Takeover Regulations to more costlier

Achuthan Committee on Takeover Regulations submits report to SEBI

Much awaited Takeover Regulations Advisory Committee constituted under the Chairmanship of Shri. C.Achuthan submitted its report to SEBI Chairman Shri. C. B. Bhave today.

Considering the substantive changes recommended upon review of the existing law governing substantial acquisition of shares and takeovers, the Committee has comprehensively re-written the regulations. The draft Regulations form an integral part of the report.

Some of the main recommendations of the Committee are summarized below:

Triggers for open offers

The Committee has recommended an increase in the acquisition threshold for the initial trigger of an open offer from the current level of 15% to 25% of the voting capital of a listed company. While no change has been recommended in the annual creeping acquisition limit of 5%, the Committee has recommended that creeping acquisition be permitted only to acquirers who already hold more than 25% of the voting capital, subject to the aggregate post-acquisition shareholding not exceeding the maximum permissible non-public shareholding.

Indirect Acquisitions

The Committee has emphasized clarity in the trigger of an open offer pursuant to an indirect acquisition of shares, voting rights in, or control over a target company.  The ability to indirectly exercise voting rights beyond the trigger threshold limits in, or exercise control over a target company, would attract the obligation to make an open offer, regardless of whether such target company is a predominant part of the business or entity being acquired. The Committee has further recommended that if the indirectly-acquired target company is a predominant part of the business or entity being acquired, the same would be treated as a direct acquisition for all purposes.  The Committee has also formulated parameters for determination of whether the indirectly-acquired target company is a significant part of the acquisition.

Offer Size

The Committee has recommended that an open offer ought to be for all the shares of the target company to ensure equality of opportunity and fair treatment of all shareholders, big and small. The exception to this rule is the size of an open offer where the same is voluntary in nature.  The current regulations mandate a minimum offer size of only 20%.

Voluntary Open Offer

Recognizing the need to enable transparent consolidation by persons already holding in excess of 25%, the Committee has recommended voluntary offers of a minimum size of at least 10% and a maximum size of such number of shares as would not result in a breach of the maximum non-public shareholding permitted under the listing agreement. Under the existing regulations, an offer for a percentage lesser than minimum prescribed percentage can only be by shareholders holding more than 55%.  

Option to delist

The Committee noted that the 100% open offer requirement could result in an acquirer ending up holding beyond the maximum permissible non-public shareholding, which may require the acquirer to either delist or bring down his holding to meet the continuous listing requirements. The Committee has recommended that the acquirer may state upfront his intention to delist if his holding in the target company were to cross the delisting threshold pursuant to the open offer.

In the absence of any such disclosure or when the response to the open offer is below the delisting threshold, the acquirer would be required to either proportionately reduce both his acquisitions under the agreement that triggered the open offer and the acquisitions under the open offer or to bring down his holding to comply with continuous listing requirements.

This option is currently not provided under the regulations, and will provide a seamless opportunity to new acquirers for delisting.

Exemptions from open offer obligations

Exemptions have been made precise, streamlined and provided with clear conditions on the basis of the specific charging provision from which exemptions would be available. Some of the areas where clarity has been brought in include schemes of arrangement, certain inter se transfers, corporate debt restructuring and rights issues. 

While SEBI would continue to have the power to grant exemption from making an open offer, the requirement of making a reference to Takeover Panel has now been left to the discretion of SEBI.

Offer price

The minimum price payable as the offer price continues to be regulated. The minimum offer price is classified between the price payable for direct acquisitions and indirect acquisitions.  The major changes proposed are: (i) market price to be based on 12 weeks volume weighted average of market prices as against higher of weekly averages of market prices for 26 weeks or 2 weeks; (ii) a qualitative improvement and expansion in the look back provision; (iii) in the case of indirect acquisitions, ascription of value to the target company under certain circumstances.

Mode of payment

The Committee has brought in clarity on valuation in case offer price is being paid through shares. To ensure that the shares given in consideration for the open offer are indeed liquid and an acceptable replacement for cash, eligibility conditions have been stipulated. The Committee also noted that although the current regulations provide for exchange offers, the same has not been used for want of clarity on whether such issuance would attract provisions of preferential allotment and public issue requirements. The Committee has recommended that SEBI may consider making suitable amendments to ICDR/ other regulations as applicable.

Competing offers

The Committee has recommended certain changes such as increasing the period for making a competing bid, prohibiting acquirers from being represented in the board of target company, and permitting any competing acquirer to negotiate and acquire the shares tendered to the other competing acquirer, at the same price that was offered by him to the public.

Execution of the agreement that triggers open offer

The Committee has recommended that the execution of the agreement that triggered the open offer obligation may be completed during the pendency of the open offer provided 100% of the consideration payable under the open offer is deposited in escrow. Currently, an agreement which triggers an open offer can be consummated only after completion of the offer formalities.

The Committee has further recommended that execution of such agreement would have to be completed within 26 weeks after the offer period. Currently the regulations are silent on this aspect.

Governance Issues

The current Regulations restrict the target company from undertaking certain transactions during the offer period. The Committee thought it fit to bring in materiality concept as also to enhance the scope of such restrictions to include transactions by subsidiaries since potentially material transactions can be undertaken at the level of any subsidiary of the target company without approval of shareholders of the target company. 

The Committee has also decided to mandate recommendation on the open offer, by a committee of independent directors of the target company. This is currently optional. 

It is to be noted that much awaited Report of Takeover Regulations Advisory Committee released for public comments and the draft regulations, if approved by the SEBI board, could alter the face of M&A in publicly listed companies in India.

Much like the proposed revamp of tax laws, the draft regulations propose to fully rewrite the existing Takeover Code and aim to provide for a simpler, precise, and unambiguous regulatory regime. The Advisory Committee has used the existing Code and jurisprudence around it as a starting point and has considered international practices suitably modified to the Indian context.

Clearly, there seems to be an attempt to balance the interests of various stakeholders including acquirers, shareholders, and target company, with the overarching philosophy of protecting the interests of public shareholders in takeover situations. It is heartening to see that the committee has painstakingly laid out the objectives and various issues considered by it while drafting these proposals.

The two most significant changes in proposed regulations are the increase in threshold limit for a public offer from 15% to 25% and the requirement to give an exit opportunity to 100% public shareholders via a public offer as compared to the minimum 20% now. The increase in threshold limit would be a welcome change for potential acquirers, particularly private equity investors, and is in recognition of the changed scenario where very few promoters control listed companies with 15% shareholding.