ACQUISITION OF SHARES AND ASSETS

ABSTRACT

Acquisition of Shares• Introduction• Issue of Shares• Initial Public Offering• Stock- brokers and Sub- brokers

Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992. • NRI Trading

Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000.• Transfer of shares

Foreign Exchange Management Act, 1999.

Companies Act, 1956.• Substantial acquisition of shares

Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeover) Regulations, 1997.

Acquisition of Assets

Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000.

SharesAccording to the section 2(46) of the Company’s Act 1956, share means a part in the share capital of the company and it also includes stock except where a distinction between stock and share capital is made expressed or implied.

Preferential shares- Sec 85 of the Act

•It carries a preferential right for the payment of the dividends at a fixed rate.•It also a carries a preferential right for the repayment of the capital during the winding up.

Equity shares- Sec 85 of the Act

When the shares are not preferential share capital, the rest will amount to equity share capital or ordinary share capital.

Cumulative &Non- cumulative

Participating &Non- participating

Redeemable&Irredeemable

ISSUE OF SHARES

Public issueWhen an issue / offer of securities is made to new investors for becoming part of shareholders’ family of the issuer it is called a public issue.

Rights issueThe securities are issued by the issuer to the existing shareholders on a record date.

Bonus issueWhen an issuer makes an issue of securities to its existing shareholders as on a record date, without any consideration from them, it is

called a bonus issue.

Private placement

It is issue of securities not exceeding to 49 persons

Initial Public Offering (IPO)

Follow up Public Offering (FPO)

• A public company issuing share capital of 50 lakhs or more must submit a draft offer document

with the SEBI, 12 months prior to the issue.

• The IPO is governed by SEBI disclosure and Investor Protection Guidelines,1992.

INITIAL PUBLIC OFFERING

•An IPO is given by a company who issues shares for the first time with the view of increasing the funds of the company.• Sec 68B of the Companies Act, 1956 deals with the initial offers of securities to be in dematerialised form in certain cases.

Prospectus When the company decides to issue shares to the public it has to issue prospectus. It contains the details of the company.

Share applicationIn order to avail the shares, an individual shall submit share application along with the application money in prescribed format.

Allotment of SharesOnce the minimum subscription amount is received, the directors of the company send out letters of allotment to the applicants.

Share CertificateAs per section 84 of the Act, a member obtains a share certificate with a common seal of the company. This shall be prima facie evidence of the title of the member to such shares

STOCK- BROKER AND SUB- BROKER

Regulations 7 and 15 of the Securities Exchange Board of India (Stock- brokers and Sub-

brokers) Regulations,1992 deals with the code of conduct of a stock and sub broker respectively.

The brokers shall maintain high standards of integrity; act with due fairness , skill, care and

diligence. A broker shall not indulge himself in any manipulative or fraudulent manner with a

view to distort a market equilibrium or personal gains.

The brokers shall abide by the statutory provisions that are in existence.

A broker shall execute all the orders given by his client regarding the buying and selling of

securities at the best available market price.

A contract note shall be issued to the client by the broker once the transaction is over.

A broker cannot commit any breach of trust relating to the disclosure of the personal investments

of their clients.

A broker shall not act only with the object of obtaining brokerage or commission. He shall

not furnish any misleading advice in order to induce business from him.

A broker shall not render service to a client who has not fulfilled the commitments of

securities previously.

Brokers shall not render advice directly or indirectly in publicly accessible media.

A broker should maintain proper conduct in dealing with other contracting parties during the

transaction.

A broker shall extend his fullest co-operation to other brokers in order to protect his client’s

interests.

A broker shall complete the settlement of transactions with other brokers.

No broker shall advertise his business publicly unless permitted by law.

A broker shall not neglect or fail or refuse to submit the required returns and not make any

false or misleading statement on any returns required to be submitted to the Board and the

stock exchange.

EXECUTION OF ORDERS OF THE CLIENT

In order to acquire shares, the client shall possess the following accounts:-

i. Demat A/c

Demat a/c holds shares, the shares are held in electronic or dematerialised form in a depository.

Depositories in India includes- National Security Depository Limited (NSDL) and Central

Depository Services (India) Limited (CDSL), registered with the SEBI. Depository Participant is

an authorized agent to operate demat a/c.

Functions:-

1. Physical share certificates are replaced by electronic book entities.

2. Purchase of shares are deemed as credits while sales are reflected as debits.

ii. Trading A/c

A Trading account is required if an individual wishes to trade, i.e. buy and sell shares in the stock

exchange. The actual trading can be done by phone, internet or using transaction slips that are

provided at the time of opening the account. Brokerage charges are applicable and this varies

according to the trading agents. The 2 main stock exchanges in India are the National Stock

Exchange (NSE) and the Bombay Stock Exchange (BSE). A Trading account can also be opened

with most banks and financial institutions.

iii. Bank A/c

Bank account is required for carrying out various financial transactions associated with trading of shares. This is where the money on sale of shares will be credited or money for buying shares will be debited from. A normal Savings Account is enough and nothing additional needs to be done with the Bank account.

Bank A/c Trading A/c Demat A/c

Demat A/c Trading A/c Bank A/c

Buying of shares

Selling of shares

Money transaction Dematerialised form

Dematerialised form Money transaction

Debit money Credit shares

Debit shares Credit money

NRI TRADING ACCOUNT

Non-Resident Indian (NRI) means a “person resident outside India” who is a citizen of India or is a

person of Indian origin"[as per FEMA regulations]

NRI can invest in the shares of an Indian company through a stock exchange as per RBI guidelines.

According to Regulation 5 of Foreign Exchange Management (Transfer or issue of security by a

person resident outside India) Regulations, 2000, NRI shall approach the designated branch of any

authorized dealer (bank) authorized by reserve bank to administer the PIS (Portfolio Investment

Scheme) to open a NRE (Non Resident External) /NRO (Non Resident Ordinary) account under the

scheme for routing Investments.

Portfolio Investment Scheme (PIS) is a scheme of reserve bank of India under which - Non Resident

Indian (NRIs) can purchase/sell shares/convertible debentures of Indian companies on Stock

Exchanges.

TRANSFER OF SHARES

Sec. 111A(2) of the Companies Act,1956 provides that the shares and debentures of a

listed company is freely transferable.

Sect. 108 of the Act, deals with registration of transfer of shares only if a proper transfer

deed in Form 7B duly stamped and executed by or on behalf of the transferor and by or

on behalf of the transferee and specifying the name, address and occupation, if any, of the

transferee, has been delivered to the company, along with the share certificate.

Sec 6(3) of the Foreign Exchange Management Act, 1999 authorises RBI to regulate the

transfer.

NRI No Resident (inc. NRI)

NRI NRI

Sale/gift

Sale/gift

transfer

transfer

An NRI can sell his shares on stock exchange through a recognized broker.

The sale transaction between the resident and NRI can be made by a private arrangement

provided there exists a prior approval of the RBI.

NRI ResidentSale transaction

Private arrangement

NRI transfer

giftResident

Procedure for share transfer in a private company

• As per sec. 3(1)(iii)(a) of the Companies Act, 1956, AOA shall restrict and govern the transfer of

shares in a private company.

• The transferor gives a notice in writing to the company regarding his intention to transfer his share.

• The directors of the company determine the price of the shares and they notify to the other members

as regards to the availability of such shares.

• If none of the members are willing to purchase the sharers, then it can be transferred to an outsider

and the company is bound to accept such a transfer.

SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVER

The Securities Exchange Board of India (Substantial acquisition of shares and Takeover) Regulations,

1997 deals with the entire concepts of substantial acquisition of shares and takeover of a target

company by acquirers who may be Persons Acting in Concert(PAC)/individuals/legal entities. A ‘target

company’ is the listed company of whose shares are to be acquired,

When an ‘acquirer’ takes control of the ‘target company’ then it is termed as ‘takeover’. ‘Substantial

acquisition of shares’ takes place when the ‘acquirer’ acquires substantial quantity of shares or voting

rights of the target company.

Any broker acting on behalf of his client is exempted from substantially acquiring shares and taking

over.

The substantial acquisition of shares and voting rights can be classified distinctly into two purposes:-

Threshold of disclosure to be made by acquirer.

Trigger point for making an open offer by an acquirer.

Threshold of disclosure to be made by an acquirer:-

5% to 15% shares or voting rights

any person who acquires shares would entitle him to exercise 5 to 14% shares or voting rights in the

target company, shall disclose the aggregate of their shareholding.

15% to 75% shares or voting rights

any person who holds shares or voting rights in the target company between 15 to 75% and who trades

shares for 2% or more shall disclose the aggregate of their shareholdings. Any person holding more than

15% shares or voting rights of the target company shall disclose their aggregate shareholdings within 21

days of the end of the financial year.

Trigger point for making an open offer by an acquirer

15% of shares or voting rights

any person who intends to acquire shares along with his existing share would be entitled to exercise

15% or more voting rights, can acquire that only by making a Public Announcement to acquire 20% of

the voting capital before the open offer.

15%-75% shares or voting rights -Creeping Acquisition Limit

any acquirer who has 15%-75% shares or voting rights shall be entitled to 5% or more voting rights in

an financial year after making PA to at least acquire 20% of shares through an open offer.

75% of shares or voting rights - Consolidation of holding

any acquirer who is having 75% shares or voting rights of a target company, can acquire further shares

or voting rights only through an open offer from the shareholders of the target company.

PROCEDURE

Public announcement

(PA)Open Offer SEBI’s Role SAST

• The acquirer is bound to a make a public announcement establishing intention to acquire the

shares of the target company

• PA constitutes the offer price, no. of shares to be acquired from the public, identity and

future plans of the acquirer, purpose of acquisition, etc. The objective of the PA is to make

awareness among the shareholders about the intention of the acquirer and create an exit

opportunity as a consequence of the open offer.

• The open offer contains the disclosures of the acquirer and the future plans of the target

company. The shareholders’ tendered offer price would also be taken into account for

determining the open offer, if any.

• SEBI does not have a say in the fixation of the open offer.

• Subsequently, the open offer is made and on the threshold of the public’s investment, the

acquirer takes over the target company.

ACQUISITION OF ASSETS When an acquirer purchases an asset, the liabilities of the target shall not be attached to the acquirer

unless it is attached to the transferred property.

A person outside India shall establish an Indian subsidiary in order to carry out asset purchase. Eg.

Joint venture with Indian companies. [RBI regulations]

Assets include shares, debentures and other securities in a company dealt under the Companies Act,

1956. The company must comply with the requirements of Sec. 293(1)(a) of the Act and obtain the

approval of the shareholders to sell all or substantial portion of its assets.

The acquisition of asset from target company i.e. a unit in a SEZ or EOU (at times) require an

addition step of ‘debonding’ of assets. The assets of a target company located within a SEZ unit are

bonded with the customs authorities for exemption of customs duty/tax. The acquirer company

under goes a de-bonding process i.e payment of customs tax in order to acquire the assets of a SEZ

unit.

Therefore, asset acquisition varies with respect to the asset that is to be purchased. Each purchase

shall be governed by respective Acts based on the type of asset.

THANK YOU

By:Catherine Monisha. F

Jeyapriya. R