Note: The answers given here are general in nature. The questions and the answers have been structured to enable the readers to gain a broad understanding of (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. For exact details the reader is advised to refer to the copy of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 which are available on our website. Readers may also note that these answers do not aim to explain the Regulations in force, since answers to questions involving particular case / fact pattern may depend upon administrative decisions and Court orders, if any, in respect of the same.

1. What is meant by Takeovers & Substantial acquisition of shares?

When an "acquirer" takes over the 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. The term "Substantial" which is used in this context has been clarified subsequently.

2. What is a Target company?

A Target company is a listed company i.e. whose shares are listed on any stock exchange and whose shares or voting rights are acquired/ being acquired or whose control is taken over/being taken over by an acquirer.

3. Who is an Acquirer?

An Acquirer means (includes persons acting in concert (PAC) with him) any individual/company/any other legal entity which intends to acquire or acquires substantial quantity of shares or voting rights of target company or acquires or agrees to acquire control over the target company

4. What is meant by the term "Persons Acting in Concert (PACs)"

PACs are individual(s) /company(ies)/ any other legal entity(ies) who are acting together for a common objective or for a purpose of substantial acquisition of shares or voting rights or gaining control over the target company pursuant to an agreement or understanding whether formal or informal. Acting in concert would imply co-operation, co-ordination for acquisition of voting rights or control. This co-operation/ co-ordinated approach may either be direct or indirect.

The concept of PAC assumes significance in the context of substantial acquisition of shares since it is possible for an acquirer to acquire shares or voting rights in a company "in concert" with any other person in such a manner that the acquisition made by them may remain individually below the threshold limit but may collectively exceed the threshold limit.

Unless the contrary is established certain entities are deemed to be persons acting in concert like companies with its holding company or subsidiary company, mutual funds with its sponsor / trustee/ Asset management company, etc.

5. How substantial quantity of shares or voting rights is defined?

The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 has defined substantial quantity of shares or voting rights distinctly for two different purposes:

I. Threshold of disclosure to be made by acquirer(s):

1) 5% and more shares or voting rights: A person who, alongwith PAC, if any, (collectively referred to as " Acquirer" hereinafter) acquires shares or voting rights (which when taken together with his existing holding) would entitle him to more than 5% or 10% or 14% or 54% or 74% shares or voting rights of target company, is required to disclose at every stage the aggregate of his shareholding to the target company and the Stock Exchanges within 2 days of acquisition or receipt of intimation of allotment of shares.

2) Any person who holds more than 15% but less than 75% shares or voting rights of target company, and who purchases or sells shares aggregating to 2% or more shall within 2 days disclose such purchase/ sale along with the aggregate of his shareholding to the target company and the Stock Exchanges.

3) Any person who holds more than 15% shares or voting rights of target company and a promoter and person having control over the target company, shall within 21 days from the financial year ending March 31 as well as the record date fixed for the purpose of dividend declaration, disclose every year his aggregate shareholding to the target company.

4) The Target company, in turn, is required to inform all the stock exchanges where the shares of target company are listed, every year within 30 days from the financial year ending March 31 as well as the record date fixed for the purpose of dividend declaration.

(II) Trigger point for making an open offer by an acquirer

1) 15% shares or voting rights:

An acquirer who intends to acquire shares which alongwith his existing shareholding would entitle him to exercise 15% or more voting rights, can acquire such additional shares only after making a public announcement (PA) to acquire atleast additional 20% of the voting capital of target company from the shareholders through an open offer.

2) Creeping acquisition limit:

An acquirer who holds 15% or more but less than 55% of shares or voting rights of a target company, can acquire such additional shares as would entitle him to exercise more than 5% of the voting rights in any financial year ending March 31 only after making a public announcement to acquire atleast additional 20% shares of target company from the shareholders through an open offer.

3) Consolidation of holding:

An acquirer who holds 55% or more but less than 75% shares or voting rights of a target company, can acquire further shares or voting rights only after making a public announcement to acquire atleast additional 20% shares of target company from the shareholders through an open offer.

6. How is "control" defined?

Control includes the right to appoint directly or indirectly or by virtue of agreements or in any other manner majority of directors on the Board of the target company or to control management or policy decisions affecting the target company. However, in case there are two or more persons in control over the target company the cesser of any one of such persons from such control shall not be deemed to be a change in control of management nor shall any change in the nature and quantum of control amongst them constitute change in control of management provided this transfer is done in terms of Reg. 3(1)(e). Also if consequent upon change in control of the target company in accordance with regulation 3, the control acquired is equal to or less than the control exercised by person (s) prior to such acquisition of control, such control shall not be deemed to be a change in control.

7. What is a Public Announcement (PA)?

A public announcement is an announcement made in the newspapers by the acquirer primarily disclosing his intention to acquire shares of the target company from existing shareholders by means of an open offer.

8. What are the disclosures required to be made under Public Announcement?

The disclosures in the announcement include the offer price, number of shares to be acquired from the public, identity of acquirer, purpose of acquisition, future plans of acquirer, if any, regarding the target company, change in control over the target company, if any, the procedure to be followed by acquirer in accepting the shares tendered by the shareholders and the period within which all the formalities pertaining to the offer would be completed.

9. What is the objective of Public Announcement?

The Public Announcement is made to ensure that the shareholders of the target company are aware of an exit opportunity available to them.

10. Can Acquirer make an offer for less than 20% of shares?

No, the acquirer cannot make an offer for less than 20% of shares. The acquirer has to make an offer for a minimum of 20% (less only in specified cases).

11. Who is required to make a Public Announcement and when is the Public Announcement required to be made?

The Acquirer is required to appoint a Merchant Banker (MB) registered with SEBI before making a PA. PA is required to be made through the said MB. The acquirer is required to make the PA within four working days of the entering into an agreement to acquire shares or deciding to acquire shares/ voting rights of target company or after any such change or changes as would result in change in control over the target company.

In case of indirect acquisition or change in control, the PA shall be made by the acquirer within three months of consummation of such acquisition or change in control or restructuring of the parent or the company holding shares of or control over the target company in India. The offer price in such cases shall be determined with reference to the date of the public announcement for the parent company and the date of the public announcement for acquisition of shares of the target company, whichever is higher, in accordance with the parameters mentioned in the Takeover Regulations.

12. Whether appointment of Merchant Banker for the offer process is mandatory?

Yes

13. What documents are to be filed with SEBI after making a P.A. and when are these documents to be filed ?

A hard and soft copy of the PA are required to be submitted to SEBI simultaneously with the publication of the same in the newspapers.

A draft letter of offer is required to be filed with SEBI within 14 days from the date of Public Announcement alongwith the filing fees as prescribed in regulation 18(3) (payable by Banker’s Cheque/Demand Draft). A due diligence certificate as well as registration details as per SEBI circular no. RMB (G-1) series dated June 26, 1997 are also required to be filed alongwith the draft letter of offer.

14. Does SEBI "approve" the draft letter of offer?

Filing of draft Letter of Offer with SEBI should not in any way be deemed or construed that the same has been cleared, vetted or approved by SEBI. The Letter of Offer is submitted to SEBI for a limited purpose of overseeing whether the disclosures contained therein are generally adequate and are in conformity with the Takeover Regulations. This requirement is to facilitate the shareholders to take an informed decision with regard to the Offer. SEBI does not take any responsibility either for the truthfulness or correctness of for any statement, for financial soundness of Acquirer, or of Persons Acting in Concert, or of Target Company, whose shares are proposed to be acquired or for the correctness of the statements made or opinions expressed in the Letter of Offer. It should be understood that while Acquirer is primarily responsible for the correctness, adequacy and disclosure of all relevant information in this Letter of Offer, the Manager to the Offer( a Merchant Banker ) is expected to exercise due diligence to ensure that the Acquirer duly discharges its responsibility adequately.

15. What is a letter of offer?

A letter of offer is a document addressed to the shareholders of the target company containing disclosures of the acquirer/ PACs, target company, their financials, justification of the offer price, the offer price, number of shares to be acquired from the public, purpose of acquisition, future plans of acquirer, if any, regarding the target company, change in control over the target company , if any, the procedure to be followed by acquirer in accepting the shares tendered by the shareholders and the period within which all the formalities pertaining to the offer would be completed.

16. What happens once SEBI gives comments on the draft letter of offer?

The MB will incorporate in the letter of offer the comments made by SEBI and then send within 45 days from the date of PA the letter of offer alongwith the blank acceptance form, to all the shareholders whose names appear in the register of the company on the Specified Date. The offer remains open for 20 days. The shareholders are required to send their Share certificate(s)/related documents to registrar or Merchant banker as specified in PA and letter of offer. The acquirer is required to pay consideration to all those shareholders whose shares are accepted under the offer, within 15 days from the closure of offer.

In their own interest, the shareholders are advised to send such documents under registered post. Further, the shareholders may also note that under no circumstances such documents should be sent to the acquirer.

17. How is the price determined in an open offer?

SEBI does not approve the offer price. The acquirer/ Merchant Banker is required to ensure that all the relevant parameters are taken in to consideration while determining the offer price and that justification for the same is disclosed in the letter of offer

The relevant parameters are:

(a) negotiated price under the agreement which triggered the open offer.

(b) price paid by the acquirer or persons acting in concert with him for acquisition, if any, including by way of allotment in a public or rights or preferential issue during the twenty six week period prior to the date of public announcement, whichever is higher;

(c) the average of the weekly high and low of the closing prices of the shares of the target company as quoted on the stock exchange where the shares of the company are most frequently traded during the twenty six weeks or the average of the daily high and low prices of the shares as quoted on the stock exchange where the shares of the company are most frequently traded during the two weeks preceding the date of public announcement, whichever is higher.

In case the shares of Target Company are not frequently traded then instead of point (c) above, parameters based on the fundamentals of the company such as return on net-worth of the company, book value per share, EPS etc. are required to be considered and disclosed.

In case of non-compete agreement for payment to any person other than the target company, if the payment is more than 25% of the offer price arrived in terms of the Regulations, the same has to be factored into the offer price.

18. What are the criteria for determining whether the shares of the Target Company are frequently or infrequently traded?

The shares of the target company will be deemed to be infrequently traded if the annualized trading turnover in that share during the preceding 6 calendar months prior to the month in which the PA is made is less than 5% (by number of shares) of the listed shares. If the said turnover is 5% or more, it will be deemed to be frequently traded.

19. Are only those shareholders whose names appear in the register of target company on a specified date, eligible to tender their shares in the open offer?

No. Any shareholder who holds the shares on or before the date of closure of the offer is eligible to participate in the offer.

20. What is a competitive bid?

Competitive bid is an offer made by a person, other than the acquirer who has made the first public announcement.

21. What happens if there is a competitive offer and a person had availed the first offer at a lower price? Can the person switch his acceptance to a better offer?

Yes, switching of acceptances between different offers is possible. The shareholder has the option to withdraw acceptance tendered by him upto three working days prior to the date of closure of the offer

To enable the shareholders to be in a better position to decide as to which of the subsisting offers is better and also not to cause last minute decisions / confusions, the offer price and size are effectively frozen for the last 7 working days prior to the closing date of the offers. Shareholders may wait till the commencement of that period to be aware of upward revisions in the offer price and size of the offers, if any.

22. Can an acquirer withdraw the offer once made?

No, the offer once made can not be withdrawn except in the following circumstances:

· Statutory approval(s) required have been refused;

· The sole acquirer being a natural person has died;

· Such circumstances as in the opinion of the Board merits withdrawal.

23. How can a person avail the offer if he/she has not received the letter of offer?

The Public Announcement contains procedure for such cases i.e. where the shareholders do not receive the letter of offer or do not receive the letter of offer in time. The shareholders are usually advised to send their consent to Registrar to offer, if any or to MB on plain paper stating the name, address, number of shares held, Distinctive Folio No, number of shares offered and bank details along with the documents mentioned in the Public Announcement, before closure of the offer. The public announcement and the letter of offer along with the form of acceptance is available on the SEBI website at www.sebi.gov.in.

24. Is there any compensation to a shareholder for delayed receipt of payment under the offer?

Acquirers are required to complete the payment of consideration to shareholders who have accepted the offer within 15 days from the date of closure of the offer. In case the delay in payment is on account of non receipt of statutory approvals and if the same is not due to wilful default or neglect on part of the acquirer, the acquirers would be liable to pay interest to the shareholders for the delayed period in accordance with Regulations.

If the delay in payment of consideration is not due to the above reasons, it would be treated as a violation of the Regulations and therefore, also liable for other action in terms of the Regulations.

25. Is the acquirer required to accept all the shares under the open offer?

No, if the shares received by the acquirer are more than the shares agreed to be acquired by him, the acceptance would be on proportionate basis.

26. What are the safeguards incorporated in the takeover process so as to ensure that shareholders get their payments under the offer/ receive back their share certificates?

Before making the Public Announcement, the acquirer has to open an escrow account in the form of cash deposited with a scheduled commercial bank or bank guarantee in favour of the Merchant Banker or deposit of acceptable securities with appropriate margin with the Merchant Banker. The Merchant Banker is also required to confirm that firm financial arrangements are in place for fulfilling the offer obligations. In case, the acquirer fails to make the payment, MB has a right to forfeit the escrow account and distribute the proceeds in the following way.

a) 1/3 of amount to target company

b) 1/3 to regional SEs, for credit to investor protection fund etc.

c) 1/3 to be distributed on pro rata basis among the shareholders who have accepted the offer.

The Merchant Banker is required to ensure that the rejected documents which are kept in the custody of the Registrar / Merchant Banker are sent back to the shareholder through Registered Post.

Besides forfeiture of escrow account, SEBI can initiate separate action against the acquirer which may include prosecution / barring the acquirer from entering the capital market for a specified period etc.

27. Whether all types of acquisitions of shares or voting rights over and above the limits specified in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, necessarily require acquirer to make a public announcement followed up by an open offer?

No. Certain type of acquisitions as stipulated under regulation 3 of Chapter I of the Regulations, are specifically exempted from the open offer process subject to the acquirer complying with the requirements/conditions, as may be applicable, for such acquisitions. Such exemptions include acquisitions arising out of firm allotment in public issues, rights issues, inter-se transfer amongst group companies, relatives, promoters, acquirer and PACs, Indian promoters and foreign collaborators and transfer of shares from state level Financial Institutions to co-promoters of company pursuant to the agreement etc.

28. Which are those acquisitions/transactions where reporting to SEBI is mandatory?

Reporting is mandatory under Regulation 3(4) in respect of acquisitions arising out of firm allotment in public issues, rights issues, inter-se transfer amongst group companies, relatives, promoters, acquirer and PACs, Indian promoters and foreign collaborators and transfer of shares from state level Financial Institutions to co-promoters of company pursuant to the agreement.

29. What is the time frame to submit such report and procedure fee thereof?

The report is required to be submitted to SEBI within 21 days from the date of acquisition / allotment alongwith a fee of Rs.25,000/- per report.

30. Is there any prescribed form of application for various reports/ documents mentioned above?

YES, SEBI has specified the format, which is available on the SEBI webite at www.sebi.gov.in

31. What information is required to be furnished to Stock Exchanges in compliance of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 and when is it required to be furnished?

For transactions, which entail reporting requirements, details of the proposed acquisition need to be filed with SEs where shares of target company are listed, atleast 4 working days before the date of actual acquisition/ allotment.

A person who, alongwith PAC, if any, (collectively referred to as " Acquirer" hereinafter) acquires shares or voting rights (which when taken together with his existing holding) would entitle him to more than 5% or 10% or 14% or 54% or 74% shares or voting rights of target company, is required to disclose at every stage the aggregate of his shareholding to the target company and the Stock Exchanges within 2 days of acquisition or receipt of intimation of allotment of shares.

Any person who holds more than 15% but less than 75% shares or voting rights of target company, and who purchases or sells shares aggregating to 2% or more shall within 2 days disclose such purchase/ sale along with the aggregate of his shareholding to the target company and the Stock Exchanges

Further, annual disclosures have to be given regarding holding of promoters, persons in control and persons holding more than 15% shares or voting rights of the Target company. Further , a copy of the Public Announcement to acquire shares from public is to be given to the Stock Exchanges simultaneously with the publication in the newspapers.. Subsequently, upward revisions in offer, withdrawal of offer has also to be intimated to the Stock Exchanges simultaneously.

32. What happens if the acquirer / Target Company /Merchant Banker violate the provisions of the Regulations?

The Regulations have laid down the general obligations of acquirer, target company and the Merchant Banker. For failure to carry out these obligations as well as for failure / non compliance of other provisions of the Regulations, the Regulations have laid down the penalties for non compliance. These penalties include

a) forfeiture of the escrow account,

b) directing the person concerned to sell the shares acquired in violation of the regulations,

c) directing the person concerned not to further deal in securities,

d) levy monetary penalties,

e) initiate prosecution proceedings.

f) directing appointment of a merchant banker for the purpose of causing disinvestment of shares acquired in breach of regulations 10, 11 or 12

g) directing transfer of any proceeds or securities to the Investors Protection Fund of a recognised stock exchange;

h) directing the target company or depository to cancel the shares where an acquisition of shares pursuant to an allotment is in breach of regulations 10,11 or 12;

i) directing the target company or the depository not to give effect to transfer or further freeze the transfer of any such shares and not to permit the acquirer or any nominee or any proxy of the acquirer to exercise any voting or other rights attached to such shares acquired in violation of regulations 10, 11 or 12;

j) debarring any person concerned from accessing the capital market or dealing in securities for such period as may be determined by the Board;

k) directing the person concerned to make public offer to the shareholders of the target company to acquire such number of shares at such offer price as determined by the Board;

l) directing disinvestment of such shares as are in excess of the percentage of the shareholding or voting rights specified for disclosure requirement under the regulations 6, 7 or 8;

m) directing the person concerned not to dispose of assets of the target company contrary to the undertaking given in the letter of offer;

n) directing the person concerned, who has failed to make a public offer or delayed the making of a public offer in terms of these Regulations, to the shareholders, whose shares have been accepted in the public offer made after the delay, the consideration amount along with interest at the rate not less than the applicable rate of interest payable by banks on fixed deposits.

Further, the Board of Directors of the target company would also be liable for action in terms of the Regulations and the SEBI Act for failure to carry out their obligations specified in the Regulations.

Action can also be initiated for suspension, cancellation of certificate of registration against an intermediary such as the Merchant Banker to the offer.

33. Are mergers and amalgamations of companies also covered under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997?

No, only takeovers and substantial acquisition of shares of a listed company fall within purview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. Mergers and Amalgamations are outside the purview of SEBI as they are a subject matter of the Companies Act, 1956.

 34. What is the Takeover Panel?

An acquirer who proposes to acquire shares through a mode which is not specifically covered under regulation 3(1)(a) to (k) may seek exemption from the applicability of the provisions of the offer process by making an application. SEBI has constituted a panel consisting of independent persons to examine such applications which is called the Takeover Panel.

The present composition of the Takeover Panel is as follows:

Chairman (Acting): Shri K Kannan (Former Chairman, Bank of Baroda)

Member: Shri R S Loona (former Executive Director of SEBI)

Member: Shri C R Mehta (Former member of Company Law Board)

Member: Shri P N Shah (Chartered Accountant)

35. What is the procedure for making an application to the Takeover Panel for seeking exemption ?

The acquirer shall make an application in the standard format specified by SEBI giving all the relevant details of the proposed acquisition along with a fee of Rs 50,000/- .The standard format is available on the SEBI website www.sebi.gov.in.

36. How does SEBI process such application?

SEBI forwards the application to the Takeover Panel within 4-5 days of its receipt. The Takeover Panel would make a recommendation on the application to SEBI within 15 days of receipt of the application from SEBI. SEBI, after affording reasonable opportunity to the concerned parties, wherever necessary, would pass a reasoned order on the application within 30 days thereof and publish the same.

37. Are there any specific provisions for disinvestment of government shareholding in listed Public Sector Undertakings (PSUs)?

To facilitate acquisition of shares or voting rights or control by strategic partner from the Central Government in a listed PSU and to harmonise the process of disinvestment and investor protection.

The said amendments include the following:

Transfer of shares and control to the strategic partner/ acquirer even before completing the open offer formalities in terms of the Regulations;

The date of entering into the share purchase agreement would be the reference date for making the public announcement.

The date on which the Central Government opens the financial bids would be the reference date for classifying the shares of the company as frequently or infrequently traded and for determination of the offer price. Non-applicability of requirement of second offer for subsequent stage of acquisition subject to certain conditions Prohibition from making a competitive bid. It may be noted that these amendments were made only for the purpose of PSU disinvestment and are not available to other acquisitions.

38. Where can an investor get more information related to the SEBI Takeover Regulations?

The Bhagwati Committee report, the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 and subsequent amendments, public announcements and letter of offer are available at SEBI’s website http://www.sebi.gov.in.

For any other information regarding Substantial Acquisition of Shares and Takeovers, you may address your query to SEBI, Division of Corporate Restructuring at SEBI Bhavan, Plot No.C4-A, 'G Block, Bandra Kurla Complex, Bandra (E), Mumbai 400 051.