Key Perspectives on the

SEBI Takeover Code

G. Anantharaman
Director – Tata Realty and Infrastructure Limited
April 2010
An Overview

Shares may be acquired either by way of block deal
with select shareholders, tender offer (to all the
shareholders), or through open market purchases.

Acquisition of a stake in a listed Indian company
requires compliance with key regulations.

- Securities and Exchange Board of India (SAST)
Regulations 1997 (the ‘Takeover Code’) of Securities
and Exchange Board of India (‘SEBI’)

The Takeover Code stipulates requirement, depending
upon the nature and quantum of the acquisition, of
making an offer to purchase shares from the public
shareholders, including

- The minimum number of shares for which the offer is
to be made

- The minimum price at which the shares must be
acquired
An Overview

In the event the public shareholding in the Indian
Company falls below the specified 10%, then

The acquirer has to make an offer to buy out the
outstanding shares remaining with the
shareholders, resulting in de-listing of the
Company, or for delisting the company process
prescribed under delisting guidelines needs to be
followed The acquirer has to divest, through an
offer for sale or by a fresh issue of capital to the
public, to keep the public holding at the
prescribed levels and prevent a delisting

FIPB and/or RBI approval may be required in
specific cases.
Overview of Major Provisions of the
Takeover Act, 1997

SEBI (SAST) Regulations, 1997 (The Takeover Code),
governs acquisitions of stocks in listed Indian
companies.

An Acquirer may begin purchasing stock without any
requirement of a Tender Offer until a 15% ownership
(all thresholds refer to Shares Outstanding) threshold

Once this is reached, or if control is acquired at a
holding below 15%, the Code requires the holder to
launch a Tender Offer for a minimum of a further
20% of the shares outstanding in the Target

At this point, assuming the Acquirer has a 35% stake
in the Target, it may do one of the several things:
Overview of Major Provisions of the
Takeover Act, 1997

Gain control (no other shareholder at 35%): if
the initial offer is for change of control,
otherwise another offer

Not gain control and simply retain his interest at
35%

Increase its stake by increments of less than 5%
within a fiscal year, and can go up to 55%
through preferential issuance / open market
purchase / buy-back / negotiated transactions

From 55% to 75% the Acquirer can purchase
incrementally upto 5% only on a one time basis
through open market normal segment on the
stock exchanges i.e. not through bulk deals /
preferential allotments/negotiated transactions
Overview of Major Provisions of the
Takeover Act, 1997

Increase its stake by increments more than 5%
within the fiscal year: if so, he is again required
by the Code to launch another Tender Offer for at
least 20% of the shares outstanding

Each of these Tender Offers may be for stakes
larger than 20% at the Acquirer’s sole discretion.
The minimum price and size are however
regulated by The Takeover Code

Any acquisition beyond 75% would mandate a
tender offer for minimum of 20% and depending
on the market capitalization of the Target,
Acquirer can hold upto 75% / 90%
Takeover Code: Share Acquisition in
Listed Companies
Regulation 10

Substantial Acquisition of Shares

Open Tender offer under Regulation 10 needs to
be made if the Acquirer (along with the PAC)
decides to acquire, directly or indirectly, more
than 15% of the shares outstanding in a
concerned target company.

Once an entity has acquired a 15% stake in
target, individually or as part of a group, the
entity must make a tender offer for a minimum of
20% of the shares outstanding (not including
shares already owned)

Please note SAT’s decision in Hardy Oil (P) Ltd. vs

SEBI (8-3-2006), the word “unless” in
Takeover Code: Share
Acquisition in Listed Companies
Regulations 10 and 11 makes the acquisition
conditional upon a P.A. being made and it does
not mean that P.A. has to be made before
acquisition. Such P.A. can be made before or
after acquisition. The object of the Regulation is
not to nullify the acquisition
Takeover Code: Share Acquisition in
Listed Companies
Regulation 11

Consolidation of Holdings

Open Tender offer under Regulation 11 (1) needs
to be made by Acquirer along with the Person
Acting in Concert (PAC) if:
 Acquirer and PAC already hold > 15% but < 55% of
the Voting Capital of Target Company
 Want to exceed the creeping limit of 5% in a
financial year

Offer under Regulation 11 (2) needs to be made if
the Acquirer along with PAC want to exceed 55%
shareholding in the Target Company
Takeover Code: Share Acquisition in
Listed Companies
Regulation 12

Acquisition of Control

Open Tender offer under Regulation 12 needs to
be made by the Acquirer and PAC if they want to
acquire control over a Target Company

Offer needs to be made irrespective of:
 Whether or not there has been any acquisition of
shares or voting rights in a target company
 Whether the control is acquired directly or indirectly

This regulation is not applicable if the change in
control takes place pursuant to a special
resolution passed by the shareholders in a
general meeting
Case (1) S.C. in the case of Swedish Match AB Vs
SEBI (2004) said “Regulations 10, 11 and 12 ex
facie operate in 3 different fields. They seek to
control creeping acquisition which may lead to
 Takeover Code: Share
Acquisition in Listed Companies
substantial acquisition and ultimately total control of
company. Where there is a mere cessor of control by
one out of two persons already in control or where any
person or persons are given joint control and combined
degree of control is not greater than being presently
exercised, a resolution in general meeting would suffice.
But if the change of control from joint to sole is due to
acquisition of shares from the joint holder at a price
higher than the market price, then the acquirer has a
statutory obligation to make a public announcement.

Case (2) Pipavav Shipyard (27-3-2010) - Punj Lloyd,

was one of the two promoters of the above company,
which went public in September 2009. As per ICDR, the
pre-issue capital of the promoter has to be maintained
 Takeover Code: Share
Acquisition in Listed Companies
for one year from the date of IPO. On 27-3-2010,
there was a company announcement, disclosing that
Punj Lloyd was exiting the company for a share value
at a discount to the market, though much higher than
the original investment. Since Punj Lloyd was selling
their shares during the lock-in, the unexpired lock-in
would pass on to the acquirer. In addition, the share
transfer may be amongst the promoters, but the
transferor and transferee have not been holding the
shares for a period of at least 3 years prior to the
transfer. Therefore, the exemption from open offer
could not be available under take-over regulations.
 Takeover Code: Minimum Tender
Offer Price and Offer Size

If shares of the company are frequently traded -

It shall not be less than the highest of the following :

The Negotiated Price under an agreement, if any, triggering
the code

Highest Price paid by the Acquirer during the 26-week
period prior to the date of public announcement for
acquiring shares of Target Company, including by way of
allotment in a public or rights issue

The price paid by the Acquirer under a preferential allotment
at any time during the 26-week period up to the date of
closure of the offer.

The average of the weekly high and low of the closing prices
of the shares of the target company as quoted on the most
frequently traded stock exchange during 26 weeks preceding
the date of the public announcement

The Average of the weekly high and low of the closing prices
of the shares of the target company as quoted on the most
frequently traded stock exchange during 2 weeks preceding
the date of the public announcement.
Takeover Code: Minimum Tender
Offer Price and Offer Size

If the shares of the company are not frequently traded,
then it shall not be less than the highest of -

The Negotiated Price under an agreement, if any,
triggering the code

Highest Price paid by the Acquirer during the 26-week
period prior to the date of public announcement for
acquiring shares of Target Company, including by way
of allotment in a public or rights issue.

The Price paid by the Acquirer under a preferential
allotment at any time during the 26-week period up to
the date of closure of the offer.

Other parameters including return on net worth, book
value of shares, EPS, price earnings multiple vis-à-vis
the industry average. In such cases, it is advisable to
get valuation from a chartered accountant in line with
the Supreme Court decision in Tomco case.
Takeover Code: Minimum Tender
Offer Price and Offer Size

The Tender Offer shall be made to acquire a
minimum of 20% of the voting capital of the
target company 15 days after the closure of the
offer.

Tender Offer under Regulation 11(2A) (i.e.
consolidation of holding beyond 55% can be for a
minimum of 20% of the voting capital of the
company

Such other lesser percentage of the voting capital
of the company, assuming full subscription to the
offer, enable the acquirer to increase its holding
to the maximum level possible 75% or 90%),
meeting the requirements of minimum public
shareholding
Takeover Code: Minimum Tender
Offer Price and Offer Size

The offer can also be made conditional upon
minimum level of acceptances from the
shareholders. In such a case, the acquirer will
have to deposit in the escrow account in cash a
sum of 50% of the consideration payable under
the public offer and also agree to cancel the MOU.
Such conditionality should be mentioned in the
Public Announcement will not work if offer is
triggered pursuant to preferential allotment.

To be made latest with 4 working days of decision

to consolidate its holding.
 90-Day Window

Date of passing a firm and final resolution by
Board/constituted Committee (Trigger Date)

— Draft copy of Public Announcement submitted to
SEBI, Stock Exchanges & Target

— Public announcement to be published in leading
newspapers :
In 4 working dates from the Trigger Date

Application to RBI/FIPB for acquisition of shares
At the earliest of the Public Announcement (within 2 days of
Public Announcement)

Draft Letter of Offer and due diligence cert. filed with
SEBI. Stock Exchange & Target
Not later than 14 days from the Public Announcement

SEBI to provide comments on the draft Letter of Offer
SEBI comments, if any, latest within 21 days of LOF Submission
90-Day Window

Final Printed Letter of Offer to SEBI

Letter of Offer to reach Shareholders
Letter of Offer to reach shareholders within 45 days of
Public Announcement

Tender Offer Opens
Not later than 55 days from date of Public Announcement

Revision of price, if any (last date)
Upto 7 working days prior to the offer closing

Tender offer Closes
Offer to remain open for 20 days

Completion of all Formalities including Payment of
Consideration
Not later than 15 days from offer closing
Regulations (in general)

Regulations are sub-ordinate

legislations
 Rule based regulations vs principle
based regulations

Regulatory proceedings are quasi-
judicial, based on preponderance of
probabilities no mensrea (Sri Ram
Mutual Fund - Supreme Court)
Takeover Regulations

Principle
Kishore Rajaram Chhabria v. The Chairman SEBI
MANU/SB/0105/2003, it was elucidated that the
‘purpose of the takeover regulations is remedial
and regulatory. Its purpose is three-fold (i) to
ensure that the incumbent management of the
target company is aware of the substantial
acquisition, (ii) to ensure that in the process of
substantial acquisition, the securities market is
not distorted or manipulated and, (iii) to ensure
that the small investors are offered a choice viz,
to either off-load their shares at a price generally
higher than the prevailing market price or to
continue as shareholders under the new
dispensation.
Regulations (in general)

Hardy Oil Pvt. Ltd v. SEBI (Order of SAT
08/03/06):- The logic underlying the Regulations
is that when a person acquires a big chunk of
shares in the target company, the remaining
shareholders other than those who have already
sold their shares or have agreed to sell their
shares to him, should have a right to decide for
themselves whether they would like to continue in
the company under the new management or not.
The shares already acquired or agreed to be
acquired are not and cannot be the subject
matter of the public announcement. The public
announcement will relate to further acquisition of
shares of the target company which will be a
minimum of 20%.
 Regulations (in general)

Takeover regulations has to be read with 40A of
Listing Agreements - Public -- level has to be
maintained.

Promoter - a person in control of the target

company or any person named as promoter in any
offer document of the target company or any filings
with the Exchanges pursuant to the listing
agreement, whichever is later.

Qualifying promoters under regulation 3 refers to

any person directly or indirectly in control or so
specified in any document

Mere fact a person is a promoter, he does not

become an acquirer unless it is shown that he
intends to acquire on his own or acting in concert
with the acquirer (High Court - Modipan & K K Modi)
 Regulations (in general)

Persons acting in concert - for a common objective or
purpose of substantial acquisition of shares or voting
rights or gaining control over the target company
pursuant to an agreement or understanding
(formal/informal) (direct/indirect). M. Srinivasulu Reddy,
Lalbhai Group.
Case 1 - KK Modi Vs SEBI (2002) Bombay High Court held
that a promoter in the target company does not
automatically become acquirer unless he intends to
acquire or is acting in concert with the acquiror. Thus,
where one promoter amongst several promoters decides
to increase his share holding through substantial
acquisition that does not ipso facto mean that other
promoters also share his objectives and become
acquirers.
Case 2 -Technip SA Vs SMS Holdings P. Ltd. – The standard
of proof to establish concert is one of probability.
Regulations (in general)
it may be established having regard to their
relations, their conduct, their common interest,
etc. leading to a possible inference that they must
be acting together. Evidence of actual concert is
normally difficult to obtain and is not insisted
upon. Where the circumstances are such that
human experience tells us that it can safely be
taken that they must be acting together.

Agreement - even an agreement to acquire
shares would make the person an acquirer; it is
not necessary that one should actually acquire
shares, voting rights or control, to fall under the
definition of acquirer (Rayban Sun Optics India
Ltd and Ondel Nalco India Ltd.)
 Regulations (in general)

An acquirer can acquire through direct or indirect
acquisition - would include acquiring through and
consequently cover acquisition made by a principal
through other companies (SAT in Kishore Rajaram
Chhabria)

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 in any other manner.
Case 1 - Ashwin K Doshi Vs SEBI (2002 SAT) it was a
case involving share transaction between Tatas to
Ambuja in ACC. The control can be exercised
directly or indirectly, it can be inferred from
shareholding, management rights, shareholders
 Regulations (in general)
agreement, voting right, etc. It can be defacto control
also, not de jure alone. Majority holding of shares is not
a decisive factor for control if the shareholding is widely
dispersed, even a fractional holding would suffice for
control.
Case 2 - Subhkam Ventures (I) P. Ltd. Vs SEBI (SAT
15/1/2010) – Control is positive power and not a
negative power. It means effective control. The
acquirer should be in the driver’s seat, controlling the
steering, accelerator, brakes, etc. Therefore, appointing
a nominee Director on the Board or requiring the
presence of investor Director to constitute quorum for
Board Meetings, or affirmative vote of investor Director
in any of the protective provisions like amendment of
Memorandum or Articles, any consolidation, sub-division
or alteration of any rights attached to any share capital,
 Regulations (in general)
the acquisition of shares of another company, approval
of annual business plan, decision to create lien or to
lease or mortage or pledge any assets of the company,
valued in excess of 5% of net worth of the company
would not mean effective control. Such empowerment
was meant for good corporate governance and to
protect the interest of investors.
Case 3 - Any indirect acquisition through global
restructuring - BP Plc (BP AMOCO) acquiring Burmah
Castrol Plc. In turn, Burmah Castrol Plc through a chain
of subsidiaries held 58% in Foseco India Ltd. The case
of BP Plc was that indirect acquisition of Foesco was an
incidental.
 Regulations (in general)
and unintended consequence to the global restructuring
of Burmah Castrol. SAT upheld SEBI’s decision of
indirect acquisition and directed BP AMOCO to make a
public announcement to the shareholders of Foseco.

Hardy Oil v SEBI (SAT 08.03.2006)
Burren Energy Plc entered into a share purchase
agreement with Unocal International Corporation on
February 14, 2005, to acquire the entire equity share
capital of Unocal Bharat Ltd. (100% subsidiary). Unocal
Bharat Ltd., in turn, held 26.01% of Hindustan Oil
Exploration Co. Ltd. (target company). In the said
Indian company, Hardy Oil Pvt. Ltd. was also a
shareholder. Hardy Oil questioned the indirect
acquisition of shares in the target company by alleging
violations of takeover code. Hardy Oil claimed their right
of preemption for purchase of shares in the target
Regulations (in general)
company. In deciding the various allegations,
SAT discussed the scope of ‘unless’ appearing in
regulations 10, 11 and 12. The distinction
between regulation 14.1 and 14.4 and also how
regulation 22(16) would not apply to a foreign
company.

Regulation 14.1 deals with direct acquisition and
14.4 deals with indirect acquisition. In the case
of indirect acquisition, a public announcement
has to be made by the acquirer within 3 months
of the confirmation of such acquisition.
Case (1) S.C. in Technip SA Vs SMS Holdings,
upheld the chain principle of control in indirect
acquisition. The two tests are whether their
shareholding in second company constitutes a
substantial part of the assets of the first company
(a subsidiary)
Regulations (in general)
OR

Whether one of the main purpose of acquiring
control of the first company was to secure control
of the second company

The said principles were followed by SAT in the
case of Holcim India Ltd.

The question of proportionate ownership was not
recognised since a share holder is not the owner
of the assets of the company in which he holds
shares. Assets are owned by the investment
company. A shareholder in terms of his holdings
in the investment company has no legal right to
exercise the voting rights available to the shares
in which the company has invested its funds.
 Regulations (in general)

Also, the dividends/bonus shares are not Separately
treated and paid to the shareholder of the investor
company based on number of shares held by each
one of the shareholders of the investor company
Case (2) - The pricing of shares for open offer under
regulation 14(4) read with Regulation 20 (12) was
decided by SAT in the case of Dr. Jayaram
Chigurupati Vs SEBI, Daichi Sankyo, Ranbaxy Lab
and Zenotec Lab on 7/10/09. Accordingly Regulation
20 (12) was applied to relate back to an earlier
period of January 2008 when Ranbaxy paid a higher
price of Rs. 160 for acquiring Zenotac shares, by
treating Ranbaxy as a person acting in concert
because of its becoming a subsidiary of Daichi.
Regulations (in general)

Sudarshan Chemical - advance ruling - If there
are more than one promoter on the side of
transferor, it is sufficient that one group in the
transferors hold the shares for 3 years or more.
 Exemption from Regulations 10,
11 and 12
Regulation 3:
a. A firm allotment in the public issue, with full
disclosure in the prospectus about the identity and
controlling interest of the acquirer.
b. Allotment pursuant to Rights issue
i. To the extent of entitlement
ii. Upto the percentage specified in Regulation 11
However the limit under Regulation 11 would not
apply to the acquisition of additional shares
consequent to undersubscription, so long as the
same has been mentioned in the Rights Letter of
offer and the acquirer is in control of the
company. If the acquisition results in any change
of control of management, the exemption will not
Exemption from Regulations 10,
11 and 12
be available.
e. Inter se transfer of shares among qualifying
promoters
Provided that the transferors as well as the
transferees have been holding shares in the
target company for a period of at least three
years prior to the proposed acquisition
f. Acquisition of shares in the ordinary course of
business by a stock broker, market maker, public
financial institutions on their own account or by
banks and PFIs as pledgees.
Exemption from Regulations 10,
11 and 12
j. Pursuant to a scheme of arrangement or
reconstruction including amalgamation or merger
or demerger under any Law or Regulation, Indian
or foreign.
k. Acquisition of shares in companies whose shares
are not listed on any stock exchange, provided
that the exemption will not be available where
such acquisition in an unlisted company gives
right to voting rights, acquisition of shares or
control over a listed company.
l. Other cases as may be exempted from Chapter
III by the Board under Regulation 4
Post Satyam Changes in SAST
Regulations

The scope of disclosures was enlarged to include
pledging of shares by promoters.

Insertion of Regulation 25 (2B) – no competitive
bid to open offer by an acquirer pursuant to
relaxation approved by SEBI under regulation
29A.

Regulation 29A was inserted providing special
relaxation from Chapter III after the processes
set up by Government approved Board in
Management change is approved by SEBI
Thank-you