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DEMYSTIFYING TAKEOVER CODE

DEMYSTIFYING TAKEOVER CODE. Pavan Kumar Vijay. :. KEYWORDS IN TAKEOVER CODE. When 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

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DEMYSTIFYING TAKEOVER CODE

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  1. DEMYSTIFYING TAKEOVER CODE Pavan Kumar Vijay :

  2. KEYWORDS IN TAKEOVER CODE When 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.

  3. LIFTING THE VEIL T SHARES Acquisition CONTROL BOTH SHARES & CONTROL AKEOVER

  4. UNDERSTANDING SHARES Reg 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.

  5. UNDERSTANDING CONTROL • Control is the right to • Appoint majority of the directors • To control the management • Control the policy decisions By virtue ofShareholding or Management rights or Shareholders Agreements or Voting Agreements or in any other manner. REG 2(c)

  6. 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)]

  7. THRESHOLDS DEFINED FOR OPEN OFFER Acquisition 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)]

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

  9. 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.

  10. Qualifying Promoters Group under MRTP Act, 1969 Categories Relatives under Companies Act, 1956 Acquirer & Persons acting in concert Categories for Inter-se transfer

  11. DETAILED ANALYSIS

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

  13. 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.

  14. 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 • Spouse • Members of HUF • Relative mentioned in Schedule 1A. • Schedule 1A gives a list of 22 persons. Main Features

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

  16. Category III – Promoters… contd Qualifying Promoters - Defined Any person who DIRECTLY OR INDIRECTLY is in control of the company Who is named as Promoter in any Offer Document OR Shareholding Disclosure, Whichever is later & includes….

  17. Category III – Promoters… contd Qualifying promoters..defined..contd

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

  19. Pre- Conditions for availing Inter- se transfer.

  20. Checks & Balances

  21. Checks & Balances under Regulation 3 C O M P L I A N C E Report (21 days of acquisition) Advance Intimation (4 days in Advance) Fees to be accompanied with Report (Rs 10000 25000) Reg 3(3) Reg 3(4) Reg 3(5)

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

  23. Taxation Issues STT vs. LTCG/STCG

  24. Taxation Issues..contd. A Comparative Study Securities Transaction Tax LTCG/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.

  25. INTER- SE TRANSFER : A STRATEGICAL MOVE Good means for consolidation of holdings in a Company.

  26. 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

  27. I SSUES

  28. 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

  29. 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

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

  31. PREFERENTIAL ALLOTMENT OF SECURITIES

  32. What is Preferential allotment of shares? An issue by a company Of Equity shares / Securities convertible into equity/FCDs/Warrants/PCDs/Convertible Preference Shares pursuant to a resolution u/s. 81(1A) of Act, to any select group of persons by way of private placement. 

  33. BENEFITS • Simple way to raise capital of the Company • No need to appoint Merchant Banker except in the case of QIP. • Economical way to raise capital. • Minimum Formalities.

  34. GOVERNING LAW The Companies Act, 1956 SEBI (Disclosure and Investor Protection) Guidelines, 2000 (Chapter – XIII & XIIIA) Listing Agreement SEBI (SAST) Regulations, 1997

  35. Proposed Allottees Chapter – XIIIA of SEBI (DIP) Guidelines Chapter – XIII of SEBI (DIP) Guidelines Allotment to QIBs (not in Promoter Group) by companies listed on NSE / BSE OTHERS

  36. Time Line- Preferential Allotment 15 days (12 months in case of QIBs) 30 days 25 days Shareholders’ Resolution must be implemented within 15 days (12 months in case of QIBs)except in case of pending regulatory approvals Despatch of Individual Notices Filing of application of in-principal approval Board Meeting General Meeting Relevant Date Allotment of Shares

  37. Pricing Schedule 6 months 30 days 2 weeks Relevant Date General Meeting

  38. Lock-in Requirement Others QIBs Existing Holding Preferential Allotment Existing Holding Preferential Allotment PROMOTERS – 20% of Total Capital - for 3 Years Remaining – for one Year No Lock in For One Year, except in case of Trading through Stock Exchange For Six Months OTHERS – For One Year

  39. Currency of Security Convertible into Equity Shares QIBs OTHERS FCDs/ PCDs/ any other convertible Security –60 Months 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 conversion Warrants convertible into Equity Shares - 18 months from the date of allotment

  40. Preferential Allotment:- In- Principle & Listing O • Process of identification of allottees. • Bank Statements • DIP Compliances – Pricing, Lock in , Identity • Clause 40A of Listing Agreement • Change in Management/Control BSE RVATIONS

  41. Preferential Allotment viz-a-viz Takeover Code

  42. Limit for Preferential Allotment Limits are calculated taking into account the EXPANDED CAPITALof the Company & not the EXISTING CAPITAL of the Company.

  43. Illustration I Acquirer (holding 20%) Through Preferential Allotment Acquirer’s holding cannot exceed 24.99% of Expanded Capital.

  44. Illustration II Acquirer (holding 5 %) Through Preferential Allotment Acquirer’s holding cannot exceed 14.99% of Expanded Capital.

  45. Illustration III Acquirer (holding 0%) Through Preferential Allotment Acquirer’s holding cannot exceed 14.99% of Expanded Capital.

  46. Example: Acquisition by a new entity upto allowable limit Existing Capital of Company: 1,00,000 shares Maximum Allowable Limit: 14.99% USUAL WAY OF CALCULATION 100000* 14.99% = 14,990 THE RIGHT WAY 100000* 14.99% / 85.01 = 17633 17633- 14990 = 2643 The difference is because of the calculation on expanded Capital Base.

  47. Example: Acquisition by a existing entity holding 50% presently Existing Capital of Company: 1,00,000 shares Maximum Allowable Limit: 4.99% USUAL WAY OF CALCULATION 100000* 4.99% = 4,990 THE RIGHT WAY Non-promoter holding / 45.01% 50000/45.01%= 11108 The promoters will get extra 11108 equal to 4.99%. So, the resultant promoter shareholding = 50000 +11108 61108 shares equal to 54.99%

  48. Queries Query 1 What is the maximum limit of preferential allotment? Can a Company through preferential allotment expand its capital without any limit? Query 2 Suppose the present holding of a promoter is 54% and after preferential allotment the holdings of the promoter remains same as that of 54% of the expanded capital. The question is whether any disclosure or compliance required in the present situation

  49. Queries Query 3 Suppose the present holding of a promoter is 54% and after preferential allotment the holdings of the promoter remains same as that of 54% of the expanded capital. The question is whether any disclosure or compliance required in the present situation? What, if, the same question arises in case the promoter is holding 60%? The issue is as there is acquisition of shares but such acquisition has not change the voting rights. The question is what is relevant in terms of takeover code, acquisition or voting rights?

  50. Conclusion To sum up… preferential allotment is becoming a buzz word these days… However, it is subject to various checks & balances.

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