Foreign Collaborators, who are shareholders.Qualifying Promoters

Category III – Promoters… contd Qualifying Promoters - DefinedAny person whoDIRECTLY OR INDIRECTLYis in control of the company Who is named as Promoter in any Offer Document OR Shareholding Disclosure, Whichever is later& includes….

Category III – Promoters… contd

Category III – Promoters… contd Category IV – Acquirer and Persons acting in concert. PAC Reg2(e)ACQUIRERReg 2(b)Exemption available only after 3 years from the date of closure of open offer made under these Regulations.

Pre- Conditions for availing Inter- se transfer.

Checks & Balances under Regulation 3COM PLIANCEStock ExchangeSEBISEBIAdvance Intimation (4 days in Advance)Report(21 days of acquisition)Fees to be accompanied with Report(Rs 1000025000)Reg 3(3)Reg 3(4)Reg 3(5)

Checks & Balances under Regulation 7Acquirer : Compliance of regulation 7(1) or 7(1A)Seller: Compliance of regulation 7(1A)Target Company:Compliance of Regulation 7(3)

Taxation IssuesSTT vs. LTCG/STCG

Taxation Issues..contd. A Comparative StudySecurities Transaction TaxLTCG/STCG STT is levied when the transfer is made through stock exchange. STT is @ 0.125% of the sale value.

LTCG/STCG is levied when the transfer is made in off market mode.LTCG –

20% with indexation benefit on the amount of capital gain . 10% without indexation benefit on amount of capital gain .STCG –

10% on the amount of capital gain. INTER- SE TRANSFER : A STRATEGICAL MOVEGood means for consolidation of holdings in a Company.

INTER- SE TRANSFER: Clause 40A Regulation 3(1A) “Nothing contained in sub-regulation (1) shall affect the applicability of the listing requirements.”Effect of Regulation 3(1A)The above-mentioned regulation is giving the effect that the exemption under regulation cannot exceed the provisions of listing agreement,i.e.the minimum public holding of 25% cannot be exceeded by the exemption of Inter- se Transfer

MATTER OF DEBATE:Whether Reporting under Regulation 3(4) is one time reporting?HELD: Regulation 3(4) is applicable to all cases wherever the acquisition exceeds the limit prescribed in the regulations irrespective of the existing holding of the acquirer.NAAGRAJ GANESHMAL JAIN V P.SRI SAI RAM, THE SAT

MATTER OF DEBATE:Whether the belated filing of report should not be considered as commission of offence when there is no substantial loss to the investors?HELD:It was held that when the belated filing of the report under 3(4) does not resulted in any gain to the appellant & also no loss to the invested, the imposition of the penalty is not justified.SAMRAT HOLDINGS V SEBI

Inter-se transfer is a good tool forconsolidation of holdings…………..However,the exemption is available subject to strict compliance of Regulation 3(3),3(4) & 3(5).Concluding Remarks

PREFERENTIAL ALLOTMENT OF SECURITIES

An issue by a companyOfEquity shares / Securities convertible into equity/FCDs/Warrants/PCDs/Convertible Preference Sharespursuant to a resolution u/s. 81(1A) of Act, to any select group of persons by way of private placement.

BENEFITS Simple way to raise capital of the Company

No need to appoint Merchant Banker.

Economical way to raise capital.

Minimum Formalities.GOVERNING LAWThe Companies Act, 1956SEBI (Disclosure and Investor Protection) Guidelines, 2000 (Chapter – XIII & XIIIA)Listing AgreementSEBI (SAST) Regulations, 1997 Unlisted Public Companies (Preferential Allotment) Rules, 2003

Proposed AllotteesChapter – XIIIA of SEBI (DIP) GuidelinesChapter – XIII of SEBI (DIP) GuidelinesAllotment to QIBs (not in Promoter Group) by companies listed on NSE / BSEOTHERS

Time Line- Preferential Allotment15 days (12 months in case of QIBs)30 days25 daysShareholders’ Resolution must be implemented within 15 days (12 months in case of QIBs)except in case of pending regulatory approvalsDespatch of Individual NoticesFiling of application of in-principal approval Board MeetingGeneral MeetingRelevant DateAllotment of Shares

Pricing Schedule6 months30 days2 weeksRelevant DateGeneral Meeting

Lock-in RequirementOthersQIBsExistingHolding Preferential Allotment ExistingHolding Preferential Allotment PROMOTERS – 20% of Total Capital - for 3 YearsRemaining – for one YearNo Lock in For One Year, except in case of Trading through Stock Exchange For Six Months OTHERS – For One Year

Currency of Security Convertible into Equity SharesQIBsOTHERSFCDs/ PCDs/ any other convertible Security –60Months from the date of allotment Warrants convertible into Equity Shares – can’t be issued to QIBs FCDs/ PCDs/ any other convertible Security –No time prescribed for conversionWarrants convertible into Equity Shares - 18 months from the date of allotment

Demystifying Takeover Code

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