Manager to the open offer
Also written Manager to the offer
The SEBI-registered merchant banker, not an associate of the acquirer, appointed before the public announcement to run an open offer and answer to SEBI for its funding, disclosures and escrow.
In plain language
An acquirer making an open offer is an interested party: it wants control at the lowest price the rules allow. The takeover code puts an independent professional between the acquirer and the target's shareholders — the manager to the open offer.
The manager is not a messenger. It must satisfy itself, before the announcement, that the acquirer can actually pay; it signs a due diligence certificate on the letter of offer; it controls the escrow; and in one case it is personally liable to make good a shortfall. That combination is what gives shareholders confidence that an announced offer will be honoured.
How it works
Appointment (Chapter 7). Before making any public announcement of an offer, the acquirer shall appoint a SEBI-registered merchant banker who is not an associate of the acquirer. The public announcement, detailed public statement and draft letter of offer are all made or filed through the manager.
General obligations. The manager to the open offer shall:
- ensure, prior to the public announcement, that the acquirer is able to implement the offer and that firm arrangements for funds through verifiable means are in place;
- ensure the public announcement, detailed public statement, letter of offer and post-offer advertisement are true, fair and adequate, not misleading, based on reliable sources, and compliant;
- furnish SEBI a due diligence certificate with the draft letter of offer;
- ensure market intermediaries engaged for the offer are registered with SEBI;
- exercise diligence, care and professional judgment;
- not deal on its own account in the target's shares during the offer period;
- file a report with SEBI within 15 working days from the expiry of the tendering period confirming completion status.
Control of the escrow.
- For cash escrow, the acquirer must empower the manager to instruct the bank to pay out.
- A bank guarantee must be in favour of the manager, valid through the offer period and 30 days after payment.
- For securities escrow, the manager is empowered to realise them — and is liable to make good any shortfall.
- The manager may not release the escrow until 30 days after payment is completed, except to move up to 90% into the special escrow account; on SEBI's direction it forfeits the escrow and distributes it.
Fees on the draft letter of offer (paid by the acquirer through the manager).
| Consideration payable | Fee |
|---|---|
| up to Rs 10 crore | Rs 5 lakh |
| above Rs 10 crore up to Rs 1,000 crore | 0.5% of offer size |
| above Rs 1,000 crore | Rs 5 crore + 0.125% of the portion above Rs 1,000 crore |
Where independence is needed on top. If the acquirer pays in securities, their value must be certified by an independent merchant banker other than the manager to the offer, or an independent chartered accountant with at least ten years of experience.
A worked example
Illustrative figures. A merchant banker is approached to manage two open offers.
Offer 1 — consideration Rs 468 crore. The acquirer holds 12% of the voting rights in the merchant banker. Under the Merchant Bankers Regulations as set out in Chapter 3, either party controlling not less than ten percent of the voting rights in the other makes them associates — so this merchant banker cannot be manager to the offer (at most it could take a marketing-only role). The acquirer appoints an unconnected firm.
SEBI fee = 0.5% × Rs 468 crore = Rs 2.34 crore
Offer 2 — consideration Rs 1,400 crore. No conflict.
SEBI fee = Rs 5 crore + 0.125% × (1,400 − 1,000) crore
= Rs 5 crore + Rs 0.5 crore = Rs 5.5 crore
Escrow = 25% × 500 + 10% × 900 = Rs 125 crore + Rs 90 crore = Rs 215 crore
The acquirer proposes to meet the escrow with listed shares of its subsidiary worth Rs 260 crore after margin. Before agreeing, the manager does the arithmetic on its own exposure: if the shares fall and the realisable value drops below Rs 215 crore when payment is due, the manager must make good the shortfall. It pushes instead for 1% of Rs 1,400 crore = Rs 14 crore in cash plus a Rs 201 crore bank guarantee in its favour — Rs 215 crore in all — the cash floor that applies whenever a bank guarantee or securities are used.
During the offer period the manager's own proprietary desk, which had been holding 20,000 target shares, may not deal in them. After tendering closes, the manager has 15 working days to file its completion report with SEBI.
Why NISM asks about it
Chapter 7 (Other Merchant Banking Activities – Mergers, Acquisitions & Takeovers), 15% of the paper, sets out the appointment, general obligations and escrow powers of the manager; Chapter 2 notes the merchant banker's limited role on Competition Commission approval; Chapter 3 lists managing takeovers under the SAST Regulations among permitted merchant banking activities.
Expect the seven general obligations as a "which is not an obligation" question, the fee table as a computation, and the securities-escrow shortfall liability.
Common exam traps
- Not an associate of the acquirer — independence is a condition of appointment.
- Funding is verified before the public announcement, not before the letter of offer.
- 15 working days from the expiry of the tendering period for the completion report.
- No dealing on own account during the offer period.
- The manager is liable for a shortfall in a securities escrow — not in a cash or bank-guarantee escrow.
- Valuing securities consideration needs someone other than the manager — an independent merchant banker or a CA with ten years' experience.
- Fee slabs are marginal above Rs 1,000 crore (Rs 5 crore + 0.125% of the excess), but a flat percentage (0.5%) between Rs 10 crore and Rs 1,000 crore.
- CCI approval is the acquirer's responsibility; the manager may follow up and disclose its status.
Check yourself
1.Which statement about the escrow and special escrow accounts in an open offer is correct?
- a)Up to 90% of the escrow account may be transferred to the special escrow account; the balance is released to the acquirer 30 days after payment of consideration is completed; and unclaimed special-escrow balances after seven years go to the Investor Protection and Education Fund
- b)The whole escrow is released to the acquirer as soon as the tendering period closes
- c)Unclaimed balances in the special escrow account are returned to the acquirer after three years
- d)The special escrow account may be opened with any bank and is operated only by the acquirer
Show the answer
Answer: (a) Up to 90% of the escrow account may be transferred to the special escrow account; the balance is released to the acquirer 30 days after payment of consideration is completed; and unclaimed special-escrow balances after seven years go to the Investor Protection and Education Fund
90% to special escrow, the balance after 30 days, unclaimed money to the IPEF after seven years. Cash in escrow is released for transfer of an amount not exceeding 90% of the escrow account, to the special escrow account, and to the acquirer, the balance of the escrow account after transfer of cash to the special escrow account, on the expiry of 30 days from the completion of payment of consideration... as certified by the manager to the open offer. The special escrow account is opened with a SEBI registered banker to an issue, and the manager is empowered to operate the special escrow account on behalf of the acquirer. 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.
- Release at close of tendering — the manager shall not release the escrow account until the expiry of thirty days from the completion of payment of consideration, apart from the special-escrow transfer.
- Back to the acquirer after three years — wrong recipient and period.
- Any bank, acquirer-operated — it must be a SEBI-registered banker to an issue, and the manager operates it.
2.The detailed public statement is published on 1 September. When must the draft letter of offer be filed, and how long does SEBI have to comment?
- a)Within 5 working days of the detailed public statement; SEBI has not later than fifteen working days, after which it is deemed to have no comments
- b)Within 15 working days; SEBI has thirty days
- c)Within 21 working days; SEBI has no fixed period
- d)Before the detailed public statement; SEBI has ten working days
Show the answer
Answer: (a) Within 5 working days of the detailed public statement; SEBI has not later than fifteen working days, after which it is deemed to have no comments
Within 5 working days from the date of the detailed public statement made the acquirer shall, through the manager to the open offer, file with SEBI, a draft of the letter of offer containing information as may be specified along with a non-refundable fee.
SEBI shall give its comments on the draft letter of offer as expeditiously as possible but 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.
The deeming provision matters — the offer does not stall for want of a response.
With one extension: in the event the SEBI has sought clarifications or additional information from the manager to the open offer, the period for issuance of comments shall be extended to the fifth working day from the date of receipt of satisfactory reply.
The steps around it. The detailed public statement itself must come not later than 5 working days of the public announcement, and copies of the draft letter of offer go simultaneously... to the target company at its registered office address and to all stock exchanges.
Then 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.
Then tendering: it shall start within 12 working days from date of receipt of comments from SEBI and shall remain open for 10 working days.
Then payment: within 10 working days from the last date of the tendering period.
For competing offers SEBI aligns its comments: it shall provide its comments on the draft letter of offer in respect of each competing offer on the same day.
And if the disclosures are poor: in the event the disclosures in the draft letter of offer are inadequate SEBI may call for a revised letter of offer.
3.An acquirer creates its open-offer escrow mainly through a bank guarantee. Which requirement applies?
- a)At least 1% of the total consideration must still be deposited in cash with a scheduled commercial bank, and the guarantee must favour the manager to the offer and stay valid through the offer period and for thirty days after payment of consideration
- b)No cash is needed if the guarantee covers 100% of the escrow amount
- c)The guarantee must be in favour of SEBI and valid for one year
- d)Bank guarantees are not permitted for open offer escrows
Show the answer
Answer: (a) At least 1% of the total consideration must still be deposited in cash with a scheduled commercial bank, and the guarantee must favour the manager to the offer and stay valid through the offer period and for thirty days after payment of consideration
A 1% cash floor, and a manager-favoured guarantee valid for 30 days after payment. In the event of the escrow account being created by way of a bank guarantee or by deposit of securities, the acquirer shall also ensure that at least 1% of the total consideration payable is deposited in cash with a scheduled commercial bank. And such bank guarantee shall be in favour of the manager to the open offer and shall be kept valid throughout the offer period and for an additional period of thirty days after completion of payment of consideration.
- No cash — the 1% cash floor always applies.
- In favour of SEBI, one year — wrong beneficiary and wrong validity.
- Not permitted — bank guarantees by any scheduled commercial bank are one of the three permitted forms, along with cash and securities.
Where this is taught
Free preparation for NISM Series IXRelated terms
- Merchant bankerA SEBI-registered body corporate engaged in the business of issue management — arranging the selling, buying or subscribing of securities, or acting as manager, consultant or adviser in relation to an issue.
- Due diligence certificateThe formal certificate a lead manager signs and files with SEBI at prescribed stages of an issue, confirming that it has verified the issuer's disclosures and that the offer document is compliant.
- Escrow accountThe security an acquirer must deposit before a takeover open offer — 25% of the first Rs 500 crore of consideration plus 10% of the balance — so that the money to pay tendering shareholders is ring-fenced.
- Offer periodUnder the SAST Regulations, the period from the agreement or public announcement that triggers an open offer until consideration is paid to accepting shareholders, or the offer is withdrawn.
- Special escrow accountThe account an acquirer opens with a SEBI-registered banker to an issue to hold the cash consideration payable to shareholders who tendered in an open offer, operated by the manager to the open offer.
- TakeoverThe acquisition of substantial shares or voting rights in a company for the purpose of seeking management control — regulated for listed companies by the SEBI (SAST) Regulations, 2011.
- Frequently traded sharesShares whose traded turnover over a set look-back is at least 10% of the total shares of that class — 240 trading days under the ICDR Regulations, twelve calendar months under the SAST Regulations.
- Persons acting in concertPersons who, with a common objective of acquiring shares, voting rights or control of a target company, co-operate under a formal or informal agreement — plus categories the SAST Regulations deem to act in concert.
- Voluntary offerAn open offer that an acquirer already holding 25% or more (but below the maximum permissible non-public shareholding) chooses to make to consolidate its stake, without any trigger forcing it.
- Conditional offerAn open offer made subject to a minimum level of acceptance — if that level is not reached, the acquirer buys nothing under the offer and the underlying agreement is rescinded.
- AcquirerUnder the SEBI takeover code, any person who acquires — or agrees to acquire — shares, voting rights or control over a target company, alone, through another, or with persons acting in concert.