DEMYSTIFYING TAKEOVER CODE

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DEMYSTIFYING TAKEOVER CODE
Pavan Kumar Vijay

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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.
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LIFTING THE VEIL
T
SHARES
Acquisition
CONTROL
BOTH SHARES CONTROL
AKEOVER
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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.
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UNDERSTANDING CONTROL

• Control is the right to
• Appoint majority of the directors
• To control the management
• Control the policy decisions
• By virtue of Shareholding or Management rights or
  Shareholders Agreements or Voting Agreements or
  in any other manner.

REG 2(c)
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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)
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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)
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Reg 3(1)(e)
INTER SE TRANSFER
An Insight
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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.

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Categories for Inter-se transfer
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DETAILED ANALYSIS
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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.

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Category I Group contd
Definition of Group
SECTION 2(ef) OF MRTP ACT, 1969 DEFINES GROUP
INTO TWO PARTS

• Associated Persons
• 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 the position to exercise
control , whether directly indirectly over any
body corporate, firm or trust.
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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
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Category III Promoters contd
Category III Inter-se transfer for Qualifying
Promoters
Qualifying Indian Promoter Foreign
Collaborators, who are shareholders.
Qualifying Promoters
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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.
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Category III Promoters contd
Qualifying promoters..defined..contd
When person is individual
His relatives as Defined u/s 6 of Co. Act 1956.
Any company controlled by P/R
Firm or HUF in which P/R is partner or coparcener stake not lt 50
When person is body corporate
Holding Subsidiary
Any company controlled by P/R
Firm or HUF in which P/R is partner or coparcener stake not lt 50
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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.
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Pre- Conditions for availing Inter- se transfer.
Conditions Category I (Group) Category II (Relative) Category III (Qualifying Promoter) Category IV (Acquirer PAC)
i. Transfer is at a price gt 25 of the price determined in terms of Reg 20(4) 20(5) of SEBI (SAST) Regs, 1997. N N Y Y
ii. 3 yrs holding of shares by transferee transferor. N N Y N
iii. Compliance of Regulation 6, 7 8. Y Y Y Y
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Checks Balances
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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)
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Checks Balances under Regulation 7
Acquirer Compliance of regulation 7(1) or 7(1A)
Seller Compliance of regulation 7(1A)
Target CompanyCompliance of Regulation 7(3)
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Taxation Issues
STT vs. LTCG/STCG
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Taxation Issues..contd.
A Comparative Study
Securities Transaction Tax
LTCG/STCG

• STT is levied when the transfer is
• made through stock exchange.
• STT is _at_ 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.

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INTER- SE TRANSFER A STRATEGICAL MOVE
Good means for consolidation of holdings in a
Company.
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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
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I
SSUES
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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
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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
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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).

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PREFERENTIAL ALLOTMENT OF SECURITIES
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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. 
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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.

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GOVERNING LAW
The Companies Act, 1956
SEBI (Disclosure and Investor Protection)
Guidelines, 2000 (Chapter XIII XIIIA)
Listing Agreement
SEBI (SAST) Regulations, 1997
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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
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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
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Pricing Schedule
6 months
30 days
2 weeks
Relevant Date
General Meeting
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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
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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 cant 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
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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

RVATIONS
BSE
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Preferential Allotment viz-a-viz Takeover Code
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Limit for Preferential Allotment
Limits are calculated taking into account the
EXPANDED CAPITAL of the Company not the
EXISTING CAPITAL of the Company.
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Illustration I
Acquirer (holding 20)
Through Preferential Allotment
Acquirers holding cannot exceed 24.99 of
Expanded Capital.
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Illustration II
Acquirer (holding 5 )
Through Preferential Allotment
Acquirers holding cannot exceed 14.99 of
Expanded Capital.
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Illustration III
Acquirer (holding 0)
Through Preferential Allotment
Acquirers holding cannot exceed 14.99 of
Expanded Capital.
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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.
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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
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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
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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?
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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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Thanks a lot....
Pavan Kumar Vijay