Exemptions Under Takeover Regulations ASSOCHAM India National Conference on Merger & Acquisition Takeover Regime in India – Issues & Challenges Saumil Shah 17 October 2012

Triggers for mandatory open offer 0% 25% 75% Trigger Creeping acquisition of 5% in FY or voluntary offer 100% Regulation 3(3) Open offer is triggered, even though individual shareholding changes, although total shareholding along with PAC remains unchanged Regulation 4 In case of direct or indirect acquisition of control, open offer would trigger- shares or voting rights may or may not be acquired Regulation 5 Triggering of open offer on indirect acquisition

Regulation 10(1)(a) – Inter Se Transfer (1/3) Amongst Relatives Amongst Immediate Relatives Spouse, child, parent, brother, sister, or of spouse Scope restricted as compared to relatives as defined under Companies Act under Old Code Relations not covered – Members of HUF, daughter / son in law , grand parents, grand children & their spouses and spouses of siblings 3/27/2017

Regulation 10(1)(a) – Inter Se Transfer (2/3) Takeover Regulations 2011 Earlier Takeover Code Regulation 10(1)(a) – Inter Se Transfer (2/3) Promoters (Interse), PACs(Interse), PACs & Company in which PACs hold shares proportionately without any differential voting rights Disclosed > 3 years as such in shareholding pattern filed under listing agreement / these regulations Holding > 3 years – Promoters Status > 3 years – PAC Format for disclosures of person acting in concert – notified Qualifying promoters, promoters and foreign collaborators Provided that transferor(s) and transferee(s) holding shares in target company for at least 3 years Acquirer and person acting in concert within 3 years of closure of open offer

Illustration– Inter-se Promoter Promoter Group Co. A Co. D Co. A, Co. B and Co. D are part of promoter group of Target Co for 3 years. B is an unlisted Hold Co. of Target Co. Co. A transfer 48% holding in Co. B to Co. D 100% Co. B (Unlisted) 48% 50% 1% 1% Target Co. Would transfer of 48% shares in Co. B from Co A to Co D trigger open offer? No Would transfer of entire 100% shareholding in Co B from Co A to Co D trigger open offer? Yes, but exempt GO HEADER & FOOTER TO EDIT THIS TEXT 3/27/2017

Illustration– Inter-se Promoter Co. A Co. D B is an unlisted promoter company holding of 30% of Target Co. Co. A holds 100% in Co. B Co D also a promoter company for 3 years holds 1% stake in Target Co Co D infuses capital in Co B and acquires 80% in Co. B 100% Co. B (Unlisted) 80% 30% 1% 1% Target Co. Would infusion in Co. B by Co D trigger open offer? Yes Dilution in Company B not covered under specific exemption GO HEADER & FOOTER TO EDIT THIS TEXT 3/27/2017

Illustration– Inter-se Promoter transfer Promoter A holds 51% and Promoter B holds 1% in Target Co. Promoter A and B are holding shares in Target Co for more than 3 years Promoter A makes inter-se transfer of 5% shares of Target Co to Promoter B Promoter B makes additional acquisition of 5% stake in Target Co Promoter A Promoter B 51% 1% Target Co. Would additional 5% acquisition by Promoter B be exempt under creeping acquisition or trigger open offer? Yes, it would trigger open offer If additional acquisition by Promoter B precedes inter-se transfer, would it trigger Open offer ? No GO HEADER & FOOTER TO EDIT THIS TEXT 3/27/2017

Regulation 10(1)(a) – Inter Se Transfer (3/3) Person >=50% >=50% Holding Company Other companies Transferor Company Subsidiaries Subsidiaries Subsidiaries Target Inter se transfer amongst above entities exempt – subject to common control Other holding vehicles not directly covered – LLP, Partnership Firms, HUF, Trusts, etc. Earlier concept of ‘group’ under MRTP Act done away with 3/27/2017

Illustration Individual X Transfer of Target Co shares from Co A to Individual X Person/s holding shares in Holding Co – whether covered under exemption? 70% Holding Co >50% Other subsidiaries Co A 30% Subsidiaries Transaction to be done in two tranches Co A to Holding Co Holding Co to Individual X Target Co. GO HEADER & FOOTER TO EDIT THIS TEXT 3/27/2017

Illustration Individuals (A, B, C) hold 51% shares in Co A (say 40: 20 : 40) Same persons hold 51% shares in Co B in different proportions (10 : 10 : 80) Control of Co B with same persons A B C 51% 51% Co A Co B 30% >50% Target Co Co X Whether transfer of Target Co shares from Co A to Co X covered under exemption? Yes GO HEADER & FOOTER TO EDIT THIS TEXT 3/27/2017

Dr. Reddy’s Holding Ltd (DRHL) Dr Reddy (Listed Target) Case Study Reddy Family 83.17% Other Promoters Dr. Reddy’s Holding Ltd (DRHL) APS Trust Proposal to transfer 83.17% in DRHL to Trust by way of gift 23.08% 2.53% Dr Reddy (Listed Target) SEBI granted exemption since no change of control or management though no specific exemption

Inter-se exemptions – Conditions Inter-se exemptions subject to following conditions If shares of target company are frequently traded Acquisition price ≤ 125% of volume-weighted average market price for 60 trading days before the issue of notice for proposed inter-se transfers If shares of target company are infrequently traded Acquisition price ≤ 125% price determined under Reg 8(2)(e) Transferor and transferee should have complied with all disclosure requirements under Takeover Regulations, 2011

Regulation 10(1)(b) – Acquisition in Ordinary Course of Business Registered Underwriter Registered Stock Broker on behalf of his client Registered Merchant Banker – Market making or subscription Person acquiring pursuant to a scheme of safety net Registered Merchant Banker – acting as a stabilising agent Registered market maker of stock exchange Scheduled commercial bank – acting as escrow agent Invocation of pledge by Scheduled Commercial bank or FI 3/27/2017

Case Study– Acquisition in Ordinary Course of Business IDBI Trusteeship IDBI Trusteeship acted as Trustees for Banks and FI IDBI Trusteeship held pledge of shares as security for loans sanctioned by Banks & FI Pledge of shares Scheduled Commercial Bank Disbursement of loan Target Co. Would invocation of pledge by IDBI Trusteeship be exempt? No, since no express provision providing exemption to Debenture Trustees act as custodians GO HEADER & FOOTER TO EDIT THIS TEXT 3/27/2017

Regulation 10(1)(c) – Further Acquisitions Amongst Relatives Subsequent acquisition by an acquirer who has made an open offer Subsequent acquisition to be contemplated under original agreement Acquirer & Seller to be same at all stages Full disclosure made in public announcement and letter of offer 3/27/2017

Regulation 10(1)(d) – Acquisitions pursuant to scheme of merger, demerger or restructuring Involving Target Not involving Target - Cash consideration less than 25% of total consideration – - post-scheme, at least 33% of voting rights in combined entity to be held by same persons who held it earlier SICA Blanket exemption for all schemes without any conditions under Old Takeover Code 3/27/2017

Illustration Merger of Co A into Co B Post merger X can hold 33% or more shares in merged Co X Y 33% 100% 100% Co A Co B Before merger Y acquires 1% shares in Co A Post merger X is allotted 15% shares in Co B – would it be exempt or attract open offer? Merger 70% Target Co. Exempt CO A is a loss making company and holds 75% shares of Target Co Co B is profit making company owned by another Group Co It is proposed to reverse merge Co B into Co A – based on fair valuation CO Y needs to be issued 75% shares in Co A Would it be exempt or attract open offer? Co X Co Y Co A Co B Merger 75% Attract Target Co. GO HEADER & FOOTER TO EDIT THIS TEXT 3/27/2017

Illustrations Group X Group Y Group X Group Y Merger Co A List Co 1 Co B 50% 70% Target Co. List Co 2 Merger of Co A into List Co 1 Based on fair valuation Group X is allotted 26% shares in List Co Whether Group X needs to make an open offer for acquisition in List Co 1? Whether List Co 1 required to make an open offer for acquiring shares of List Co 2? What if a division of Co A is demerged into Co B resulting in transfer of List Co shares ? Exempt, if the shareholding of Group X in Co B is >= 33% No Yes GO HEADER & FOOTER TO EDIT THIS TEXT 3/27/2017

Regulation 10(1) (e) to (h) – Other Acquisitions Acquisition pursuant to provisions of SARFAESI Act, 2002 - exempt Acquisition pursuant to delisting of shares - exempt Acquisition by way of transmission, succession or inheritance - exempt Acquisition of voting rights or preference shares carrying voting rights - exempt 3/27/2017

Other Exemptions Regulation 10(2) Acquisition pursuant to corporate debt restructuring – exempted from obligation to make an open offer under regulation 3 Regulation 10(3) Increase in voting rights pursuant to buy back of shares – exempted, provided the voting rights falls below threshold of 25% within 90 days (No specific provision under old takeover code) 3/27/2017

Regulation 10(4) – Buyback of shares Increase in voting rights pursuant to buy back of shares* Amongst Relatives If results in crossing 25% limit – exempt if shareholder reduces holding within 90 days [Reg 10(3)] Otherwise exempt – subject to conditions [Reg 10(4)(c)] - Acquirer should not have voted in favour of buyback as director or shareholder - Voting by postal ballot - Not to result in change in control In case of non compliance, shareholding to be reduced below the level at which open offer triggered 0% 25% 75% Trigger on buyback No trigger subject to conditions; to be diluted below level at which open offer triggers in case of violation 100% No trigger if does not cross 25% No trigger if diluted within 90 days *No specific provision under old Takeover Code 3/27/2017

Regulation 10(4) – Acquisition pursuant to Right Issue 0% 25% 75% Trigger on rights issue Exempt upto entitlement and in case of beyond entitlement subject to conditions 100% No trigger if does not cross 25% Acquisition of shares beyond entitlement pursuant to a rights issue exempt from Reg 3(2) subject to following: - Acquirer has not renounced his entitlement - Right issue price is within prescribed limits Under Old Takeover Code, Exempt if upto entitlement of shareholder and up to creeping limit - Should not result in change in control If Acquirer cross 25% pursuant to the rights issue, whether exemption applies? No exemption from regulation 3(1) GO HEADER & FOOTER TO EDIT THIS TEXT 3/27/2017

Other Public Shareholders Illustrations Public Shareholders Other Public Shareholders Co. A Co. X Co. A 16% 55% 40% 60% 29% Target Co. Target Co. Co. A (promoter) holds 60% in Target Co. Co. A acquires 5% shareholding by way of creeping acquisition Subsequently, Target Co. undertakes buyback of shares from outside shareholders. Pursuant to buyback, Co. A acquires additional voting rights of 6% in Target Co. Conditions under 10(4)(c) complied with Co. A (promoter) holds 55% in Target Co. Co. X non promoter and non PAC holds 29% in Target Co A acquires 5% shareholding by way of creeping acquisition from Co X Subsequently, Target Co. undertakes buyback of shares where other public shareholders tender 5% shares in Target Co; Conditions complied Whether Co. A would be required to make an open offer? Whether CO X would be required to make an open offer? No Yes, but may dilute back to 24% within 90 days 3/27/2017

Regulations 10(4) – Other Exemptions 10(4)(d) Acquisition of shares in target company in exchange for shares of another target company pursuant to open offer 10(4)(e) Acquisition of shares by promoters from state-level financials institutions or by companies promoted by them pursuant to an agreement between them 10(4)(f) Acquisition of shares from registered VCF or foreign venture capital investor GO HEADER & FOOTER TO EDIT THIS TEXT 3/27/2017

Exemptions by the Board 3/27/2017

Regulation 11 – Exemption by Board If Government or regulatory authorities have superceded the board of directors of target company and the new directors decide on a plan to protect the interest of all the stake holders and fulfilling other conditions (2) Acquirer (1) or the target company(2) shall file application with the Board alongwith all other relevant documents and fees Subject to conditions as it deems fit in the interest of investors (1) 3/27/2017

Thank you 3/27/2017