Mergers, Acquisitions and Takeovers

Where this chapter sits

Chapter 7 carries 15%.

Merchant bankers are also involved in many other activities, such as providing advisory services regarding mergers and acquisitions divestments, takeovers etc. to corporate houses which may involve a change in ownership of a company or business.

7.1 The three terms

Merger

'Merger' is a broader term and it denotes a combination of two or more companies to form a single entity, in which either one or both lose their identity and a new company is formed.

When both companies lose their identity, a new company is formed and existing companies' stocks are surrendered and shares of new company are issued in their place.

And an important qualification: merger is not necessarily amongst two equal or comparable stature companies.

The workbook's review question tests exactly this — the statement that a merger is necessarily between equals is False.

A "merger of equals" is one particular case: a merger happens when two firms agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals". The firms are often of about the same size.

The example given: in the 1999 merger of GlaxoWellcome and SmithKline Beecham, both firms ceased to exist when they merged, and a new company, GlaxoSmithKline, was created.

Acquisition

An 'acquisition' is the purchase of one business or company by another company or other business entity.

Consolidation occurs when two companies combine together to form a new enterprise altogether, and neither of the previous companies survives independently.

'Acquisition' usually refers to a purchase of a smaller firm by a larger one.

The legal consequence: when one company takes over another and clearly establishes itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded.

Takeover

'Takeover' is the acquisition of substantial shares or voting rights for the purpose of seeking management control of the company.

How a hostile one happens: if management of a prospective selling company is unwilling to negotiate a transaction with a prospective buyer, the buyer may make a direct bid to the seller's shareholders and purchase seller's shares from the market to acquire a controlling stake in the seller's company.

And afterwards: the target company may be maintained as a subsidiary or division or dissolved or be merged.

Takeover can be by merger of a solvent acquirer with a sick company for availing the tax benefits, or else it can be acquisition of shares through direct negotiations with one who owns controlling interest or through open offer or market purchase of requisite voting rights to change the management of the company.

Telling them apart

A merger is a mutual decision of two companies to combine and become one entity. The combined business can cut costs and increase profits, boosting shareholder values for both groups of shareholders.

A takeover, or acquisition, on the other hand, is characterized by the purchase of a smaller company by a much larger one. This combination of "unequals" can produce the same benefits as a merger, but it does not necessarily have to be a mutual decision.

A larger company can initiate a hostile takeover of a smaller firm, which essentially amounts to buying the company in the face of resistance from the smaller company's management.

How the price is paid differs too: unlike in a merger, in an acquisition, the acquiring firm usually offers a cash price per share to the target firm's shareholders or the acquiring firm's share's to the shareholders of the target firm according to a specified conversion ratio.

The example: how the Walt Disney Corporation bought Pixar Animation Studios in 2006. In this case, the takeover was friendly, as Pixar's shareholders all approved the decision to be acquired.

And on the acquisition-versus-takeover distinction: there is no tangible difference between an acquisition and a takeover; both words can be used interchangeably - the only difference is that each word carries a slightly different connotation. Typically, takeover is used to reference a hostile takeover where the company being acquired is resisting. In contrast, acquisition is frequently used to describe more friendly acquisitions or negotiated acquisition.

Takeovers involve change in management control of the target company while acquisitions usually result in change in control when majority stakes are acquired in the target company.

7.1.2 The merchant banker's role

In all types of corporate restructuring, the merchant banker performs the pivotal role, acting as a catalyst for the entire deal. However, in transactions involving mergers and acquisitions, the task becomes onerous.

In a merger, functions relating to (i) preparation and circulation of information memoranda, (ii) deal structuring & negotiations, (iii) valuation and due diligence are taken care of by one or more merchant bankers, (iv) providing fairness opinion on valuation of assets/shares and (v) certificate on disclosure of unlisted company involved in scheme in the abridged prospectus.

Mergers involve statutory compliances and application to the Court/Tribunal. It also involves liasoning with accountants, lawyers or company secretaries.

The seven laws and regulators listed:

1. The Companies Act, 2013 · 2. The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 · 3. The Foreign Exchange Management Act, 1999 · 4. The Reserve Bank of India and the RBI Act, 1934 · 5. The Income Tax Act, 1961 · 6. The Competition Act 2002 · 7. Master Circular SEBI dated November 23, 2021.

Which law applies where: mergers, amalgamations, de-mergers, acquisitions of business units or divisions, are all governed by Companies Act 2013. Any acquisitions of shares or control in listed Indian companies are governed by the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011.

The Companies Act and The Takeover Code work in very different ways and impose very different sets of regulations on the merger and/or acquisition process within India.

In an open offer: the merchant banker's role involves managing the public offer and ensuring compliance with the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

7.2 The SAST Regulations, 2011

The SEBI (Substantial Acquisition of shares and takeovers) Regulations, 2011... ensure greater transparency, fairness, and equitable treatment to all investors, timeliness and accuracy of disclosure of information, prevention of frivolous offers and enforcement against violations.

The core purpose, in the workbook's own words: the major thrust of these Regulations is to ensure that when a large number of shares changes hands, that is, one group sells a substantial or controlling block of shares to another; the minority shareholders also get the opportunity to sell their shares at the fair price.

In absence of this Code, an existing group, say A, could sell the controlling stake to another group, say B, and the common shareholders would simply continue to hold the shares without getting the right to participate in the sale that happened.

Three kinds of acquisition are envisaged: (a) Change in Control of Management (b) Consolidation of Holdings (c) Substantial Acquisition of shares or voting rights.

Definitions

"Acquirer" means any person who, directly or indirectly, acquires or agrees to acquire whether by himself, or through, or with persons acting in concert with him, shares or voting rights in, or control over a target company.

"Control" includes 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: Provided that a director or officer of a target company shall not be considered to be in control over such target company, merely by virtue of holding such position.

"Frequently traded shares" means shares of a target company, in which the traded turnover on any stock exchange during the twelve calendar months preceding the calendar month in which the public announcement is required to be made... is at least ten per cent of the total number of shares of such class of the target company.

Note the different window from the ICDR test — twelve calendar months here, 240 trading days for a preferential issue.

"Offer period" means the period between the date of entering into an agreement, formal or informal, to acquire shares, voting rights in, or control over a target company requiring a public announcement, or the date of the public announcement, as the case may be, and the date on which the payment of consideration to shareholders who have accepted the open offer is made, or the date on which open offer is withdrawn.

"Persons acting in concert" means persons who, with a common objective or purpose of acquisition of shares or voting rights in, or exercising control over a target company, pursuant to an agreement or understanding, formal or informal, directly or indirectly co-operate for acquisition of shares or voting rights in, or exercise of control over the target company.

And these categories are deemed to be persons acting in concert: a company, its holding company, subsidiary company and any company under the same management or control · a company, its directors, and any person entrusted with the management of the company · directors of companies above referred to and their associates · promoters and members of the promoter group · immediate relatives · a mutual fund, its sponsor, trustees, trustee company, and asset management company · a collective investment scheme and its collective investment management company, trustees and trustee company · a venture capital fund and its sponsor, trustees, trustee company and asset management company · an alternative investment fund and its sponsor, trustees, trustee company and manager · a merchant banker and its client, who is an acquirer · a portfolio manager and its client, who is an acquirer · banks, financial advisors and stock brokers of the acquirer... · an investment company or fund and any person who has an interest in such investment company or fund as a shareholder or unitholder having not less than 10 per cent of the paid-up capital.

Note the ninth limb — a merchant banker and its client who is an acquirer are deemed to be acting in concert.

**"Promoter" has the same meaning as in the SEBI ICDR Regulations and includes a member of the promoter group.

7.2.1 The triggers

The 25% trigger: an acquirer shall not acquire shares or voting rights in a target company which entitle them (acquirer and persons acting in concert) to exercise 25% or more of the voting rights in the target company unless they have made a public announcement of an open offer for acquiring shares of such target company.

For the Innovators Growth Platform the figure changes: any reference to "twenty-five per cent" in case of listed entity which has listed its specified securities on Innovators Growth Platform shall be read as "forty-nine per cent". This has been made to make the platform more accessible to companies in view of the evolving start-ups ecosystem.

The 5% creeping acquisition trigger: an acquirer already holding 25% or more of the voting rights... but less than the maximum permissible non-public shareholding, shall [not] acquire within any financial year additional shares or voting rights... entitling them to exercise more than 5% of the voting rights without an open offer.

And a ceiling: such an acquirer shall not be entitled to acquire or enter into any agreement to acquire shares or voting rights exceeding such number of shares as would take the aggregate shareholding pursuant to the acquisition above the maximum permissible non-public shareholding.

One exemption from that ceiling: acquisition pursuant to a resolution plan approved under section 31 of the Insolvency and Bankruptcy Code, 2016 shall be exempt — in such resolution cases, even if the thresholds mentioned in the SAST are exceeded by the acquirer of the distressed company, no open offer obligation arises towards the minority shareholders of such company.

The control trigger: unless the public announcement of an open offer for acquiring shares of the target company is made, no acquirer shall acquire directly or indirectly control over such target company.

Control needs no threshold — acquiring control triggers an offer whatever the shareholding.

How the 5% is computed:

(i) gross acquisitions alone shall be taken into account regardless of any intermittent fall in shareholding or voting rights whether owing to disposal of shares held or dilution of voting rights owing to fresh issue of shares by the target company.

(ii) in the case of acquisition of shares by way of issue of new shares by the target company... the difference between the pre-allotment and the post-allotment percentage voting rights shall be regarded as the quantum of additional acquisition.

Gross, not net — selling and rebuying does not reset the count.

And individual crossings count: for the purposes of calculating 25% or 5%, acquisition of shares by any person, such that the individual shareholding of such person acquiring shares exceeds the stipulated thresholds, shall also be attracting the obligation to make an open offer... irrespective of whether there is a change in the aggregate shareholding with persons acting in concert.

7.2.2 Voluntary offer

An acquirer, who together with persons acting in concert with him, holds shares or voting rights in a target company entitling them to exercise 25% or more but less than the maximum permissible non-public shareholding, shall be entitled to voluntarily make a public announcement of an open offer, provided the post-offer holding does not exceed the maximum permissible non-public shareholding.

A 52-week lookback bars it: where the acquirer or any person acting in concert with him has acquired shares of the target company in the preceding 52 weeks without attracting the obligation to make a public announcement of an open offer, he shall not be eligible to voluntarily make a public announcement of an open offer.

And during the offer period: the acquirer shall not be entitled to acquire any shares otherwise than which is under the open offer.

A six-month cooling-off follows: an acquirer who has made a voluntary offer shall not be entitled to acquire any shares of the target company for a period of six months after completion of the open offer except pursuant to another voluntary open offer — though such restriction shall not prohibit the acquirer from making a competing offer, and shares acquired through bonus issue or stock splits shall not be considered for purposes of the disentitlement.

Two absolute disqualifications:

No person who is a wilful defaulter shall make a public announcement of an open offer for acquiring shares or enter into any transaction that would attract the obligation to make a public announcement of an open offer — though a wilful defaulter may still make a competing offer.

No person who is a fugitive economic offender shall make a public announcement of an open offer or make a competing offer for acquiring shares or enter into any transaction, either directly or indirectly, for acquiring any shares or voting rights or control of a target company.

Note the asymmetry — a wilful defaulter may make a competing offer; a fugitive economic offender may not.

7.2.3 Offer size

The open offer... shall be for at least 26% of total shares of the target company, as on 10th working day from the closure of the tendering period.

**That count shall take into account all potential increases in the number of outstanding shares during the offer period contemplated as of the date of the public announcement, and the offer size shall be proportionately increased in case of an increase in total number of shares, after the public announcement which is not contemplated on the date of the public announcement.

For a voluntary offer: the open offer shall be for acquisition of at least such number of shares as would entitle the holder thereof to exercise an additional 10% of the voting rights in the target company, and shall not exceed such number of shares as would result in the post-acquisition holding... exceeding the maximum permissible non-public shareholding.

26% for a mandatory offer; at least 10% additional for a voluntary one.

On a competing offer: the voluntary acquirer shall be entitled to increase the number of shares for which the open offer has been made to such number of shares as he deems fit — within a period of 15 working days from the public announcement of a competing offer, failing which the acquirer shall not be entitled to increase the offer size. Such an increase deems the offer to be made under the 5% creeping acquisition provision.

If the offer takes the acquirer over the public shareholding limit: the acquirer shall be required to bring down the non-public shareholding to the level specified and within the time permitted under SC(R)R, 1957 — and shall not be eligible to make a voluntary delisting offer under the SEBI (Delisting of Equity Shares) Regulations, 2021 unless a period of 12 months has elapsed from the date of the completion of the offer period.

Who the offer goes to: all shareholders of the target company, other than the acquirer, persons acting in concert with him and the parties to any underlying agreement including persons deemed to be acting in concert with such parties.

A scale-down alternative exists where the acquirer has stated upfront his intention to retain the listing of the target company — it may alternatively undertake a proportionate reduction of the shares or voting rights to be acquired pursuant to the underlying agreement... such that the resulting shareholding... does not exceed the maximum permissible non-public shareholding.

7.2.4 Offer price

Direct acquisition — the highest of six

(a) The highest negotiated price per share of the target company for any acquisition under the agreement attracting the obligation to make a public announcement of an open offer

(b) The volume-weighted average price paid or payable for acquisitions, whether by the acquirer or by any person acting in concert with him, during the fifty-two weeks immediately preceding the date of the public announcement

(c) The highest price paid or payable for any acquisition... during the 26 weeks immediately preceding the date of the public announcement

(d) The volume weighted average market price of such shares for a period of 60 trading days immediately preceding the date of the public announcement as traded on the stock exchange where the maximum volume of trading in the shares of the target company are recorded during such period, provided such shares are frequently traded — this clause shall not apply in the case of disinvestment of a public sector undertaking by the Central Government or a State Government, and only in case of a change in control in the public sector undertaking

(e) Where the shares are not frequently traded, the price determined by an independent registered valuer taking into account valuation parameters including, book value, comparable trading multiples, and such other parameters as are customary

(f) the per share value computed under sub-regulation (5), if applicable.

52 weeks VWAP, 26 weeks highest, 60 trading days market VWAP — and the highest of all applicable parameters governs.

Indirect acquisition where the Regulation 5(2) parameters are not met

The same structure, but measured from the earlier of the primary acquisition date and the announcement date — negotiated price; 52 weeks VWAP; 26 weeks highest; the highest price paid between that earlier date and the public announcement; and the sixty trading days market VWAP; plus the per share value if applicable.

Where the price cannot be determined at all: the offer price shall be the fair price of shares of the target company... determined by an independent registered valuer.

The 15% test for indirect acquisitions

In the case of an indirect acquisition and open offers where (1) the proportionate net asset value of the target company as a percentage of the consolidated net asset value of the entity or business being acquired; (2) the proportionate sales turnover of the target company as a percentage of the consolidated sales turnover of the entity or business being acquired; or (3) the proportionate market capitalisation of the target company as a percentage of the enterprise value for the entity or business being acquired; is in excess of 15%, on the basis of the most recent audited annual financial statements, the acquirer shall be required to compute and disclose in the letter of offer, the per share value of the target company taken into account for the acquisition, along with a detailed description of methodology adopted for such computation.

Adjustments and after-effects

Convertibles count: where the acquirer has any outstanding convertible instruments convertible into shares of the target company at a specific price, the price at which such instruments are to be converted into shares, shall also be considered as a parameter.

Everything paid counts: the price shall include any price paid or agreed to be paid for the shares or voting rights in, or control over the target company, in any form whatsoever, whether stated in the agreement... or in any incidental, contemporaneous or collateral agreement, whether termed as control premium or as non-compete fees or otherwise.

Buying higher during the offer period raises the offer: where the acquirer buys at a price higher than the offer price, the offer price shall be revised to the highest price paid or payable — and no such acquisition shall be made after the third working day prior to the commencement of the tendering period and until the expiry of the tendering period.

Corporate action adjustments: the parameters shall be adjusted... for corporate actions such as issuances pursuant to rights issue, bonus issue, stock consolidations, stock splits, payment of dividend, de-mergers and reduction of capital, where the record date... falls prior to 3 working days before the commencement of the tendering period — with no adjustment... for dividend declared with a record date falling during such period except where the dividend per share is more than 50% higher than the average of the dividend per share paid during the 3 financial years preceding the date of the public announcement.

Buying higher afterwards triggers a top-up: where the acquirer buys during the period of 26 weeks after the tendering period at a price higher than the offer price, the acquirer and persons acting in concert shall pay the difference between the highest acquisition price and the offer price, to all the shareholders whose shares were accepted in the open offer, within 60 days from the date of such acquisition — not applicable to another open offer, a delisting offer, or open market purchases made in the ordinary course on the stock exchanges, not being negotiated acquisition... by way of bulk deals, block deals or in any other form.

Indirect acquisition interest: the offer price shall stand enhanced by an amount equal to a sum determined at the rate of 10% per annum for the period between the earlier of the date on which the primary acquisition, or the date on which the intention or the decision to make the primary acquisition is announced in the public domain and the date of the detailed public statement, provided such period is more than 5 working days.

Partly paid shares: the difference between the offer price and the amount due towards call-in-arrears including calls remaining unpaid with interest, if any.

Differential voting right shares: determined by the acquirer and the manager to the open offer, with full disclosure of justification in the detailed public statement and the letter of offer.

Foreign currency: converted at the Exchange rate as prevailing on the date preceding the date of public announcement, with the source disclosed.

7.2.5 Payment mode

The offer price may be paid in – a) cash; b) by issue, exchange or transfer of listed shares in the equity share capital of the acquirer or of any person acting in concert; c) by issue, exchange or transfer of listed secured debt instruments issued by the acquirer or any person acting in concert with a rating not inferior to investment grade as rated by a SEBI registered credit rating agency; d) by issue, exchange or transfer of convertible debt securities entitling the holder thereof to acquire listed share in the equity share capital of the acquirer or of any person acting in concert; or e) a combination.

A cash option becomes compulsory where shares acquired in the 52 weeks immediately preceding the date of public announcement constituting more than 10% of the voting rights in the target company has been paid for in cash — then the open offer shall entail an option to the shareholders to require payment of the offer price in cash.

And the default is cash: a shareholder who has not exercised an option in his acceptance shall be deemed to have opted for receiving the offer price in cash.

On revision: the mode of payment of consideration may be altered subject to the condition that the component of the offer price to be paid in cash prior to such revision is not reduced.

Shares offered as consideration must qualify:

(a) such class of shares are listed on a stock exchange and frequently traded at the time of the public announcement (b) such class of shares have been listed for a period of at least two years preceding the date of the public announcement (c) the issuer of such class of shares has redressed at least 95 percent of the complaints received from investors by the end of the calendar quarter immediately preceding the calendar month in which the public announcement is made (d) the issuer... has been in material compliance with the listing regulations for a period of at least two years — and where SEBI thinks otherwise, the offer price shall be paid in cash only (e) the impact of auditors' qualifications, if any, on the audited accounts... for three immediately preceding financial years does not exceed five per cent. of the net profit or loss after tax (f) the Board has not issued any direction against the issuer of such shares not to access the capital market or to issue fresh shares.

Differential pricing by option is allowed: where shareholders have options, the pricing for the open offer may be different for each option subject to compliance with minimum offer price requirements, with justification for such differential pricing in the detailed public statement and letter of offer.

And if securities compliance is not completed: the acquirer must complete it not later than the commencement of the tendering period, failing which the acquirer shall pay the entire consideration in cash.

Valuing securities offered as consideration — the higher of:

(a) the average of the weekly high and low of the closing prices of such securities quoted on the stock exchange during the six months preceding the relevant date (b) the average of the weekly high and low of the closing prices... during the two weeks preceding the relevant date; and (c) the volume-weighted average market price for a period of sixty trading days preceding the date of the public announcement

with the ratio of exchange of shares... duly certified by an independent registered valuer.

7.2.6 Exemptions

General exemptions — the main ones:

Inter se transfer amongst qualifying persons: (1) Immediate relatives; (2) Persons named as promoters in the shareholding pattern filed by the target company... for not less than 3 years prior to the proposed acquisition; (3) A company, its subsidiaries, its holding company, other subsidiaries of such holding company, persons holding not less than 50% of the equity shares of such company, other companies in which such persons hold not less than 50% of the equity shares, and their subsidiaries subject to control over such qualifying persons being exclusively held by the same persons; (4) Persons acting in concert for not less than 3 years prior to the proposed acquisition, and disclosed as such...; (5) Shareholders of a target company who have been persons acting in concert for a period of not less than three years... and any company in which the entire equity share capital is owned by such shareholders in the same proportion.

Three years is the qualifying period for promoters and persons acting in concert; 50% for the company chain.

Acquisition in the ordinary course of business by: a SEBI registered underwriter by way of allotment pursuant to an underwriting agreement · a SEBI registered stock broker on behalf of his client in exercise of lien over the shares · a SEBI registered merchant banker or a nominated investor in the process of market making or subscription to the unsubscribed portion of issue · any person acquiring shares pursuant to a scheme of safety net · a SEBI registered merchant banker acting as a stabilising agent or by the promoter or pre-issue shareholder · a registered market maker of an exchange · a scheduled commercial bank, acting as an escrow agent; and invocation of pledge by SCBs or public financial institutions as a pledge.

Note that several of these are the merchant banker's own regular activities — underwriting, market making, green shoe stabilisation.

Disinvestment stages: acquisitions at subsequent stages under a disinvestment agreement, provided both the acquirer and the seller are the same at all the stages and full disclosures of all the subsequent stages... have been made in the public announcement of the open offer and in the letter of offer.

Schemes of arrangement: under section 18 of the Sick Industrial Companies (Special Provision) Act, 1985; a scheme involving the target company as a transferor company or as a transferee company, or reconstruction of the target company, including amalgamation, merger or demerger, pursuant to an order of a court or a tribunal or a competent authority; or a scheme not directly involving the target company, subject to the component of cash and cash equivalents in the consideration paid being less than 25% of the consideration paid under the scheme and where after implementation of the scheme..., persons directly or indirectly holding atleast 33% of the voting rights in the combined entity are the same as the persons who held the entire voting rights before the implementation.

Other general exemptions: acquisition pursuant to a resolution plan approved under Section 31 of the Insolvency and Bankruptcy Code, 2016 · under the SARFAESI Act, 2002 · under the SEBI (Delisting of Equity Shares) Regulations, 2021 · by way of transmission, succession or inheritance · voting rights or preference shares carrying voting rights arising out of the operation of sub-section (2) of section 47 of the Companies Act, 2013 · acquisition of shares by the lenders pursuant to conversion of their debt as part of a debt restructuring scheme implemented per RBI guidelines · and increase in voting rights arising out of the operation of sub-section (1) of section 106 of the Companies Act, 2013 or pursuant to a forfeiture of shares.

Plus: an increase beyond the thresholds without the acquisition of control, pursuant to the conversion of equity shares with superior voting rights into ordinary equity shares, and any acquisition... by way of preferential issue in compliance with regulation 164A of the SEBI ICDR Regulations, 2018.

Buy-back: an increase beyond the 25% threshold pursuant to buy-back of shares [by the target company] shall be exempt... provided such shareholder reduces his shareholding such that his voting rights fall to below the threshold... within ninety days from the date of the closure of the said buy-back offer.

Exempt from the 5% creeping acquisition trigger:

(a) acquisition of shares by any shareholder of a target company, upto his entitlement, pursuant to a rights issue

(b) acquisition of shares... beyond his entitlement, pursuant to a rights issue, provided the acquirer has not renounced any of his entitlements and the price at which the rights issue is made is not higher than the ex-rights price — computed from the sixty trading days VWAP before the rights price determination date, blended with the rights price by weight of shares

Increase in voting rights pursuant to a buy-back, provided such shareholder has not voted in favour of the resolution authorising the buy-back, voting is by way of postal ballot where a shareholder resolution is used, an interested director has not voted in favour where no shareholder resolution is required, and the increase in voting rights does not result in an acquisition of control — with the ninety days reduction route where those conditions are not met

Also: acquisition of shares in a target company by any person in exchange for shares of another target company tendered pursuant to an open offer · acquisition by promoters from state-level financial institutions or their subsidiaries or companies promoted by them · and acquisition by promoters from a venture capital fund or category I Alternative Investment Fund or a foreign venture capital investor registered with the Board.

Exemptions by SEBI

SEBI may grant exemption... subject to conditions imposed by SEBI and after recording it in writing, and may grant relaxations... from strict compliance with any procedural requirement.

The application: the acquirer shall file an application with SEBI, supported by a duly sworn affidavit, giving details of the proposed acquisition and the grounds on which the exemption has been sought, with a non-refundable fee of Rs. five lakh.

And the order is public: SEBI shall pass a reasoned order either granting or rejecting the exemption or relaxation sought. The order shall be placed on the SEBI Website.

7.2.7 The open offer process

Appointing the merchant banker

Before making any public announcement of offer, the acquirer shall appoint a SEBI registered merchant banker who shall not be an associate of the acquirer.

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

Merchant bankers also serve in independent capacities:

Regarding 'Mode of Payment' when securities of the acquirer company are offered in lieu of cash payment, the value of such securities shall be determined in the specified manner, as duly certified by an independent merchant banker (other than the manager to the offer) or an independent chartered accountant having a minimum experience of ten years.

And on escrow releases — the manager to the open offer certifies release on withdrawal, and release of the balance on the expiry of 30 days from the completion of payment of consideration.

General obligations of the manager to the offer

1. Ensure prior to public announcement being made that (a) the acquirer is able to implement the open offer; and (b) firm arrangements for funds through verifiable means have been made by the acquirer to meet the payment obligations under the open offer.

2. Ensure that the contents of the public announcement, the detailed public statement and the letter of offer and the post offer advertisement are true, fair and adequate in all material aspects, not misleading in any material particular, are based on reliable sources, state the source wherever necessary, and are in compliance with the requirements under the SEBI SAST.

3. Furnish to SEBI a due diligence certificate along with the draft letter of offer filed with SEBI.

4. Ensure that market intermediaries engaged for the purposes of the open offer are registered with SEBI.

5. Exercise diligence, care and professional judgment to ensure compliance with these regulations.

6. Not deal on his own account in the shares of the target company during the offer period.

7. File a report with SEBI within 15 working days from the expiry of the tendering period, in such form as may be specified, confirming status of completion of various open offer requirements.

Timing of the public announcement

The public announcement shall be made... on the date of agreeing to acquire shares or voting rights in, or control over the target company.

With special cases:

(a) In case of market purchases, such public announcement shall be made prior to placement of the purchase order with the stock broker

(b) on conversion of convertibles without a fixed date of conversion or of depository receipts — on the same day as the date of exercise of the option to convert

(c) on conversion of convertibles with a fixed date of conversion — on the second working day preceding the scheduled date of conversion

(d) Pursuant to a disinvestment, the announcement shall be made on the same day as the date of executing the agreement

(e) indirect acquisition where the Regulation 5 parameters are not met — at any time within 4 working days from the earlier of, the date on which the primary acquisition is contracted, and the date on which the intention or the decision to make the primary acquisition is announced in the public domain

(f) indirect acquisition where they are met — on the earlier of those two dates

(g) under a preferential issue — on the date on which the board of directors of the target company authorises such preferential issue

(h) on a buy-back not qualifying for exemption — not later than the 90th day from the date of closure of the buy-back offer

(i) where the date of acquiring title is beyond the control of the acquirer — not later than 2 working days from the date of receipt of intimation of having acquired such title.

For a voluntary offer: on the same day as the date on which the acquirer takes the decision.

And then the detailed public statement: not later than 5 working days of the public announcement.

Publication

The public announcement shall be sent to all the stock exchanges on which the shares of the target company are listed, which shall forthwith disseminate such information to the public, and a copy... shall be sent to SEBI and to the target company at its registered office within 1 working day.

The detailed public statement... needs to be published in all editions of any 1 English national daily with wide circulation, any 1 Hindi national daily with wide circulation, and any 1 regional language daily with wide circulation at the place where the registered office of the target company is situated and 1 regional language daily at the place of the stock exchange where the maximum volume of trading in the shares of the target company are recorded during the sixty trading days preceding the date of the public announcement.

Four newspapers, with copies simultaneously to SEBI through the manager, the exchanges, and the target company — which shall forthwith circulate it to the members of its board.

Contents of the public announcement

Name and identity of the acquirer and persons acting in concert with him · name and identity of the sellers, if any · nature of the proposed acquisition · the consideration for the proposed acquisition... and the price per share, if any · the offer price, and mode of payment of consideration · offer size and conditions as to minimum level of acceptances, if any · and intention of the acquirer to either delist the target company or retain the listing — with the proposed open offer price and indicative price where delisting is proposed.

And the general standard: the public announcement, detailed public statement and any other statement, advertisement, circular, brochure, publicity material or letter of offer... shall not omit any relevant information, or contain any misleading information.

Letter of offer

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

Filing: within 5 working days from the date of the detailed public statement the acquirer shall, through the manager to the open offer, file with SEBI, a draft of the letter of offer... along with a non-refundable fee.

The consideration payable under the open offer shall be calculated at the offer price assuming full acceptance, at the highest offer price where differential pricing applies, with revised fees paid within 5 working days from the date of such revision.

Responsibility is shared but not equally: while Acquirer is primarily responsible for the correctness, adequacy and disclosure of all relevant information in this Letter of Offer, the Merchant Banker is expected to exercise due diligence to ensure that the Acquirer duly discharges its responsibility adequately.

SEBI's clock: comments not later than fifteen working days of the receipt of the draft letter of offer and in the event of no comments being issued by the SEBI within such period, it shall be deemed that the SEBI does not have comments to offer — extended to the fifth working day from the date of receipt of satisfactory reply where clarifications were sought.

**For competing offers, SEBI shall provide its comments on the draft letter of offer in respect of each competing offer on the same day.

Then: the Merchant Banker will incorporate in the letter of offer the comments made by SEBI and then send the letter of offer along with the blank acceptance form, to all the shareholders whose names appear in the register of the company on the Specified Date.

Escrow

The acquirer should create an escrow account towards security for performance of his obligations... at least two working days prior to the date of the detailed public statement.

Where an open offer is made conditional upon minimum level of acceptance, 100% of the consideration payable in respect of minimum level of acceptance or 50% of the consideration payable under the open offer, whichever is higher, shall be deposited in cash.

Forms: a. cash deposited with any scheduled commercial bank; b. bank guarantee issued in favour of the manager to the open offer by any scheduled commercial bank; or c. deposit of frequently traded and freely transferable equity shares or other freely transferable securities with appropriate margin.

Securities may not be deposited for indirect acquisitions announced under the four-working-day route.

Where a guarantee or securities are used: the acquirer shall also ensure that at least 1% of the total consideration payable is deposited in cash with a scheduled commercial bank as a part of the escrow account.

**The bank guarantee must be kept valid throughout the offer period and for an additional period of thirty days after completion of payment of consideration.

And on securities: the manager is empowered to realise the value of such escrow account by sale or otherwise, and in the event there is any shortfall..., the manager to the open offer shall be liable to make good such shortfall.

Release rules: the manager shall not release the escrow account until the expiry of thirty days from the completion of payment of consideration, except for transfer to the special escrow account — with not exceeding 90% of the escrow account transferable there. On non-fulfilment, SEBI may direct the manager to the open offer to forfeit the escrow account.

Other process requirements

Simultaneously with the filing of the draft letter of offer with SEBI, the acquirer shall send a copy... to the target company at its registered office address and to all stock exchanges.

Dispatch: the letter of offer goes to shareholders on the register as of the identified date, not later than seven working days from the receipt of comments from SEBI or where no comments are offered by SEBI, within 7 working days from the expiry of the period as stipulated. It may also be dispatched through electronic mode, with physical copies on request.

A foreign jurisdiction carve-out: where local laws expose the parties to material risk of civil, regulatory or criminal liabilities and shareholders there hold less than 5% of the voting rights, the acquirer may refrain from dispatch of the letter of offer into such jurisdiction — but every person holding shares, regardless of whether he held shares on the identified date or has not received the letter of offer, shall be entitled to tender such shares.

Revisions: an acquirer may make upward revisions to the offer price, and... to the number of shares sought to be acquired... at any time prior to the commencement of the last one working day before the commencement of the tendering period — with corresponding escrow increases, newspaper announcements and intimation to SEBI, the exchanges and the target company.

Disclosure during the offer period: every acquisition must be disclosed to the exchanges and the target company within 24 hours, and the acquirer and persons acting in concert with him shall not acquire or sell any shares of the target company during the period between 3 working days prior to the commencement of the tendering period and until the expiry of the tendering period.

Tendering runs through the exchange: the acquirer shall facilitate tendering of shares by the shareholders and settlement of the same, through the stock exchange mechanism as specified by SEBI — with transfers directly to the account maintained by the clearing corporation, and consideration and unaccepted shares credited directly to shareholders' bank and demat accounts respectively.

Pre-tendering advertisement: 1 working day before the commencement of the tendering period, announcing the schedule of activities for the open offer, the status of statutory and other approvals, if any,... unfulfilled conditions, if any, and their status, the procedure for tendering acceptances.

The tendering period: shall start within 12 working days from date of receipt of comments from SEBI and shall remain open for 10 working days. And shareholders who have tendered shares in acceptance of the open offer shall not be entitled to withdraw such acceptance during the tendering period.

Completion: within 10 working days from the last date of the tendering period, complete all requirements... including payment of consideration.

Approvals are the acquirer's responsibility — where payment is delayed by non-receipt of statutory approvals, SEBI may, grant extension of time for making payments, subject to the acquirer agreeing to pay interest to the shareholders for the delay, provided SEBI is satisfied that such non-receipt was not attributable to any wilful default, failure or neglect on the part of the acquirer.

Post offer advertisement: within five working days after the offer period, giving aggregate number of shares tendered, accepted, date of payment of consideration, published in the same newspapers and sent to SEBI, the exchanges and the target company.

Conditional offers

An acquirer can make an open offer conditional as to the minimum level of acceptance, provided that the open offer is made after the agreement. The agreement shall have a condition that in the event the desired level of acceptance of the open offer is not received, the acquirer shall not acquire any shares under the open offer and the agreement attracting the obligation to make the open offer shall stand rescinded.

And during the offer period such an acquirer shall not acquire... any shares in the target company except under the open offer and any underlying agreement.

Competing offers

When a public announcement of an open offer... is made, any person, other than the acquirer who has made such public announcement, is entitled to make a public announcement of an open offer within 15 working days of the date of the detailed public statement made by the acquirer who has made the first public announcement.

Size: the competing offer shall be for such number of shares which, when taken together with shares held by the acquirer along with persons acting in concert with him, shall be at least equal to the holding of the acquirer who has made the first public announcement, including the number of shares proposed to be acquired by him under the offer and any underlying agreement.

**Such an offer shall not be regarded as a voluntary open offer, and both it and the first offer shall be regarded as competing offers.

After 15 working days the window closes: nobody is entitled to make a public announcement of an open offer... after the period of fifteen working days and until the expiry of the offer period. And no competing offer at all is permitted where the open offer is for acquisition of shares pursuant to disinvestment or pursuant to a relaxation from strict compliance as granted by SEBI.

Timelines converge: the schedule of activities and the tendering period for all competing offers shall be carried out with identical timelines. The last date for tendering shares in acceptance of every competing offer shall stand revised to the last date for tendering shares in acceptance of the competing offer last made.

Revisions: an earlier competing acquirer may revise provided the revised terms are more favourable to the shareholders, and all competing acquirers may revise the price upward at any time up to 1 working day prior to the commencement of the tendering period.

And on conditionality: unless the open offer first made is an open offer conditional as to the minimum level of acceptances, no acquirer making a competing offer may be made conditional as to the minimum level of acceptances.

Payment of consideration

The acquirer shall open a special escrow account with a SEBI registered banker to an issue and deposit the amount of consideration (in cash) covering the entire sum due and payable to the shareholders, empowering the manager to the offer to operate the special escrow account on behalf of the acquirer.

**Payment must be completed within ten working days of the expiry of the tendering period.

And unclaimed money has a destination: any unclaimed balances, lying to the credit of the special escrow account at the end of seven years from the date of deposit thereof, shall be transferred to the Investor Protection and Education Fund.

Completion of acquisition

The acquirer... shall not complete the acquisition of shares or voting rights in, or control over, the target company... until the expiry of the offer period.

But there is an early route: subject to depositing in the escrow account... cash of an amount equal to the entire consideration payable under the open offer assuming full acceptance, the parties to such agreement may after the expiry of 21 working days from the date of detailed public statement, act upon the agreement.

And a further route — an acquirer may acquire shares of the target company through preferential issue or through the stock exchange settlement process, other than through bulk deals or block deals, subject to such shares being kept in an escrow account and the acquirer not exercising any voting rights over such shares.

The outer limit: the acquirer shall complete the acquisitions contracted under any agreement attracting the obligation to make an open offer not later than 26 weeks from the expiry of the offer period — with SEBI able to extend in case of any extraordinary and supervening circumstances.

Withdrawal

An open offer for acquiring shares once made shall not be withdrawn except under any of the following circumstances:

(a) statutory approvals required for the open offer... having been finally refused, where disclosed in the detailed public statement and letter of offer

(b) the acquirer, being a natural person, has died

(c) any condition stipulated in the agreement... is not met for reasons outside the reasonable control of the acquirer, and such agreement is rescinded, where disclosed — though an acquirer shall not withdraw an open offer pursuant to a public announcement made under clause (g)... even if the proposed acquisition through the preferential issue is not successful

(d) such circumstances as in the opinion of the SEBI, merit withdrawal — by a reasoned order permitting withdrawal, hosted on the SEBI website.

On withdrawal, the acquirer shall, through the manager, within two working days make an announcement in the same newspapers providing the grounds and reasons for withdrawal and simultaneously inform the Board, all the exchanges, and the target company at its registered office.

The SAST regulations have laid down the general obligations of the Merchant Banker. For any failure to carry out these obligations as well as for failure/non-compliance of other provisions of the Regulations, penalties have also been laid down which shall be applicable to any defaulting intermediary.