: 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 Target Company, it results into substantial acquisition of shares.

AKEOVER SHARES CONTROL BOTH SHARES & CONTROL Acquisition LIFTING THE VEIL

UNDERSTANDING SHARES Reg 2 (k) 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 ISSUE What is the status of partly paid shares under SAST Regulations, 1997? The partly paid up shares are also shares under Takeover Code as voting rights is embedded in partly paid up shares.

UNDERSTANDING CONTROL REG 2(c) 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.

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)]

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)]

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

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.

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

DETAILED ANALYSIS

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

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.

Category II – Inter-se transfer amongst relatives Main Features  Relatives under this regulation means the Relatives defined under Section 6 & Schedule 1A under Companies Act,  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.

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

When person is individual His relatives as Defined u/s 6 of Co. Act Any company controlled by P/R Firm or HUF in which P/R is partner or coparcener ;stake not < 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 < 50% Category III – Promoters… contd Qualifying promoters..defined..contd

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

Pre- Conditions for availing Inter- se transfer. ConditionsCategory I (Group) Category II (Relative) Category III (Qualifying Promoter) Category IV (Acquirer & PAC) i. Transfer is at a price > 25% of the price determined in terms of Reg 20(4) & 20(5) of SEBI (SAST) Regs, NNYY ii. 3 yrs holding of shares by transferee & transferor. NNYN iii. Compliance of Regulation 6, 7 & 8. YYYY

Checks & Balances under Regulation 3 COMPLIANCECOMPLIANCE Reg 3(3)Reg 3(4) Reg 3(5) Advance Intimation (4 days in Advance) Report (21 days of acquisition) Fees to be accompanied with Report (Rs )

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)

Taxation Issues STT vs. LTCG/STCG

Taxation Issues..contd. Securities Transaction Tax LTCG/STCG STT is levied when the transfer is made through stock exchange. STT 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. A Comparative Study

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

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

MATTER OF DEBATE: 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 Whether Reporting under Regulation 3(4) is one time reporting?

MATTER OF DEBATE: 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 Whether the belated filing of report should not be considered as commission of offence when there is no substantial loss to the investors?

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). Concluding Remarks

An issue by a company 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. pursuant to a resolution u/s. 81(1A) of Act, to any select group of persons by way of private placement. Of What is Preferential allotment of shares?

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.

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

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

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

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

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

Currency of Security Convertible into Equity Shares QIBsOTHERS 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

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

Preferential Allotment viz-a-viz Takeover Code

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

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

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

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

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 * 14.99% = 14,990 THE RIGHT WAY * 14.99% / = The difference is because of the calculation on expanded Capital Base = 2643

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 * 4.99% = 4,990 THE RIGHT WAY Non-promoter holding / 45.01% 50000/45.01%= The promoters will get extra equal to 4.99%. So, the resultant promoter shareholding = shares equal to 54.99%

Queries 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 Query 1 Query 2 What is the maximum limit of preferential allotment? Can a Company through preferential allotment expand its capital without any limit?

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? Query 3 Queries

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

Pavan Kumar Vijay