Sebi Substantial Acquisition of shares and Takeover Regulation

Sebi Substanstial Acquisiotion

1. SEBI ( SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS, 2018

2. Index Topic Presented by Preliminary Ali Asgar Bohra Substantial acquisition of shares, voting rights or control Ali Asgar Bohra Open Offer Process Rishabh Aggarwal Other Obligations Rishabh Aggarwal Disclosure of Shareholding and control Rohit Ranjan Singh Miscellaneous Rohit Ranjan Singh 2

3. Preliminary These regulations may be called the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 These regulations shall apply to direct and indirect acquisition of shares or voting rights in, or control over target company 3

4. TYPES OF TAKEOVER 4

5. TYPES OF TAKEOVER 5

6. VERTICAL INTEGRATION 6

7. DIVERSIF I C A TI O N 7

8. DEFINITIONS TARGET COMPANY : means & includes body corporate or a company which is listed on a stock exchange in India and whose shares are acquired or intended to be acquired by any acquirer. 8

9. DEFINITIONS ACQUIRER : means any person who directly or indirectly acquires or agrees to acquire whether by himself or through or with person acting in concert with him, shares or voting rights or control over target company. 9

10. DEFINITIONS SHARES: MEANS ~ EQUITY SHARE CAPITAL OF TARGET COMPANY INCLUDES ~ ANY SECURITY WHICH ENTITLES THE HOLDER TO EXERCISE VOTING RIGHTS 10

11. DEFINITIONS DEEMED PERSON ACTING IN CONCERT : Company, its holding company, subsidiary company & companies under same management or control a company, its directors, and any person entrusted with the management of the company promoters and members of the promoter group immediate relatives MF/ VCF/ CIS / AIF, its sponsor, trustees, trustee company, and asset management company a merchant banker / portfolio manager and its client, who is an acquirer Investment Co. / Fund and such person who has an interest @ 10% of the paid up capital or unit – NA for Mutual Funds registered with SEBI banks, financial advisors and stock brokers of the acquirer * * not apply to a bank whose sole role is that of providing normal commercial banking services 11

12. DEFINITIONS CONTROL: includes the right to appoint majority of the directors or to control the management or policy decisions 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 . Provided that a director or officer of a target company shall not be considered to be in control over such target company, merely by virtue of holding such position; 12

13. DEFINITIONS ACQUISITION means DIR E C T L Y INDIR E C T L Y A C QUIRING AGREEING TO ACQUIRE SHARES CON T ROL VOTING RIGHTS OF TARGET COMPANY 13

14. AREAS OF TAKEOVER CODE DISCLOSURES OPEN OFFER PROCESS & COMPLIANCE EXEMPTIONS FROM OPEN OFFER 14

15. Reg. 3 : SUBSTANTIAL ACQUISITION OF SHARES OR VOTING RIGHTS TRIGGER LIMIT / PUBLIC AMM O U N C E MENT 1 st LEVEL / INITIAL TRIGGER 2 nd LEVEL / CREEPING ACQUISITION TRIGGER 15

16. 1 st LEVEL TRIGGER Any acquirer, along with PAC (if any) while acquiring shares of the Target Company where by pursuant to such acquisition their post acquisition holding in the Target company Reaches or Exceeds 25% of the voting rights in such target company then initial trigger is said to be touched by such acquirer Reg. 3(1) Casts an obligation on the acquirer to make public announcement of an open offer for acquisition of additional 26% shares of Target Company As per Reg. 7(1) prior acquiring such shares, entitling him to exercise 25% or more voting rights in such Target Company. 16

17. CREEPING ACQUISITION Any acquirer who along with his PAC hold 25% or more voting rights in the Target Company can acquire additional maximum 5% shares of the Target Company during any financial year without attracting the obligation to make an open offer under the Takeover regulations Ex. Mr. Ambani hold 28 % shares in East India Hotels Ltd. (EIH) as on 01/04/2015. Now for the financial year 2015 – 2016, he can acquire max. 5% more shares of company i.e. 28% + 5% = 33% However in next financial year 2016 – 2017, he can further acquire additional 5% shares of EIH Ltd. i.e. 33% + 5% = 38% & so on 17

18. 2 nd LEVEL TRIGGER As per Reg. 7(1) PROVIDED THAT Post acquisition holding of such acquirer together with its PAC must not exceed the maximum permissible non – public shareholding. Thus maintaining the minimum public float of 25% in such Target company. As per Reg. 3(2) Any acquirer, along with PAC (if any) who has already acquired 25 % or more shares of the Target Company shall not acquire more than 5% shares of such Target company within any financial year (starting April 1 st ) without making prior public announcement of an open offer for acquiring additional 26% s hares of Target Company 18

19. ACQUISITION OF ADDITIONAL VOTING RIGHTS For the purpose of determining the acquisition of additional voting rights GROSS ACQUISITIONS made by the acquirer along with PAC must be taken into consideration. Assuming that these were the only 4 transactions that were entered by Rajiv. IS THE TRIGGER TOUCHED ? YES. Since his gross acquisition has exceeded 5% (i.e. 3% in April & May each) even though his aggregate holding is same. Ex. Rajiv’s stake in Bajaj Ltd. was 42% as on 01/04/2015 He purchased 3% shares in April’15 He sold 3% shares in May’15 He purchased 3% shares in June’15 He sold 3% shares in July’15 (42 + 3 = 45%) (45 – 3 = 42%) (42 + 3 = 45%) (45 – 3 = 42%) 19

20. ACQUISITION OF ADDITIONAL VOTING RIGHTS I n the case of acquisition of shares by way of issue of new shares by the target company or where the target company has made an issue of new shares in any given financial year, the difference between the pre-allotment and the post-allotment percentage voting rights shall be regarded as the quantum of additional acquisition . POST ALLOTMENT PRE ALLOTMENT CHANGE IN VOTING RIGHTS UP TO 5 % NO PUBLIC ANNOUNCEMENT MORE THAN 5 % TRIGGER IS TOUCHED PUBLIC ANNOUNCEMENT 20

21. Reg. 6: VOLUNTARY OPEN OFFER Pre Conditions: Prior holding of at least 25% or more of voting rights in the Target Company. No acquisition was made in the preceding 52 weeks without attracting the obligation to make an public announcement to make an open offer. i.e. NO CREEPING ACQUISITION Minimum offer size of 10 % No acquisition of shares during the offer period except under the open offer No further acquisition of shares for a period of 6 months after the completion of open offer except by way of another voluntary open offer or competing offer 21

22. Definitions In these regulations, unless the context otherwise requires, the terms defined herein shall bear the meanings assigned to them below, and their cognate expressions and variations shall be construed accordingly— “Acquirer” means any person who, directly or indirectly, acquires or agrees to acquire whether by himself, or through, or with persons acting in concert with him, shares or voting rights in, or control over a target company; “Acquisition” means, directly or indirectly, acquiring or agreeing to acquire shares or voting rights in, or control over, a target company; “Act” means the Securities and Exchange Board of India Act, 1992 (15 of 1992); “Board” means the Securities and Exchange Board of India established under section 3 of the Act; 22

23. Definitions “Control” includes the right to appoint majority of the directors or to control the management or policy decisions 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 “Convertible Security” means a security which is convertible into or ex-changeable with equity shares of the issuer at a later date, with or without the option of the holder of the security, and includes convertible debt instruments and convertible preference shares; “Disinvestment” means the direct or indirect sale by the Central Government or any State Government or by a government company, as the case may be, of shares or voting rights in, or control over, a target company, which is a public sector undertaking; “Enterprise Value” means the value calculated as market capitalization of a company plus debt, minority interest and preferred shares, minus total cash and cash equivalents; 23

24. Open Offer Process 24

25. Rules Related to - Procedure Rules Appointment of a Merchant Banker Must be a third party with no stakes in the transaction Public Announcement of Acquisition 1.)Must be on the same day as the appointment. 2.)Must be sent to the target company, all exchanges where the company is listed and in an English, Hindi and regional language newspaper of their choice. 3.) Must contain the details of companies as well as the offer price and size. Detailed Statement to SEBI 1.) Must be sent within five working days of public announcement. 2.)Must contain Mode of Consideration along with other documents such as public announcement, the detailed public statement and the draft letter of offer Provision of Escrow 1.)Must be made within two days of Public Announcement. 2.) Must contain at least 25% of total consideration payable, the remaining amount may be available in a form of bank guarantee. 3.) The Account can only be wound up 30 days after payment of consideration 25

26. Rules Related to - Procedure Rules Conditional and competing offers 1.) Upon making a conditional offer, the offering company shall not acquire any shares of the target company till the acceptance. 2.) If a competing offer is not made within 15 days of a previous offer then the competing acquirer is considered to be “disinterested” Payment of consideration 1.) The payment to the shareholders must be made within 10 working days. 2.) Money left in the account 7 years after payment is credited to investor protection fund. Completion of Acquisition 1.) The Acquisition may only be completed 21 days of payment of consideration. 2.)The acquirer shall complete the acquisitions not later than twenty-six weeks from the expiry of the offer period 26

27. In case of withdrawal of the open offer A withdrawal may only be done under following conditions- A statutory approval being refused Such circumstances as in the opinion of the Board, merit withdrawal. The death of the acquirer being a natural person A false statement made in the offer which cannot be upheld by the acquirer. In the event of withdrawal of the open offer, the acquirer shall through the manager to the open offer, within two working days, inform all parties involved until now. 27

28. Obligations of Various Parties involved in the Merger or Acquisition 28

29. Obligations of the Directors of the target Company No person representing the acquirer shall be appointed as director on the board of directors of the target company, for at least 15 days after the provision of escrow. During the pendency of competing offers, by any acquirer, there shall be no induction of any new director to the board of directors of the target company. In the event the acquirer is already represented by a director on the board of the target company, such director shall not participate in any deliberations of the board of directors of the target company. 29

30. Obligations of the Acquirer Prior to making the public announcement of an open offer, the acquirer shall ensure that firm financial arrangements have been made for fulfilling the payment obligations under the open offer and that the acquirer is able to implement the open offer. Unless specified in the offer document the acquirer may be debarred from causing alienation of material assets for a period of two years after the offer period. The acquirer shall not sell shares of the target company held by it, during the offer period. 30

31. Obligations of the Target Company The Target Company must not take any special corporate action during the tender period. The Target Company must assist the acquirer with the acquisition process through acts like providing them with the list of shareholders and verification of shares tendered in acceptance of the open offer. The board of directors of the target company shall make available to all acquirers making competing offers, any information required by them. 31

32. Obligations of the manager to the open offer The manager must arrange and ensure sufficient funds for the acquirer to meet the upcoming financial obligations. The manager must ensure due diligence in all formal proceedings including but not limited to offer document, compliance and Board approval. The manager to the open offer shall file a report with the Board within fifteen working days from the expiry of the tendering period, confirming status of completion of various open offer requirements. 32

33. Disclosure of Shareholding and Control Disclosure related to Provisions SH and voting rights of acquirer, promoter and PAC Convertible securities regarded as shares Immediate release of information by stock exchange Disclosure of acquisition and disposal If acquirer or PAC, held shares aggregating to 5% or more in target company ,must be disclosed Disclose it with in two days of the acquisition to stock exchange and RO of target company shares taken by way of encumbrance shall be treated as an acquisition, shares given upon release of encumbrance shall be treated as a disposal 33

34. Continual Disclosures Acquirer or PAC, held shares (> 25%) in target company as on 31 st Mar, shall disclose Promoter and PAC disclose their SH as on 31 st Mar With in 7 days from end of FY, to stock exchange and RO of target company Disclosure of encumbered shares Promoter and PAC shall disclose details of shares in such target company encumbered by them Also invocation or release of such encumbrance of shares Disclosures shall be made within seven working days 34

35. MISCELLANEOUS Power to issue directions- SEBI If shares were acquired in violation of regulations, SEBI can direct divestment of shares. transfer the shares or proceeds from sale of those share to IPEF direct the target company or any depository not to give effect to any transfer of shares direct not to exercise voting rights by acquirer or any person related debar the person from capital market direct acquirer to make open offer on price set by Board direct acquirer to make open offer and pay interest, if making of an open offer has delayed In case of non payment by acquirer, SEBI can restrict acquire to enter in any transaction that can make him liable to make open offer. 35

36. JHS Svendgaard Laboratories 'promoter settles case with SEBI As per the order, Nanda informed that in the EGM held in September 2015, a special resolution was passed to issue 3.59 crore fully convertible warrants on a preferential basis. Following this, the board of directors in January, 2016 resolved to allot 1.5 crore fully convertible warrants at an issue price of Rs 11 each convertible into equivalent number of equity shares of the company to Nanda. The conversion of the warrants into equity shares was intended to happen over the course of three financial years, the order noted. A total of 58.5 lakh warrants were supposed to be converted during the financial year 2016-17. However, only 8.5 lakh shares were converted in the financial year as the conversion did not happen as intended due to an inadvertent error, it added. SEBI considered the proposed settlement terms by the applicant, and recommended the case for settlement upon payment of Rs 37.42 lakh. 36

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38. Amendments in 2020 Increase in creeping acquisition limit -Promoters are now permitted to increase their stake in Listed Companies by up to 10% (increased from the earlier limit of 5%) during financial year 2020-21, without triggering the obligation to launch a mandatory open offer for an additional 26% stake. To avail of such relaxation, the underlying acquisition (beyond 5% and up to 10%) must be through a preferential issue of equity shares – i.e. through a primary infusion of capital in the Listed Companies Removal of restrictions on voluntary open offer : The restriction on making a voluntary open offer if shares of a Listed Company were acquired in the preceding fifty-two weeks has been temporarily suspended till 31 March 2021. Accordingly, Promoters are now entitled to launch a voluntary open offer to acquire 10% or more stake from public shareholders, even if such promoter has acquired Listed Company shares in the preceding fifty-two weeks. 38

39. A Case Study Target Company- Saurashtra Cement Limited Matter- The target company convened an AGM on December 12, 1997 inter alia to pass a resolution, to allot in the course of domestic and/or international offering, equity shares of `10/- each for a total of `400 crores including premium, at a price to be decided as per SEBI Guidelines on Preferential Issues, but not less than `30/- per share. The noticees ( Pallor, Fern, Fawn , Tejashree, Willow ) applied for allotment of a total of 80 lakh shares and the target company had, on March 11, 1998, allotted 80,00,000 shares to five noticees, who are the wholly owned subsidiaries of a main promoter (i.e., Jagmi Investments Limited) of the Target Company. 39

40. The Target Company had further issued and allotted shares to Tejashree, two different entities, namely, F. L. Smidth & Co., Denmark and Industrialization Funds for Developing Countries. a public offer was made on March 19, 1998 by the 'Auto Riders Group’. Stayed by civil court in a suit filed by fawn. Auto Riders Group had filed a complaint with SEBI alleging violation of disclosure (that noticees were part of promoter group of target company and had not made public offer). January 15, 1999 , SEBI had directed the noticees to make a 'public announcement to acquire shares from the remaining shareholders of the target company an aggregate minimum of 20% of voting capital of the target company within a period of two months of the Order at a price in accordance with the regulations’. Order was challenged by Fawn and T.C by way of two separate appeals before the Central Government. Both appeal Got rejected. 40

41. Then challenged in High Court , whose order came out on March 03, 2011 - it is for SEBI to consider whether even after lapse of so many years it still wants, the petitioner to make offer to the public, as is directed by the order impugned in the petition. SEBI reiterated its previous order with exemption from payment of interest on the consideration amount citing stay by HC. Noticees challenged the order before the Hon'ble Securities Appellate Tribunal. SAT asked noticees to provide shareholding pattern on trigger date and present date SAT issued the order on Mar 05,2014 – Reiterate the same order of HC. SEBI then issued third order – directed noticees to made public offer with payment of interest on consideration amount. 41

42. Noticees challenged again this order to SAT, on which SAT on September 14, 2016 set aside the third SEBI Order with a direction to SEBI to "pass fresh order on merits and in accordance with law without being influenced by the observation made in the earlier orders. SEBI provided opportunity of personal hearing for noticees on April 16, 2018 After personal hearing ,noticees on May 10, 2018 filed their written submissions cited SEBI had no power to order an Open Offer . After all submissions and consideration SEBI had directed five noticees to make public offer and pay interest the rate of 10% per annum, from the date when they incurred the liability to make the public announcement (i.e. March 11, 1998) till the date of payment of consideration, to the shareholders who were holding shares in the Target Company on the date of violation and whose shares have been accepted in the open offer, after adjusting dividend, if any, that was paid. 42