Mergers And Acquisitions

MERGERS

&

ACQUISITIONA book made by:

Contents

ChaptersPage No.

Chapter 1. Introduction to Mergers and Acquisition.

2-5

Chapter 2. Purpose of merger and acquisition.

6-8

Chapter 3. Types of Mergers.

9-10

Chapter 4. Advantages of mergers and takeovers.

11-14

Chapter 5. Consideration of Merger and Takeover.

15-19

Chapter 6. Reverse Merger.

20-24

Chapter 7. Procedure of Merger and Acquisition.

25-28

Chapter 8. SEBI takeover code & Regulations.

Chapter9. Methods of merger and takeovers.

Chapter10. Defenses: pre & post Merger.

Chapter11. CASE -STUDY

Introduction to Mergers and Acquisition

We have been learning about the companies coming together to from another company and companies taking over the existing companies to expand their business.

With globalisation taking toll of many Indian businesses and the feeling of insecurity surging over our businessmen, it is not surprising when we hear about the immense numbers of corporate restructurings taking place, especially in the last couple of years. Several companies have been taken over and several have undergone internal restructuring, whereas certain companies in the same field of business have found it beneficial to merge together into one company.

In this context, it would be essential for us to understand what corporate restructuring and mergers and acquisitions are all about.

All our daily newspapers are filled with cases of mergers, acquisitions, spin-offs, tender offers, & other forms of corporate restructuring. Thus important issues both for business decision and public policy formulation have been raised. No firm is regarded safe from a takeover possibility. On the more positive side Mergers & Acquisitions may be critical for the healthy expansion and growth of the firm. Successful entry into new product and geographical markets may require Mergers & Acquisitions at some stage in the firm's development. Successful competition in international markets may depend on capabilities obtained in a timely and efficient fashion through Mergers & Acquisition's. Many have argued that mergers increase value and efficiency and move resources to their highest and best uses, thereby increasing shareholder value. .

To opt for a merger or not is a complex affair, especially in terms of the technicalities involved. We have discussed almost all factors that the management may have to look into before going for merger. Considerable amount of brainstorming would be required by the managements to reach a conclusion. e.g. a due diligence report would clearly identify the status of the company in respect of the financial position along with the net worth and pending legal matters and details about various contingent liabilities. Decision has to be taken after having discussed the pros & cons of the proposed merger & the impact of the same on the business, administrative costs benefits, addition to shareholders' value, tax implications including stamp duty and last but not the least also on the employees of the Transferor or Transferee Company.

Merger:

Merger is defined as combination of two or more companies into a single company where one survives and the others lose their corporate existence. The survivor acquires all the assets as well as liabilities of the merged company or companies. Generally, the surviving company is the buyer, which retains its identity, and the extinguished company is the seller.

Merger is also defined as amalgamation. Merger is the fusion of two or more existing companies. All assets, liabilities and the stock of one company stand transferred to Transferee Company in consideration of payment in the form of:

Equity shares in the transferee company,

Debentures in the transferee company,

Cash, or

A mix of the above modes.

Acquisition:

Acquisition in general sense is acquiring the ownership in the property. In the context of business combinations, an acquisition is the purchase by one company of a controlling interest in the share capital of another existing company.

Methods of Acquisition:

An acquisition may be affected by

(a) agreement with the persons holding majority interest in the company management like members of the board or major shareholders commanding majority of voting power;

(b) purchase of shares in open market;

(c) to make takeover offer to the general body of shareholders;

(d) purchase of new shares by private treaty;

(e) Acquisition of share capital through the following forms of considerations viz. means of cash, issuance of loan capital, or insurance of share capital.

Takeover:

A takeover is acquisition and both the terms are used interchangeably.

Takeover differs from merger in approach to business combinations i.e. the process of takeover, transaction involved in takeover, determination of share exchange or cash price and the fulfillment of goals of combination all are different in takeovers than in mergers. For example, process of takeover is unilateral and the offer or company decides about the maximum price. Time taken in completion of transaction is less in takeover than in mergers, top management of the offerer company being more co-operative.

De-merger or corporate splits or division:

De-merger or split or divisions of a company are the synonymous terms signifying a movement in the company.

A successful Mergers & Acquisition growth strategy must be supported by three capabilities: deep local networks, the abilities to manage uncertainty, and the skill to distinguish worthwhile targets. Companies that rush in without them are likely to be stumble.

Due diligence can be difficult because disclosure practices are poor and companies often lack the information buyer need. Moreover, most Asian conglomerates still do not present consolidated financial statements, leaving the possibilities that the sales and the profit figures might be bloated by transactions between affiliated companies. The financial records that are available are often unreliable, with different projections made by different departments within the same company, and different projections made for different audiences. Banks and investors, naturally, are likely to be shown optimistic forecasts.

Purpose of Mergers and Acquisition

The purpose for an offeror company for acquiring another company shall be reflected in the corporate objectives. It has to decide the specific objectives to be achieved through acquisition. The basic purpose of merger or business combination is to achieve faster growth of the corporate business. Faster growth may be had through product improvement and competitive position.

Other possible purposes for acquisition are short listed below: -

(1)Procurement of supplies:

1. to safeguard the source of supplies of raw materials or intermediary product;

2. to obtain economies of purchase in the form of discount, savings in transportation costs, overhead costs in buying department, etc.;

3. to share the benefits of suppliers economies by standardizing the materials.

(2)Revamping production facilities:

1. to achieve economies of scale by amalgamating production facilities through more intensive utilization of plant and resources;

2. to standardize product specifications, improvement of quality of product, expanding

3. market and aiming at consumers satisfaction through strengthening after sale

4. services;

5. to obtain improved production technology and know-how from the offeree company

6. to reduce cost, improve quality and produce competitive products to retain and

7. improve market share.

(3) Market expansion and strategy:

1. to eliminate competition and protect existing market;

2. to obtain a new market outlets in possession of the offeree;

3. to obtain new product for diversification or substitution of existing products and to enhance the product range;

4. strengthening retain outlets and sale the goods to rationalize distribution;

5. to reduce advertising cost and improve public image of the offeree company;

6. strategic control of patents and copyrights.

(4) Financial strength:

1. to improve liquidity and have direct access to cash resource;

2. to dispose of surplus and outdated assets for cash out of combined enterprise;

3. to enhance gearing capacity, borrow on better strength and the greater assets backing;

4. to avail tax benefits;

5. to improve EPS (Earning Per Share).

(5) General gains:

1. to improve its own image and attract superior managerial talents to manage its affairs;

2. to offer better satisfaction to consumers or users of the product.

(6) Own developmental plans:

The purpose of acquisition is backed by the offeror companys own developmental plans.

A company thinks in terms of acquiring the other company only when it has arrived at its own development plan to expand its operation having examined its own internal strength where it might not have any problem of taxation, accounting, valuation, etc. but might feel resource constraints with limitations of funds and lack of skill managerial personnels. It has to aim at suitable combination where it could have opportunities to supplement its funds by issuance of securities, secure additional financial facilities, eliminate competition and strengthen its market position.

(7) Strategic purpose:

The Acquirer Company view the merger to achieve strategic objectives through alternative type of combinations which may be horizontal, vertical, product expansion, market extensional or other specified unrelated objectives depending upon the corporate strategies. Thus, various types of combinations distinct with each other in nature are adopted to pursue this objective like vertical or horizontal combination.

(8) Corporate friendliness:

Although it is rare but it is true that business houses exhibit degrees of cooperative spirit despite competitiveness in providing rescues to each other from hostile takeovers and cultivate situations of collaborations sharing goodwill of each other to achieve performance heights through business combinations. The combining corporates aim at circular combinations by pursuing this objective.

(9) Desired level of integration:

Mergers and acquisition are pursued to obtain the desired level of integration between the two combining business houses. Such integration could be operational or financial. This gives birth to conglomerate combinations. The purpose and the requirements of the offeror company go a long way in selecting a suitable partner for merger or acquisition in business combinations.

Types of mergers

Merger or acquisition depends upon the purpose of the offeror company it wants to achieve. Based on the offerors objectives profile, combinations could be vertical, horizontal, circular and conglomeratic as precisely described below with reference to the purpose in view of the offeror company.

(A) Vertical combination:

A company would like to takeover another company or seek its merger with that company to expand espousing backward integration to assimilate the resources of supply and forward integration towards market outlets. The acquiring company through merger of another unit attempts on reduction of inventories of raw material and finished goods, implements its production plans as per the objectives and economizes on working capital investments. In other words, in vertical combinations, the merging undertaking would be either a supplier or a buyer using its product as intermediary material for final production.

An example of this is where a motorcar manufacturer and a manufacturer of sheet metal merge. Here, a supplying enterprise, which merges, with a customer enterprise can extend its control over the market by foreclosing an actual or potential outlet for the products of its competitors. The object of the merger may be to ensure a source of supply or an outlet for products and the effect may improve efficiency

The following main benefits accrue from the vertical combination to the acquirer company i.e.

(1) it gains a strong position because of imperfect market of the intermediary products, scarcity of resources and purchased products;

(2) has control over products specifications.

(B) Horizontal combination:

It is a merger of two competing firms, which are at the same stage of industrial process. The acquiring firm belongs to the same industry as the target company. The mail purpose of such mergers is to obtain economies of scale in production by eliminating duplication of facilities and the operations and broadening the product line, reduction in investment in working capital, elimination in competition concentration in product, reduction in advertising costs, increase in market segments and exercise better control on market. (for example, sugar and artificial sweeteners).(C) Circular combination:

Companies producing distinct products seek amalgamation to share common distribution and research facilities to obtain economies by elimination of cost on duplication and promoting market enlargement. The acquiring company obtains benefits in the form of economies of resource sharing and diversification.

(D) Conglomerate combination:

It is amalgamation of two companies engaged in unrelated industries like DCM and Modi Industries. The basic purpose of such amalgamations remains utilization of financial resources and enlarges debt capacity through re-organizing their financial structure so as to service the shareholders by increased leveraging and EPS, lowering average cost of capital and thereby raising present worth of the outstanding shares. Merger enhances the overall stability of the acquirer company and creates balance in the companys total portfolio of diverse products and production processes.

Advantages of mergers and takeovers

Mergers and takeovers are permanent form of combinations which vest in management complete control and provide centralized administration which are not available in combinations of holding company and its partly owned subsidiary. Shareholders in the selling company gain from the merger and takeovers as the premium offered to induce acceptance of the merger or takeover offers much more price than the book value of shares. Shareholders in the buying company gain in the long run with the growth of the company not only due to synergy but also due to boots trapping earnings.

Motivations for mergers and acquisitions

Mergers and acquisitions are caused with the support of shareholders, managers ad promoters of the combing companies. The factors, which motivate the shareholders and managers to lend support to these combinations and the resultant consequences they have to bear, are briefly noted below based on the research work by various scholars globally.

(1) From the standpoint of shareholders

Investment made by shareholders in the companies subject to merger should enhance in value. The sale of shares from one companys shareholders to another and holding investment in shares should give rise to greater values i.e. the opportunity gains in alternative investments. Shareholders may gain from merger in different ways viz. from the gains and achievements of the company i.e. through

(a) realization of monopoly profits;

(b) economies of scales;

(c) diversification of product line;

(d) acquisition of human assets and other resources not available otherwise;

(e) better investment opportunity in combinations.

One or more features would generally be available in each merger where shareholders may have attraction and favour merger.

(2) From the standpoint of managersManagers are concerned with improving operations of the company, managing the affairs of the company effectively for all round gains and growth of the company which will provide them better deals in raising their status, perks and fringe benefits. Mergers where all these things are the guaranteed outcome get support from the managers. At the same time, where managers have fear of displacement at the hands of new management in amalgamated company and also resultant depreciation from the merger then support from them becomes difficult.

(3) Promoters gains

Mergers do offer to company promoters the advantage of increasing the size of their company and the financial structure and strength. They can convert a closely held and private limited company into a public company without contributing much wealth and without losing control.

(4) Benefits to general publicImpact of mergers on general public could be viewed as aspect of benefits and costs to:

(a) Consumer of the product or services;

(b) Workers of the companies under combination;

(c) General public affected in general having not been user or consumer or the worker in the companies under merger plan.

(a) Consumers

The economic gains realized from mergers are passed on to consumers in the form of lower prices and better quality of the product which directly raise their standard of living and quality of life. The balance of benefits in favour of consumers will depend upon the fact whether or not the mergers increase or decrease competitive economic and productive activity which directly affects the degree of welfare of the consumers through changes in price level, quality of products, after sales service, etc.

(b) Workers community

The merger or acquisition of a company by a conglomerate or other acquiring company may have the effect on both the sides of increasing the welfare in the form of purchasing power and other miseries of life. Two sides of the impact as discussed by the researchers and academicians are: firstly, mergers with cash payment to shareholders provide opportunities for them to invest this money in other companies which will generate further employment and growth to uplift of the economy in general. Secondly, any restrictions placed on such mergers will decrease the growth and investment activity with corresponding decrease in employment. Both workers and communities will suffer on lessening job opportunities, preventing the distribution of benefits resulting from diversification of production activity.

(c) General public

Mergers result into centralized concentration of power. Economic power is to be understood as the ability to control prices and industries output as monopolists. Such monopolists affect social and political environment to tilt everything in their favour to maintain their power ad expand their business empire. These advances result into economic exploitation. But in a free economy a monopolist does not stay for a longer period as other companies enter into the field to reap the benefits of higher prices set in by the monopolist. This enforces competition in the market as consumers are free to substitute the alternative products. Therefore, it is difficult to generalize that mergers affect the welfare of general public adversely or favorably.

Consideration of Merger and Takeover

Mergers and takeovers are two different approaches to business combinations. Mergers are pursued under the Companies Act, 1956 vide sections 391/394 thereof or may be envisaged under the provisions of Income-tax Act, 1961 or arranged through BIFR under the Sick Industrial Companies Act, 1985 whereas, takeovers fall solely under the regulatory framework of the SEBI Regulations, 1997.

Minority shareholders rights

SEBI regulations do not provide insight in the event of minority shareholders not agreeing to the takeover offer. However section 395 of the Companies Act, 1956 provides for the acquisition of shares of the shareholders. According to section 395 of the Companies Act, if the offerer has acquired at least 90% in value of those shares may give notice to the non-accepting shareholders of the intention of buying their shares. The 90% acceptance level shall not include the share held by the offerer or its associates. The procedure laid down in this section is briefly noted below.

1. In order to buy the shares of non-accepting shareholders the offerer must have reached the 90% acceptance level within 4 months of the date of the offer, and notice must have been served on those shareholders within 2 months of reaching the 90% level.

2. The notice to the non-accepting shareholders must be in a prescribed manner. A copy of a notice and a statutory declaration by the offerer (or, if the offerer is a company, by a director) in the prescribed form confirming that the conditions for giving the notice have been satisfied must be sent to the target.

3. Once the notice has been given, the offerer is entitled and bound to acquire the outstanding shares on the terms of the offer.

4. If the terms of the offer give the shareholders a choice of consideration, the notice must give particulars of options available and inform the shareholders that he has six weeks from the date of the notice to indicate his choice of consideration in writing.

5. At the end of the six weeks from the date of the notice to the non-accepting shareholders the offerer must immediately send a copy of notice to the target and pay or transfer to the target the consideration for all the shares to which the notice relates. Stock transfer forms executed on behalf of the non-accepting shareholders by a person appointed by the offerer must also be sent. Once the company has received stock transfer forms it must register the offerer as the holder of the shares.

6. The consideration money, which is received by the target, should be held on trust for the person entitled to shares in respect of which the sum was received.

7. Alternatively, if the offerer does not wish to buy the non-accepting shareholders shares, it must still within one month of company reaching the 90% acceptance level give such shareholders notice in the prescribed manner of the rights that are exercisable by them to require the offerer to acquire their shares. The notice must state that the offer is still open for acceptance and specify a date after which the right may not be exercised, which may not be less than 3 months from the end of the time within which the offer can be accepted. If the offerer fails to send such notice it (and its officers who are in default) are liable to a fine unless it or they took all reasonable steps to secure compliance.

8. If the shareholder exercises his rights to require the offerer to purchase his shares the offerer is entitled and bound to do so on the terms of the offer or on such other terms as may be agreed. If a choice of consideration was originally offered, the shareholder may indicate his choice when requiring the offerer to acquire his shares. The notice given to shareholder will specify the choice of consideration and which consideration should apply in default of an election.

9. On application made by an happy shareholder within six weeks from the date on which the original notice was given, the court may make an order preventing the offerer from acquiring the shares or an order specifying terms of acquisition differing from those of the offer or make an order setting out the terms on which the shares must be acquired.

In certain circumstances, where the takeover offer has not been accepted by the required 90% in value of the share to which offer relates the court may, on application of the offerer, make an order authorizing it to give notice under the Companies Act, 1985, section 429. It will do this if it is satisfied that:

a. the offerer has after reasonable enquiry been unable to trace one or more shareholders to whom the offer relates;

b. the shares which the offerer has acquired or contracted to acquire by virtue of acceptance of the offerer, together with the shares held by untraceable shareholders, amount to not less than 90% in value of the shares subject to the offer; and

c. the consideration offered is fair and reasonable.

The court will not make such an order unless it considers that it is just and equitable to do so, having regard, in particular, to the number of shareholder who has been traced who did accept the offer.

Alternative modes of acquisitionThe terms used in business combinations carry generally synonymous connotations and can be used interchangeably. All the different terms carry one single meaning of merger but each term cannot be given equal treatment in the discussion because law has created a dividing line between take-over and acquisitions by way of merger, amalgamation or reconstruction. Particularly the takeover Regulations for substantial acquisition of shares and takeovers known as SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 vide section 3 excludes any attempt of merger done by way of any one or more of the following modes:

(a) by allotment in pursuant of an application made by the shareholders for right issue and under a public issue;

(b) preferential allotment made in pursuance of a resolution passed under section 81(1A) of the Companies Act, 1956;

(c) allotment to the underwriters pursuant to underwriters agreements;

(d) inter-se-transfer of shares amongst group, companies, relatives, Indian promoters and Foreign collaborators who are shareholders/promoters;

(e) acquisition of shares in the ordinary course of business, by registered stock brokers, public financial institutions and banks on own account or as pledges;

(f) acquisition of shares by way of transmission on succession or inheritance;

(g) acquisition of shares by government companies and statutory corporations;

(h) transfer of shares from state level financial institutions to co-promoters in pursuance to agreements between them;

(i) acquisition of shares in pursuance to rehabilitation schemes under Sick Industrial Companies (Special Provisions) Act, 1985 or schemes of arrangements, mergers, amalgamation, De-merger, etc. under the Companies Act, 1956 or any other law or regulation, Indian or Foreign;

(j) acquisition of shares of company whose shares are not listed on any stock exchange. However, this exemption in not available if the said acquisition results into control of a listed company;

(k) such other cases as may be exempted from the applicability of Chapter III of SEBI regulations by SEBI.

The basic logic behind substantial disclosure of takeover of a company through acquisition of shares is that the common investors and shareholders should be made aware of the larger financial stake in the company of the person who is acquiring such companys shares. The main objective of these Regulations is to provide greater transparency in the acquisition of shares and the takeovers of companies through a system of disclosure of information.

Escrow account

To ensure that the acquirer shall pay the shareholders the agreed amount in redemption of his promise to acquire their shares, it is a mandatory requirement to open escrow account and deposit therein the required amount, which will serve as security for performance of obligation.

The Escrow amount shall be calculated as per the manner laid down in regulation 28(2). Accordingly:

For offers which are subject to a minimum level of acceptance, and the acquirer does want to acquire a minimum of 20%, then 50% of the consideration payable under the public offer in cash shall be deposited in the Escrow account.

Payment of consideration

Consideration may be payable in cash or by exchange of securities. Where it is payable in cash the acquirer is required to pay the amount of consideration within 21 days from the date of closure of the offer. For this purpose he is required to open special account with the bankers to an issue (registered with SEBI) and deposit therein 90% of the amount lying in the Escrow Account, if any. He should make the entire amount due and payable to shareholders as consideration. He can transfer the funds from Escrow account for such payment. Where the consideration is payable in exchange of securities, the acquirer shall ensure that securities are actually issued and dispatched to shareholders in terms of regulation 29 of SEBI Takeover Regulations.

Reverse Merger

Generally, a company with the track record should have a less profit earning or loss making but viable company amalgamated with it to have benefits of economies of scale of production and marketing network, etc. As a consequence of this merger the profit earning company survives and the loss making company extinguishes its existence. But in many cases, the sick companys survival becomes more important for many strategic reasons and to conserve community interest. The law provides encouragement through tax relief for the companies that are profitable but get merged with the loss making companies. Infact this type of merger is not a normal or a routine merger. It is, therefore, called as a Reverse Merger.

The allurement for such mergers is the tax savings under the Income-tax Act, 1961. Section 72A of the Act ensures the tax relief which becomes attractive for amalgamations of sick company with a healthy and profitable company to take the advantage of carry forward losses. Taking advantage of the provisions of section 72A through merger or amalgamation is known as reverse merger, which gives survival to the sick unit by merging it with the healthy unit. The healthy unit extincts loosing its name and the surviving sick company retains its name. Companies to take advantage of the section follow this route but after a year or so change their names to the one of the healthy company as were done amongst others by Kirloskar Pneumatics Ltd. The company merged with Kirloskar Tractors Ltd, a sick unit and initially lost its name but after one year it changed its name as was prior to merger.

Reverse Merger under Tax Laws

Section 72A of the Income-tax Act, 1961 is meant to facilitate rejuvenation of sick industrial undertaking by merging with healthier industrial companies having incentive in the form of tax savings designed with the sole intention to benefit the general public through continued productive activity, increased employment avenues and generation of revenue.

(1) Background

Under the existing provisions of the Income-tax Act, so much of the business loss of a year as cannot be set off by him against the profits of the following year from any business carried on by him. If the loss cannot be so wholly set off, the amount not so set off can be carried forward to the next following year and so on, up to a maximum of eight assessment years immediately succeeding the assessment year for which the loss was first computed. The benefit of carry forward and set off of business loss is, however, not available unless the business in which the loss was originally sustained is continued to be carried on by the assessee. Further, only the assessee who incurred the loss by his predecessor. Similarly, if a business carried on one assessee is taken over by another, the unabsorbed depreciation allowance due to the predecessor in business and set off against his profits in subsequent years. In view of these provisions, the accumulated business loss and unabsorbed depreciation allowance of a company which merges with another company under a scheme of amalgamation cannot be carried forward and set off by the latter company against its profits.

The very purpose of section 72A is to revive the business of an undertaking, which is financially non-viable and to bring it back to health. Sickness among industrial undertakings is a matter of grave national concern. Experience has shown that taking over of such units by Government is not always the most satisfactory or the most economical solution. The more effective course suggested was to facilitate the amalgamation of sick industrial units with sound ones by providing incentives and removing impediments in the way of such amalgamation. To save the Government from social costs in terms of loss of production and employment and to relieve the Government of the uneconomical burden of taking over and running sick industrial units is one of the motivating factors in introducing section 72A. To achieve this objective so as to facilitate the merger of sick industrial units with sound one, the general rule of carry forward and set off of accumulated losses and unabsorbed depreciation allowance of amalgamating company by the amalgamated company was statutorily related. By a deeming fiction, the accumulated loss or the unabsorbed depreciation of the amalgamating is treated to be the loss or, as the case may be, allowance for depreciation of the amalgamated company for the previous year in which amalgamation was effected.

There are three statutory conditions which are to be fulfilled under section 72A(1) for the benefits prescribed therein to be available to the amalgamated company, namely

(i) The amalgamating company was, immediately before such amalgamation, financially non-viable by reason of its liabilities, losses and other relevant factors;

(ii) The amalgamation is in the public interest;

(iii) Such other conditions as the Central Government may by notification in the Official Gazette, specify, to ensure that the benefit under this section is restricted to amalgamation, which would facilitate the rehabilitation or revival of the business of amalgamating company.

(2) Reverse merger

As it can be now understood, a reverse merger is a method adopted to avoid the stringent provisions of Section 72A but still be able to claim all the losses of the sick unit. For doing so, in case of a reverse merger, instead of a healthy unit taking over a sick unit, the sick unit takes over/ amalgamates with the healthy unit.

High Court discussed 3 tests for reverse merger:

a. assets of transferor company being greater than transferee company;

b. equity capital to be issued by the transferee company pursuant to the acquisition exceeding its original issued capital, and

c. the change of control in the transferee company clearly indicated that the present arrangement was an arrangement, which was a typical illustration of takeover by reverse bid.

Court held that prime facie the scheme of merging a prosperous unit with a sick unit could not be said to be offending the provisions of section 72A of the Income Tax Act, 1961 since the object underlying this provision was to facilitate the merger of sick industrial unit with a sound one.

(3) Salient features of reverse merger under section 72A1. Amalgamation should be between companies and none of them should be a firm of partners or sole-proprietor. In other words, partnership firm or sole-proprietary concerns cannot get the benefit of tax relief under section 72A merger.

2. The companies entering into amalgamation should be engaged in either industrial activity or shipping business. In other words, the tax relief under section 72A would not be made available to companies engaged in trading activities or services.

3. After amalgamation the sick or financially unviable company shall survive and other income generating company shall extinct. In other words essential condition to be fulfilled is that the acquiring company will be able to revive or rehabilitate having consumed the healthy company.

4. One of the merger partner should be financially unviable and have accumulated losses to qualify for the merger and the other merger partner should be profit earning so that tax relief to the maximum extent could be had. In other words the company which is financially unviable should be technically sound and feasible, commercially and economically viable but financially weak because of financial stringency or lack of financial recourses or its liabilities have exceeded its assets and is on the brink of insolvency. The second requisite qualification associated with financial unavailability is the accumulation of losses for past few years.

5. Amalgamation should be in the public interest i.e. it should not be against public policy, should not defeat basic tenets of law, and must safeguard the interest of employees, consumers, creditors, customers and shareholders apart from promoters of company through the revival of the company.

6. The merger must result into following benefit to the amalgamated company i.e. (a) carry forward of accumulated business loses of the amalgamated company; (b) carry forward of unabsorbed depreciation of the amalgamating company and (c) accumulated loss would be allowed to be carried forward set of for eight subsequent years.

7. Accumulated loss should arise from Profits and Gains from business or profession and not be loss under the head Capital Gains or Speculation.

8. For qualifying carry forward loss, the provisions of section 72 should have not been contravened.

9. Similarly for carry forward of unabsorbed depreciation the conditions of section 32 should not have been violated.

10. Specified authority has to be satisfied of the eligibility of the company for the relief under section 72 of the Income Tax Act. It is only on the recommendations of the specified authority that Central Government may allow the relief.

11. The company should make an application to a specified authority for requisite recommendation of the case to the Central Government for granting or allowing the relief.

12. Procedure for merger or amalgamation to be followed in such cases is same as in any other cases. Specified Authority makes recommendation after taking into consideration the courts direction on scheme of amalgamation.

Procedure for Takeover

and AcquisitionPublic announcement:

To make a public announcement an acquirer shall follow the following procedure:

1. Appointment of merchant banker:

The acquirer shall appoint a merchant banker registered as category I with SEBI to advise him on the acquisition and to make a public announcement of offer on his behalf.

2. Use of media for announcement:

Public announcement shall be made at least in one national English daily one Hindi daily and one regional language daily newspaper of that place where the shares of that company are listed and traded.

3. Timings of announcement:

Public announcement should be made within four days of finalization of negotiations or entering into any agreement or memorandum of understanding to acquire the shares or the voting rights.

4. Contents of announcement:

Public announcement of offer is mandatory as required under the SEBI Regulations. Therefore, it is required that it should be prepared showing therein the following information:

(1) paid up share capital of the target company, the number of fully paid up and partially paid up shares.

(2) Total number and percentage of shares proposed to be acquired from public subject to minimum as specified in the sub-regulation (1) of Regulation 21 that is:

a) The public offer of minimum 20% of voting capital of the company to the shareholders;

b) The public offer by a raider shall not be less than 10% but more than 51% of shares of voting rights. Additional shares can be had @ 2% of voting rights in any year.

(3) The minimum offer price for each fully paid up or partly paid up share;

(4) Mode of payment of consideration;

(5) The identity of the acquirer and in case the acquirer is a company, the identity of the promoters and, or the persons having control over such company and the group, if any, to which the company belong;

(6) The existing holding, if any, of the acquirer in the shares of the target company, including holding of persons acting in concert with him;

(7) Salient features of the agreement, if any, such as the date, the name of the seller, the price at which the shares are being acquired, the manner of payment of the consideration and the number and percentage of shares in respect of which the acquirer has entered into the agreement to acquirer the shares or the consideration, monetary or otherwise, for the acquisition of control over the target company, as the case may be;

(8) The highest and the average paid by the acquirer or persons acting in concert with him for acquisition, if any, of shares of the target company made by him during the twelve month period prior to the date of the public announcement;

(9) Objects and purpose of the acquisition of the shares and the future plans of the acquirer for the target company, including disclosers whether the acquirer proposes to dispose of or otherwise encumber any assets of the target company:

Provided that where the future plans are set out, the public announcement shall also set out how the acquirers propose to implement such future plans;

(10) The specified date as mentioned in regulation 19;

(11) The date by which individual letters of offer would be posted to each of the shareholders;

(12) The date of opening and closure of the offer and the manner in which and the date by which the acceptance or rejection of the offer would be communicated to the share holders;

(13) The date by which the payment of consideration would be made for the shares in respect of which the offer has been accepted;

(14) Disclosure to the effect that firm arrangement for financial resources required to implement the offer is already in place, including the details regarding the sources of the funds whether domestic i.e. from banks, financial institutions, or otherwise or foreign i.e. from Non-resident Indians or otherwise;

(15) Provision for acceptance of the offer by person who own the shares but are not the registered holders of such shares;

(16) Statutory approvals required to obtained for the purpose of acquiring the shares under the Companies Act, 1956, the Monopolies and Restrictive Trade Practices Act, 1973, and/or any other applicable laws;

(17) Approvals of banks or financial institutions required, if any;

(18) Whether the offer is subject to a minimum level of acceptances from the shareholders; and

(19) Such other information as is essential fort the shareholders to make an informed design in regard to the offer.

SEBI TAKEOVER CODE

A takeover generally involves acquisition of a certain block of equity capital of a co., which enables the acquirer to exercise control over the affair of the co.

TYPES TAKEOVERS:

Friendly Takeover: Takeovers call be friendly or hostile. A negotiated settlement is possible in friendly takeovers. Friendly ones are characterized by bargaining until agreement is signed. Successful takeovers depend on the premium offered to the targets current share price, the composition of the board, the composition and sentiment of targets current shareholders.

Aggressive takeovers take the form of bear hug, proxy contests, open market operations and tender offers. Alternative takeover defenses may be classified under pre-bid and post-bid.

Hostile takeover: Hostile takeover is an unsolicited offer made by a potential acquirer that is resisted by target firm's management. It is normally disclosed in the press. Aggressive public rejection of the offer is the first step in the process leading to a negotiated settlement. If there are confidential negotiations before there is a public announcement of a bid or a completed negotiation, the transaction may be considered friendly. The existence of negotiations is some times revealed to attract alternative bidders.

Bear Hug: Bear hug limits target's option. If the friendly approach is considered inappropriate or is unsuccessful the acquiring company may attempt to limit the option of the target management by making a formal acquisition proposal to the board of directors of the target. The intent is to move the board to a negotiated settlement. The board may be motivated to do so because of its fiduciary responsibility to the target's shareholders. Once the bid is made the company is effectively put into play.

The target board is unlikely to reject the bid without obtaining a fairness opinion from an investment banker that the offer is inadequate. Otherwise the management may face litigation from shareholders that it has not properly discharged its fiduciary responsibility.

PROXY CONTEST

Proxy contest takes place for seats on the board of directors and those concerning management proposals. By replacing board members proxy contests can be an effective means of gaining control without owning 51 % of voting stock or used to eliminate takeover defenses.

A successful proxy fights represent purchasing at a substantial premium a controlling interest in the target company.

Pretender Tactics: By purchasing target stock at a price lower than the eventual price secretly bidder accumulates large stock which helps in achieving potential leverage with the voting rights associated with the stock it has purchased.

Street Sweeps: Purchases made clandestinely before prenotitication percentages are reached. Once a purchaser's intentions are made public the target's stock price will soar.

TENDER OFFER

A public limited company carries the risk that any person or company can go to it shareholders and offer to buy their shares. If enough shareholders are willing to sell or tender their shares at a certain price a formal shareholder vote is not necessary. Tender offers give share holders a chance to vote without a formal proxy.

Tender offer takes the battle to the shareholders. But it is resorted when a friendly negotiated settlement is not possible. An unsolicited offer may be made to shareholders without board approval of the target. It can force management's attention and response. If the bid is real, management must find some alternative means of getting shareholders comparable value. Otherwise, the hostile bidder may eventually be able to negotiate the final bid with the target's management.

Tender offers can be for cash or securities. In either case the proposal is put directly to the shareholders of the target. The offer is extended for a specific period of time and may be unrestricted (any or all offer) or restricted to a certain percentage or number of the target's shares.

Acquirer" means any person who, directly or indirectly, acquires or agrees to acquire shares or voting rights in the target company, or acquires or agrees to acquire control over the target company, either by himself or with any person acting in concert with the acquirer

Target company" means a listed company whose shares or voting rights or control is directly or indirectly acquired or is being acquired.

"Control" shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner;

* ["Explanation: (i) Where 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 that the transfer from joint control to sole control is effected in accordance with clause (e) of sub - regulation (1) of regulation 3.

(ii). 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".] *

Offer period means the period between the date of entering into Memorandum of Understanding or the public announcement, as the case may be and the date of completion of offer formalities relating to the offer made under these regulations.

Promoter" means -

(i) the person or persons who are in control of the company, directly or indirectly, whether as a shareholder, director or otherwise; or

(ii) person or persons named as promoters in any document of offer of securities to the public or existing shareholders,

and includes,

(a) where the promoter is an individual, -

(1) a relative of the promoter within the meaning of section 6 of the Companies Act, 1956 (1 of 1956);

(2) any firm or company, directly or indirectly, controlled by the promoter or a relative of the promoter or a firm or Hindu undivided family in which the promoter or his relative is a partner or a coparcener or a combination thereof:

Provided that, in case of a partnership firm, the share of the promoter or his relative, as the case may be, in such firm should not be less than 50%.

(b) where the promoter is a body corporate,- (1) a subsidiary or holding company of that body; or

(2) any firm or company, directly or indirectly, controlled by the promoter of that body corporate or by his relative or a firm or Hindu undivided family in which the promoter or his relative is a partner or coparcener or a combination thereof:

Provided that, in case of a partnership firm, the share of such promoter or his relative, as the case may be, in such firm should not be less than 50%.

PERSON ACTING IN CONCERT" comprises, -

(1) persons who, for a common objective or purpose of substantial acquisition of shares or voting rights or gaining control over the target company, pursuant to an agreement or understanding (formal or informal), directly or indirectly co-operate by acquiring or agreeing to acquire shares or voting rights in the target company or control over the target company.

(2) Without prejudice to the generality of this definition, the following persons will be deemed to be persons acting in concert with other persons in the same category, unless the contrary is established :

(i) a company, its holding company, or subsidiary of such company or company under the same management either individually or together with each other;

(ii) a company with any of its directors, or any person entrusted with the management of the funds of the company;

(iii) directors of companies referred to in sub-clause (i) of clause (2) and their associates;

(iv) mutual fund with sponsor or trustee or asset management company;

(v) foreign institutional investors with sub account(s);

(vi) merchant bankers with their client(s) as acquirer;

(vii) portfolio managers with their client(s) as acquirer;

(viii) venture capital funds with sponsors;

(ix) banks with financial advisers, stock brokers of the acquirer, or any company which is a holding company, subsidiary or relative of the acquirer.

Provided that sub-clause (ix) shall not apply to a bank whose sole relationship with the acquirer or with any company, which is a holding company or a subsidiary of the acquirer or with a relative of the acquirer, is by way of providing normal commercial banking services or such activities in connection with the offer such as confirming availability of funds, handling acceptances and other registration work.

(x) any investment company with any person who has an interest as director, fund manager, trustee, or as a shareholder having not less than 2% of the paid-up capital of that company or with any other investment company in which such person or his associate holds not less than 2% of the paid up capital of the latter company.

*[ Note: For the purposes of this clause `associate' means:

(a) any relative of that person within the meaning of section 6 of the Companies Act, 1956 (1 of 1956); and

(b) family trusts and Hindu Undivided Families.]*

Non-Applicability of the Regulation (a) Allotment in pursuance of an application made to a public issue.

Such allotment shall be exempt only if full disclosures are made in the prospectus about the identity of the acquirer who has agreed to acquire the shares, the purpose of acquisition, consequential changes in voting rights, shareholding pattern of the company and in the Board of Directors of the Company, if any, and whether such allotment would result in change in control over the company.

(b) Allotment pursuant to an application made by the shareholder for rights issue,

*[(i) to the extent of his entitlement; and

(ii) upto the percentage specified in consolidations of holdings]*

Provided further that this exemption shall not be available in case the acquisition of securities results in the change of control of management.

(c) Allotment to the underwriters pursuant to any underwriting agreement;

(d) acquisition of shares in the ordinary course of business by,-

(i) a registered stock-broker of a stock exchange on behalf of clients;

(ii) a registered market maker of a stock exchange in respect of shares for which he is the market maker, during the course of market making;

(iii) by Public Financial Institutions on their own account;

(iv) by banks and public financial institutions as pledgees;

(v) a merchant banker or a promoter of the target company pursuant to a scheme of safety net under the provisions of the Securities and Exchange Board of India

(e) Shares held by banks and financial institutions by way of security against loans

(f) Issue of American Depository Receipts and Global Depository Receipts or Foreign Currency Convertible Bonds, till such time as they are not converted into equity shares;

(g) In addition to the above cases, even when there is a change in control and management of the company, the Takeover Code would still not apply if at least 51% of the shareholders of the company have approved the acquisition by the acquirer after being made aware that such acquisition would result in change in control and management.

The Takeover Panel

(1) The Board shall for the purposes of this Regulation constitute a Panel of majority of independent persons from within the categories

(2) For seeking exemption the acquirer shall file an application [supported by a duly sworn affidavit] with the Board, giving details of the proposed acquisition and the grounds on which the exemption has been sought.[Format of application]

(3) The acquirer shall, along with the application pay a fee of Rs. 25, 000/- to the Board, either by a bankers cheque or demand draft in favour of the Securities and Exchange Board of India, payable at Mumbai.

(4) The Board shall within 5 days of the receipt of an application forward the application to the Panel.

(5) The Panel shall within 15 days from the date of receipt of application make a recommendation on the application to the Board.

(6) The Board shall after affording reasonable opportunity to the concerned parties and after considering all the relevant facts including the recommendations, if any, pass a reasoned order on the application within 30 days thereof.

(7) The order of the Board shall be published by the Board.

DISCLOSURES OF SHAREHOLDING AND CONTROL IN A LISTED COMPANY

(1) Any person, who holds more than 5 percent shares or voting rights in any company, shall within two months of notification of these Regulations disclose his aggregate shareholding in that company, to the company.

(2) Every company whose shares are held by the persons referred to in sub-regulation (1) shall, within three months from the date of notification of these Regulations, disclose to all the stock exchanges on which the shares of the company are listed, the aggregate number of shares held by each person.

(3) A promoter or any person having control over a company shall within two months of notification of these Regulations disclose the number and percentage of shares or voting rights held by him and by person(s) acting in concert with him in that company, to the company.

(4) Every company, whose shares are listed on a stock exchange, shall within three months of notification of these Regulations, disclose to all the stock exchanges on which the shares of the company are listed, the names and addresses of promoters and, or person(s) having control over the company, and number and percentage of shares or voting rights held by each such person.

Acquisition of 5% voting rights

(1) Any acquirer of shares or voting rights with a total of existing holdings in excess of five per cent or ten per cent. or fourteen per cent. shares or voting rights in a company, in any manner whatsoever, shall disclose at every stage to the concerned company the aggregate of his shareholding or voting rights within two working days of the receipt of intimation of allotment/ acquisition of shares/voting rights.

(2) Any acquirer who has acquired shares or voting rights of a company under the provisions of consolidation of holdings shall disclose purchase or sale aggregating two per cent. or more of the share capital of the target company to the target company, and the stock exchanges where shares of the target company are listed within two days of such purchase or sale along with the aggregate shareholding after such acquisition or sale.

(2)The disclosures

(a) the receipt of intimation of allotment of shares; or

(b) the acquisition of shares or voting rights, as the case may be must be made.

The stock exchange shall immediately display the information received from the acquirer on the trading screen, the notice board and also on its website.]

(3) Every company, whose shares are acquired shall disclose to all the stock exchanges on which the shares of the said company are listed the aggregate number of shares held by each of such persons referred above within seven days of receipt of information

Continual disclosures

(a)Every person who holds more than 15% shares shall 21 days from F. Y. March 31st disclosed to the co. his holdings.

(b)Promoter within 21 days from F. Y. March 31st disclosed the no. & % of shares to the company

(c)Every co. within 30 days make yearly discloser to the stock exchange the changes in respect of the holdings.

Acquisition of 15 Per cent or More Shares/Voting Rights An acquirer acquiring shares/voting rights that, together with existing holdings by him/person(s) working in concert with him entitle him, to exercise 15 per cent or more of the voting rights in a company has to make a public announcement to the effect.

Consolidation of Holdings An acquirer (together with a person acting in concert) holding not less than 15 per cent but not more than 75 per cent of the shares/voting rights in a company has to make a public announcement to acquire additional shares/voting rights entitling him to exercise more than 5 per cent of the rights in any financial year ending on March31. Moreover, an acquirer who (together with a person acting in concert with him) has acquired 75 per cent of the shares/ voting rights in a company cannot acquire, either by himself/or through a person acting in concert with him, any additional shares without making a public announcement. The term acquisition, with reference to the substantial acquisition and consolidation of holdings, includes both direct in a listed company as well as indirect by virtue of acquisition of companies, whether listed/unlisted in India/abroad.

Acquisition of Control Irrespective of whether or not there has been any acquisition of shares/ voting rights no person can acquire control over the target company without making public announcement. A change in control in pursuance to a special resolution of the shareholders passed in general meeting is exempted from this requirement. For passing the special resolution, the facility of voting through a ballot box should also be provided. Acquisition would include direct/indirect acquisition of control of the target company by virtue of acquisition of companies, whether listed/unlisted and whether in India/abroad.

Appointment of a Merchant Banker

Before making any public announcement of offer ,the acquirer shall appoint a merchant banker in Category-I holding a certificate of registration granted by the Board, who is not associate of or group of the acquirer or the target company

Timing of the Public Announcement of Offer:

(1) The merchant banker should make the public announcement not later than four working days of entering into an agreement for acquisition of shares or voting rights or deciding to acquire shares or voting rights in excess of the specified percentage .

[Provided that in case of disinvestment of a Public Sector Undertaking, the public announcement shall be made by the merchant banker not later than 4 working days of the acquirer executing the Share Purchase Agreement or Shareholders Agreement with the Central Government[or the State Government as the case may be] for the acquisition of shares or voting rights exceeding the percentage of share holding or the transfer of control over a target Public Sector Undertaking]

(2) In case of an acquirer acquiring securities, including Global Depositories Receipts or American Depository Receipts which, when taken together with the voting rights, if any already held by him or persons acting in concert with him, would entitle him to voting rights, exceeding the percentage specified the public announcement (1) shall be made not later than four working days before he acquires voting rights on such securities upon conversion, or exercise of option, as the case may be.

(3) The public announcement shall be made by the merchant banker not later than four working days after any such change or changes are decided to be made as would result in the acquisition of control over the target company by the acquirer.

(4) In case of indirect acquisition or change in control, a public announcement 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.

Public Announcement of Offer:

(1) The public announcement to be made shall be made in all editions of one English national daily with wide circulation, one Hindi national daily with wide circulation and a regional language daily with wide circulation at the place where the registered office of the target company is situated and at the place of the stock exchange where the shares of the target company are most frequently traded.

(2) Simultaneously with publication of the public announcement in the newspaper in a copy of the public announcement shall be,

(i) submitted to the Board through the merchant banker, (ii) sent to all the stock exchanges on which the shares of the company are listed for being notified on the notice board, (iii) sent to the target company at its registered office for being placed before the Board of Directors of the company.

(3) Simultaneous with the submission of the public announcement to the Board, the public announcement shall also be sent to all the stock exchanges on which the shares of the company are listed for being notified on the notice board, and to the target company at its registered office for being placed before the board of directors of the Company.

(4) The offer under these Regulations shall be deemed to have been made on the date on which the public announcement has appeared in any of the newspapers

Contents of the Public Announcement Offer: - These include the following particulars:

1. The existing paid-up share capital of the target company, giving break-up of the number of fully paid up & partly paid up shares.

2. Total number & percentage of shares proposed to be acquired from the public, subject to the specified minimum.

3. Minimum offer price for each partly paid up share and fully paid - up share.

4. The identity of the acquirer(s) and in case the acquirer is the company/companies, the identity of the promoters and, or the persons having control such company(ies) belong.

5. The existing holding, if any, of the acquirer in the shares of the target company, including holdings of persons acting in concert with him.

6. salient features of the agreement, if any, such as the date, the name of the seller, the price at which the shares are being acquired, the manner of payment of consideration and the number & percentage of shares in respect of which the acquirer has entered into agreement to acquire the shares or the consideration, monetary or otherwise, for the acquisition of control over the target company, as the case may be.

7. the highest and the average price paid by the acquirer or persons acting in concert with him for acquisition, if any, of shares of the target company made by him during the 12 months period prior to the date of public announcement.

8. object and purpose of acquisition of shares; the future plans of the acquirer, if any, for the target company including whether he proposes to strip/dispose off or otherwise encumber any assets of the target company during the succeeding two years except in the ordinary course of business of the target company. When the public announcement sets out, the future plan should also be stated how he propose to implement it.

9. the specified date the public announcement should specify a date for the purpose of determining the names of shareholders to whom the letter of offer would be sent. The specified date cannot be later than the 30th day from the date of the public announcement.

10. the date by which the individual letters of offer would be posted to the shareholders

11. the date of opening and closure of the offer and the manner in which and the date by which the acceptance & rejection of the offer should be communicated to the shareholders

12. the date by which the shares in respect of which the offer is accepted would be acquired against payment of consideration

13. statement to the effect that firm arrangement for financial resources required to implement the offer is already in place including the details regarding the source of funds

14. provision for acceptance of the offer by person(s) who own shares but are not the registered holder of such shares

15. the statutory approvals, if any, required to be obtained for the purpose of acquiring the shares under the Companies Act, the MRTP Act, 1969, The Foreign Exchange Regulation Act, 1973 and/or any other applicable laws.

16. whether the offer is subject to a minimum level of acceptances from the shareholders

17. mode of payment of consideration

18. approval of banks & financial institution

19. Such other information as is essential for the shareholders to make an informed decision in regard to offer.

Submission of Letter of offer to the Board

The acquirer shall, through its merchant banker, file with the Board, the draft of the letter of offer, containing disclosures as specified by the Board. within 14 days from the date of public announcement with a fee of Rs. 50000.

(2) The letter of offer shall be dispatched to the shareholders not earlier than 21 days from its submission to the Board

The Board specifies changes, if any, in the letter of offer, (without being under any obligation to do so) the merchant banker and the acquirer shall carry out such changes before the letter of offer is dispatched to the shareholders.

[Provided further that if the disclosures in the draft letter of offer are inadequate or the Board has received any complaint or has initiated any enquiry or investigation in respect of the public offer, the Board may call for revised letter of offer with or without rescheduling the date of opening or closing of the offer and may offer its comments to the revised letter of offer within seven working days of filing of such revised letter of offer.]

OFFER PRICE(1) The offer price shall be payable -

(a) in cash ;

(b) by issue, exchange and, or transfer of shares (other than preference shares) of acquirer company, if the person seeking to acquire the shares is a listed body corporate; or

(c) by issue, exchange and, or transfer of secured instruments of acquirer company with a minimum A grade rating from a credit rating agency registered with the Board;

(d) a combination of clause (a), (b) or (c) :

*[Provided that where the payment has been made in cash to any class of shareholders for acquiring their shares under any agreement or pursuant to any acquisition in the open market or in any other manner during the immediately preceding twelve months from the date of public announcement, the letter of offer shall provide an option to the shareholders to accept payment either in cash or by exchange of shares or other secured instruments

Provided further that the mode of payment of consideration may be altered in case of revision in offer price or size subject to the condition that the amount to be paid in cash as mentioned in any announcement or the letter of offer is not reduced.

(3 Where approval of the shareholders, is required for issuance of securities as consideration it should be obtained within 21 days from date of closure of the offer , failing which the acquirer shall pay the entire consideration in cash.]*

The minimum offer price should be the highest of the(a)The negotiated price under the agreement

(b) The highest price paid by the acquirer/person working with the company for acquisition or can be in a way of allotment in a right/public issue/ a preferential treatment, if any, during the 26 month prior to the date of public announcement.

(c) The average of the quoted weekly high & low of the closing prices of the shares of the target company on the stock exchanges where the shares of the target company are mostly frequently traded during 26 weeks preceding the date of public announcement. or the average of the daily high and low of the closing 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.

If the share price of the target company is not frequently traded, the offer price should be determined in consultation with the merchant banker based on the following factors: -

The negotiated price under the agreement

The highest price paid by the acquirer/person working with the company for acquisition or can be in a way of allotment in a right/public issue/ preferential treatment, if any, during the 26 month prior to the date of public announcement..

Other parameters like Return on networth, EPS, P/E multiple Vis - a - Vis industry average.

(Shares are said to be frequently traded, if on the stock exchange, the annualized trading turnover in that share during the preceding calendar month prior to the month in which the public announcement is made, is less than 2% (by number of shares) of listed shares)

Where the acquirer has acquired shares in the open market or through negotiation or otherwise, after the date of public announcement at a price higher than the offer price stated in the letter of offer, then, the highest price paid for such acquisition shall be payable for all acceptances received under the offer: Provided that no such acquisition shall be made by the acquirer during the last seven working days prior to the closure of the offer.

Any payment made to the persons other than the target company in respect of non compete agreement in excess of twenty five per cent. of the offer price should be added to the offer price

The letter of offer shall contain justification or the basis on which the price has been determined.

Acquisition price under creeping acquisition

An acquirer who has made a public offer and seeks to acquire further shares shall not acquire such shares during the period of 6 months from the date of closure of the public offer at a price higher than the offer price.

(2) This shall not apply where the acquisition is made through the stock exchanges.

Minimum number of shares to be acquired

(1) The public offer made by the acquirer to the shareholders of the targetcompany shall be for a minimum twenty per cent of the voting capital of the company.

(2) If the public offer results in the public shareholding being reduced to 10% or less of the voting capital of the company, or if the public offer is in respect of a company which has public shareholding of less than 10% of the voting capital of the company, the acquirer shall either,

(a) make an offer to buy the outstanding shares remaining with the shareholders in accordance with the Guidelines specified by the Board in respect of Delisting of Securities; or

(b) undertake to dis-invest through an offer for sale or by a fresh issue of capital to the public, which shall open within a period of 6 months from the date of closure of the public offer, such number of shares so as to satisfy the listing requirements.

(3) The letter of offer shall state clearly the option available to the acquirer.

(4) For the purpose of computing the percentage voting rights as at the expiration of 30 days after the closure of the public offer shall be reckoned.

(5) Where the number of shares offered for sale by the shareholders are more than the shares agreed to be acquired by the person making the offer, such person shall, accept the offers received from the shareholders on a proportional basis, in consultation with the merchant banker, taking care to ensure that the basis of acceptance is decided in a fair and equitable manner and does not result in non-marketable lots.

Provided that acquisition of shares from a shareholder shall not be less than the minimum marketable lot or the entire holding if it is less than the marketable lot.

Offer conditional upon level of acceptance

(1)Subject to the provisions an acquirer or any person acting in concert with him may make an offer conditional as to the level of acceptance which may be less than twenty per cent:

Provided that where the public offer is in pursuance of a Memorandum of Understanding, the Memorandum of Understanding shall contain a condition to the effect that in case the desired level of acceptance is not received the acquirer shall not acquire any shares under the Memorandum of Understanding and shall rescind the offer.] *

General Obligations of the acquirer

(1) The public announcement of offer to acquire the shares of the target company shall be made only when the acquirer is able to implement the offer.

(2) Within 14 days of the public announcement of the offer, the acquirer shall send a copy of the draft letter of offer to the target company at its registered office address, for being placed before the board of directors and to all the stock exchanges where the shares of the company are listed.

(3) The acquirer shall ensure that the letter of offer is sent to all the shareholders (including non-resident Indians) of the target company, whose names appear on the register of members of the company as on the specified date mentioned in the public announcement, so as to reach them within 45 days from the date of public announcement.

Provided that where the public announcement is made pursuant to an agreement to acquire shares or control over the target company, the letter of offer shall be sent to shareholders other than the parties to the agreement.

Explanation:- (i) A copy of the letter of offer shall also be sent to the Custodians of Global Depository Receipts or American Depository Receipts to enable such persons to participate in the open offer, if they are entitled to do so.

(ii) A copy of the letter of offer shall also be sent to warrant holders or convertible debenture holders, where the period of exercise of option or conversion falls within the offer period.

Offer Period means a period between the date of entering into MOU / public announcement and the date of completion of offer formalities.

(4) The date of opening of the offer shall be not later than the sixtieth day from the date of public announcement.

(5) The offer to acquire shares from the shareholders shall remain open for a period of 30 days.

[(5A) The shareholder shall have the option to withdraw acceptance tendered by him upto three working days prior to the date of closure of the offer.]

(6) In case the acquirer is a company, the public announcement of offer, brochure, circular, letter of offer or any other advertisement or publicity material issued to shareholders in connection with the offer must state that the directors accept the responsibility for the information contained in such documents.

Provided that if any of the directors desires to exempt himself from responsibility for the information in such document, such director shall issue a statement to that effect, together with reasons thereof for such statement.

(7) During the offer period, the acquirer or persons acting in concert with him shall not be entitled to be appointed on the board of directors of the target company.

[Provided that in case of acquisition of shares or voting rights or control of a Public Sector Undertaking pursuant to a public announcement the provision relating to general obligations of the board of directors would be applicable.

[Provided further that where the acquirer, other than the acquirer who has made an offer under regulation , after assuming full acceptances, has deposited in the escrow account hundred per cent. of the consideration payable in cash where the consideration payable is in cash and in the form of securities where the consideration payable is by way of issue, exchange or transfer of securities or combination thereof, he may be entitled to be appointed on the Board of Directors of the target company after a period of twenty one days from the date of public announcement.]

(8) Where an offer is made conditional upon minimum level of acceptances, the acquirer or any person acting in concert with him -

(i) shall, irrespective of whether or not the offer received response to the minimum level of acceptances, acquire shares from the public to the extent of the minimum percentage specified

(ii) Provided that the provisions of this clause shall not be applicable in case the acquirer has deposited in the escrow account, in cash, 50% of the consideration payable under the public offer.

(ii) shall not acquire, during the offer period, any shares in the target company, except by way of fresh issue of shares of the target company,

(iii) shall be liable for penalty of forfeiture of entire escrow amount, for the non-fulfillment of obligations under the Regulations;

(9) If any of the persons representing or having interest in the acquirer is already a director on the board of the target company or is an "insider" within the meaning of Securities and Exchange Board of India (Insider Trading) Regulations, 1992, he shall refuse himself and not participate in any matter(s) concerning or 'relating' to the offer including any preparatory steps leading to the offer.

(10) On or before the date of issue of public announcement of offer, the acquirer shall create an escrow account.

(11) The acquirer shall ensure that firm financial arrangements has been made for fulfilling the obligations under the public offer and suitable disclosures in this regard shall be made in the public announcement of offer.

(12) The acquirer shall, within a period of 30 days from the date of the closure of the offer, complete all procedures relating to the offer including payment of consideration to the shareholders who have accepted the offer and for the purpose open a special account as provided under Regulation 29.

Provided that where the acquirer is unable to make the payment to the shareholders who have accepted the offer before the said period of 30 days due to non-receipt of requisite statutory approvals, the Board may, if satisfied that non-receipt of requisite statutory approvals was not due to any willful default or neglect of the acquirer or failure of the acquirer to diligently pursue the applications for such approvals, grant extension of time for the purpose, subject to the acquirer agreeing to pay interest to the shareholders for delay beyond 30 days, as may be specified by the Board from time to time.

(13) Where the acquirer fails to obtain the requisite statutory approvals in time on account of willful default or neglect or inaction or non-action on his part, the amount lying in the escrow account shall be liable to be forfeited apart from the acquirer being liable for penalty as provided in the Regulations.

(14) In the event of withdrawal of offer in terms of the Regulations, the acquirer shall not make any offer for acquisition of shares of the target company for a period of six months from the date of public announcement of withdrawal of offer.

(15) In the event of non-fulfillment of obligations under Chapter III or Chapter IV of the Regulations, the acquirer shall not make any offer for acquisition of shares of any listed company for a period of twelve months from the date of closure of offer.

(16) If the acquirer, in pursuance to an agreement, acquires shares which along with his existing holding, if any, increases his share holding beyond [15%], then such an agreement for sale of shares shall contain a clause to the effect that in ca se of non-compliance of any provisions of this regulation, the agreement for such sale shall not be acted upon by the seller or the acquirer.

[ Provided that in case of acquisition of shares of a Public Sector Undertaking pursuant to a public announcement made under the Regulations,

(17) Where the acquirer or persons acting in concert with him has acquired any shares at a price equal to or less or more than the offer price, he shall disclose the number, percentage, price and the mode of acquisition of such shares to the stock exchanges on which the shares of the target company are listed and to the merchant banker within 24 hours of such acquisition and the stock exchanges shall forthwith disseminate such information to the public.]

(18) Where the acquirer has not either, in the public announcement, and, or in the letter of offer, stated his intention to dispose of or otherwise encumber any assets of the target company except in the ordinary course of business of the target company, the acquirer, where he has acquired control over the target company, shall be debarred from disposing of or otherwise encumbering the assets of the target company for a period of 2 years from the date of closure of the public offer.

(19) The acquirer and the persons acting in concert with him shall be jointly and severally responsible for fulfillment of obligations under these Regulations.]

General Obligations of the board of directors of the target company

(1) Unless the approval of the general body of shareholders is obtained after the date of the public announcement of offer, the board of directors of the target company shall not, during the offer period, -

(a)Sell, transfer, encumber or otherwise dispose of or enter into an agreement for sale, transfer, encumbrance or for disposal of assets otherwise, not being sale or disposal of assets in the ordinary course of business, of the company or its subsidiaries; or

(b)Issue[or allot] any authorized but un-issued securities carrying voting rights during the offer period; or

(c)Enter into any material contracts.

[Explanation: - Restriction on issue of securities under clause (b) of sub-regulation (1) shall not affect -

(i) The right of the target company to issue or allot shares carrying voting rights upon conversion of debentures already issued or upon exercise of option against warrants, as per pre-determined terms of conversion or exercise of option.

(ii) Issue or allotment of shares pursuant to public or rights issue in respect of which the offer document has already been filed with the Registrar of Companies or Stock Exchanges, as the case may be.]

(2) The target company shall furnish to the acquirer, within 7 days of the request of the acquirer or within 7 days from the specified date, whichever is later, a list of shareholders or warrant holders or convertible debenture holders as are eligible for participation containing names, addresses, shareholding and folio number, and of those persons whose applications for registration of transfer of share s are pending with the company.

(3) Once the public announcement has been made, the board of directors of the target company shall not, -

(a)Appoint as additional director or fill in any casual vacancy on the board of directors, by any person(s) representing or having interest in the acquirer, till the date of certification by the merchant banker as provided under sub-regulation (6) below.

Provided that upon closure of the offer and the full amount of consideration payable to the shareholders being deposited in the special account, changes as would give the acquirer representation on the Board or control over the company, can be made by the target company.

(b)Allow any person or persons representing or having interest in the acquirer, if he is already a director on the board of the target company before the date of the public announcement, to participate in any matter relating to the offer, including any preparatory steps before the date of the public announcement..

(4) The board of directors of the target company may, if they so desire, send their unbiased comments and recommendations on the offer(s) to the shareholders, keeping in mind the fiduciary responsibility of the directors to the shareholders and for the purpose seek the opinion of an independent merchant banker or a Committee of Independent Directors;

Provided that for any misstatement or for concealment of material information, the directors shall be liable for action in terms of these Regulations and the Act.

(5) The board of directors of the target company shall facilitate the acquirer in verification of securities tendered for acceptances.

(6) Upon fulfillment of all obligations by the acquirers under the Regulations as certified by the merchant banker, the board of directors of the target company shall transfer the securities acquired by the acquirer, whether under the agreement or from open market purchases, in the name of the acquirer and, or allow such changes in the board of directors as would give the acquirer representation on the board or control over the company.

(7) The obligations of the acquirer, having a shareholding exceeding 15% should be complied with the target company

(8) The restrictions-

(a) for appointment of directors on the Board of a target company by the acquirer

(b) for acting on agreement for sale of shares where the share holding of the acquirer exceeds 15% .

(c) for appointment of directors by the target company till the date of certification by the merchant banker and :

(d) for on transfer of securities or changes in the Board of Directors of the target company shall not be applicable, in case of sale of shares of a Public Sector Undertaking by the Central Government[or the State Government], and the agreement to sell contains a clause to the effect that in case of non-compliance of any of the provisions of the Regulations by the acquirer, transfer of shares or change of management or control of Public Sector Undertaking shall vest back with the Central Government [or the State Government] and the acquirer shall be liable to such penalty as may be imposed by the Central Government[or the State Government]. ]

General obligations of the merchant banker

(1) Before the public announcement of offer is made, the merchant banker shall ensure that-

(a)the acquirer is able to implement the offer;

(b)the provision relating to escrow account referred to in Regulation 28 has been made;

(c) firm arran