takeover code presentation ludhiana 17.9.06
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DEMYSTIFYING TAKEOVER CODE
Pavan Kumar Vijay
KEYWORDS IN TAKEOVER CODEWhen an
"acquirer" takes over the “shares” or “control” of
the "target company",
it is termed as Takeover.
When an acquirer acquires "substantial quantity of shares or voting
rights" of the
Target Company, it results into substantial acquisition of
shares.
AKEOVER
SHARES
CONTROL
BOTH SHARES & CONTROL
Acquisition LIFTING THE VEIL
UNDERSTANDING SHARES Reg 2 (k)
REG 2(k)
Shares carrying voting rights & any security which would entitle to receive shares with voting rights
in future But shall not include PREFERNCE SHARES
ISSUE
What is the status of partly paid shares under SAST Regulations, 1997?The partly paid up shares are also shares under Takeover Code as voting rights is embedded in partly paid up shares.
UNDERSTANDING CONTROL
REG 2(c)
Control is the right to Appoint majority of the directors To control the management Control the policy decisionsBy virtue of Shareholding or Management rights or Shareholders Agreements or Voting Agreements or in any other manner.
THRESHOLDS DEFINED
FOR COMPLIANCE
Acquisition of more than 5%, 10%, 14%, 54% & 74%
[Regulation 7]
Persons, who are holding between 15% - 55%,
acquisition/ sale aggregating more than 2% or more voting
rights [Regulation 7(1A)]
THRESHOLDS DEFINED
FOR OPEN OFFER
Acquisition more than 15% or more voting rights [Regulation
10] Persons, who are holding
between 15% - 55%, acquisition more than 5% or
more voting rights in a financial year.[Regulation
11(1)]Persons, who are holding more than 55%, acquisition of
single share or voting right [Regulation 11(2)]
INTER – SE TRANSFER
Reg 3(1)(e)
An Insight
Legal Insight: Inter-se Transfer
• REGULATION 3(1)(e) OF SEBI (SAST) REGULATIONS,
1997 GOVERNS THE ACQUISITIONS THROUGH INTER
SE TRANSFERS. • EXEMPTION FROM APPLICABILITY OF REGULATION 10,11 & 12 i.e. REQUIREMENT FROM MAKING PUBLIC OFFER.
Acquirer & Persons acting in concert
Relatives under
Companies Act, 1956
Group under MRTP Act,
1969
Qualifying Promoters
Categories
Categories for Inter-se transfer
DETAILED ANALYSIS
Category I – Inter-se Transfer amongst Group
Main Features Group here is signifying the group as
defined under MRTP Act, 1959.
Where persons constituting such group have been shown as group in the last published Annual Report of the Target Company.
Category I – Group… contd
Definition of Group
SECTION 2(ef) OF MRTP ACT, 1969 DEFINES GROUP INTO TWO PARTS:
Associated Persons
Group of persons having control without exercising controlling interest. Associated persons such as relatives of director of a company, partner of a firm & any trustee in relation to a trust. Any associated person in relation to associated person.
-
Two or more Individuals, AOI, firms, trusts, body
corporates who are in the position to exercise control
, whether directly & indirectly over any body corporate, firm or trust.
Category II – Inter-se transfer amongst relatives
Main Features
Relatives under this regulation means the Relatives defined under Section 6 & Schedule 1A under Companies Act, 1956.
The definition of relative u/s 6 includes
Spouse Members of HUF Relative mentioned in Schedule 1A.
Schedule 1A gives a list of 22 persons.
Qualifying Indian
Promoter & Foreign
Collaborators, who are shareholde
rs.
Category III – Inter-se transfer for Qualifying Promoters
Qualifying Promoters
Category III – Promoters… contd
Category III – Promoters… contd
Qualifying Promoters - Defined
Any person whoDIRECTLY OR INDIRECTLY
is in control of the company
Who is named as Promoter in any
Offer Document OR Shareholding
Disclosure, Whichever is
later
& includes….
When person is individual
His relatives as Defined u/s 6 of Co.
Act 1956.Any company
controlled by P/R Firm or HUF in which
P/R is partner or coparcener ;stake
not < 50%
When person is body corporate
Holding & Subsidiary
Any company controlled by P/R
Firm or HUF in which P/R is partner
or coparcener ; stake not <
50%
Category III – Promoters… contd
Qualifying promoters..defined..contd
Category IV –… contd
Category IV – Acquirer and Persons acting in concert.
ACQUIRER
Reg 2(b)
PAC Reg2(e)
Exemption available only after 3 years from the date of closure of open offer
made under these Regulations.
Pre- Conditions for availing Inter- se transfer. Conditions Category I
(Group)Category II(Relative)
Category III
(Qualifying
Promoter)
Category IV
(Acquirer & PAC)
i. Transfer is at a price > 25% of the price determined in terms of Reg 20(4) & 20(5) of SEBI (SAST) Regs, 1997.
N N Y Y
ii. 3 yrs holding of shares by transferee & transferor.
N N Y N
iii. Compliance of Regulation 6, 7 & 8.
Y Y Y Y
Checks & Balances under Regulation 3
C
O
M
P
L
I
A
N
C
EReg 3(3) Reg 3(4) Reg 3(5)
Advance Intimation (4 days in Advance)
Report
(21 days of acquisition)
Fees to be accompanied with Report
(Rs 10000
25000)
Checks & Balances under Regulation 7
Acquirer : Compliance of regulation 7(1) or 7(1A)
Seller: Compliance of regulation 7(1A)
Target Company:Compliance of Regulation 7(3)
Taxation Issues..contd.
Securities Transaction Tax
LTCG/STCG STT is levied when the transfer is made through stock exchange.
STT is @ 0.125% of the sale value.
LTCG/STCG is levied when the transfer is made in off market mode. LTCG – 20% with indexation benefit on the amount of capital gain . 10% without indexation benefit on amount of capital gain . STCG – 10% on the amount of capital gain.
A Comparative Study
INTER- SE TRANSFER : A STRATEGICAL MOVE
Good means for
consolidation of holdings in a Company.
INTER- SE TRANSFER: Clause 40A
Regulation 3(1A) “Nothing contained in sub-regulation (1) shall affect the
applicability of the listing requirements.”
Effect of Regulation 3(1A)The above-mentioned regulation is giving the effect that
the exemption under regulation cannot exceed the provisions of listing agreement,i.e.the minimum public
holding of 25% cannot be exceeded by the exemption of Inter- se Transfer
MATTER OF DEBATE:
HELD:
Regulation 3(4) is applicable to all cases wherever the acquisition exceeds the limit prescribed in the regulations irrespective of the existing holding of the acquirer.
NAAGRAJ GANESHMAL JAIN V P.SRI SAI RAM, THE SAT
Whether Reporting under Regulation 3(4) is one time reporting?
MATTER OF DEBATE:
HELD:It was held that when the belated filing of the report under 3(4) does not resulted in any gain to the appellant & also no loss to the invested, the imposition of the penalty is not justified.
SAMRAT HOLDINGS V SEBI
Whether the belated filing of report should not be considered as commission of offence when there is no substantial loss to the investors?
Inter-se transfer is a good tool forconsolidation of holdings…………..
However,the exemption is available subject to strict compliance of Regulation 3(3),3(4) & 3(5).
Concluding Remarks
An issue by a companyAn issue by a company
Equity sharesEquity shares / / Securities convertible into Securities convertible into equityequity//
FCDsFCDs//WarrantsWarrants//PCDsPCDs//
Convertible Preference SharesConvertible Preference Shares
pursuant to a resolution u/s. 81(1A) of Act, pursuant to a resolution u/s. 81(1A) of Act, to any select group of personsto any select group of persons by way of private placement. by way of private placement.
Of
What is Preferential allotment of shares?
BENEFITS Simple way to raise capital of the Company
No need to appoint Merchant Banker except in the case of QIP.
Economical way to raise capital.
Minimum Formalities.
The Companies Act, 1956
SEBI (Disclosure and Investor Protection) Guidelines, 2000 (Chapter – XIII & XIIIA)
SEBI (SAST) Regulations, 1997
Listing Agreement
GOVERNING LAW
Allotment to QIBs (not in Promoter Group)
by companies listed on NSE / BSE
OTHERS
Chapter – XIIIA of SEBI (DIP) Guidelines Chapter – XIII of
SEBI (DIP) Guidelines
Proposed Allottees
Time Line- Preferential Allotment
Relevant Date
30 days
General Meeting
Filing of applicatio
n of in-
principal approval
Despatch of Individual Notices
25 days
15 days (12 months in case of QIBs)
Board Meeting
Allotment of
Shares
Shareholders’ Resolution must be
implemented within 15 days (12 months in case of QIBs) except in case of pending regulatory
approvals
Pricing Schedule
General Meeting
Relevant Date
30 days2 weeks
6 months
QIBs Others
ExistingHolding
Preferential Allotment
ExistingHolding
Preferential Allotment
No Lock in For One Year, except in case
of Trading through Stock Exchange
For Six Months
PROMOTERS – 20% of Total Capital - for 3 YearsRemaining – for one Year
OTHERS – For One Year
Lock-in Requirement
Currency of Security Convertible into Equity Shares
QIBs OTHERS
FCDs/ PCDs/ any other convertible Security –60
Months from the date of allotment
Warrants convertible into Equity Shares –
can’t be issued to QIBs
FCDs/ PCDs/ any other convertible Security –No
time prescribed for conversion
Warrants convertible into Equity Shares - 18 months from the date of allotment
Preferential Allotment:- In- Principle & Listing
Process of identification of allottees. Bank Statements DIP Compliances – Pricing, Lock in , Identity Clause 40A of Listing AgreementChange in Management/Control
Preferential Allotment viz-a-viz
Takeover Code
Limit for Preferential Allotment
Limits are calculated taking into account the
EXPANDED CAPITAL of the Company
& not the EXISTING CAPITAL of the Company.
Acquirer(holding 20%)
Through Preferential Allotment
Acquirer’s holding cannot exceed 24.99% of Expanded Capital.
Illustration I
Acquirer(holding 5 %)
Through Preferential Allotment
Acquirer’s holding cannot exceed
14.99% of Expanded Capital.
Illustration II
Illustration III
Acquirer(holding
0%) Through Preferential Allotment
Acquirer’s holding cannot exceed
14.99% of Expanded Capital.
Example:Acquisition by a new entity upto allowable limit
Existing Capital of Company: 1,00,000 sharesMaximum Allowable Limit: 14.99%
USUAL WAY OF CALCULATION
100000* 14.99% = 14,990
THE RIGHT WAY 100000* 14.99% / 85.01
= 17633
The difference is because of the
calculation on expanded Capital Base.
17633- 14990 = 2643
Example:Acquisition by a existing entity holding 50% presently
Existing Capital of Company: 1,00,000 shares
Maximum Allowable Limit: 4.99%
USUAL WAY OF CALCULATION
100000* 4.99% = 4,990 THE RIGHT WAY
Non-promoter holding / 45.01%
50000/45.01%= 11108
The promoters will get extra 11108 equal to 4.99%. So, the resultant promoter shareholding = 50000 +11108 61108 shares equal to 54.99%
Queries
Suppose the present holding of a promoter is 54% and after preferential allotment the holdings of the promoter remains same as that of 54% of the expanded capital. The question is whether any disclosure or compliance required in the present situation
Query 1
Query 2
What is the maximum limit of preferential allotment? Can a Company through preferential allotment expand its capital without any limit?
Suppose the present holding of a promoter is 54% and after preferential allotment the holdings of the promoter remains same as that of 54% of the expanded capital. The question is whether any disclosure or compliance required in the present situation? What, if, the same question arises in case the promoter is holding 60%? The issue is as there is acquisition of shares but such acquisition has not change the voting rights. The question is what is relevant in terms of takeover code, acquisition or voting rights?
Query 3
Queries
Conclusion
To sum up… preferential allotment is becoming a buzz word these days…
However, it is subject to various checks & balances.
Pavan Kumar Vijay