Takeover
The 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.
In plain language
A merger is two companies agreeing to become one. An acquisition is one business buying another. A takeover is about control: acquiring enough shares or voting rights to run the company, whether the existing management likes it or not.
The workbook is candid that the words overlap. There is no tangible difference between an acquisition and a takeover; the difference is connotation. "Takeover" is typically used where the target resists (a hostile takeover); "acquisition" for friendlier, negotiated deals.
For listed companies in India, what matters is not the label but the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 — the takeover code — whose central idea is that when control changes hands, the minority shareholders get the chance to sell at a fair price too.
How it works
Routes to a takeover (Chapter 7). By merger of a solvent acquirer with a sick company for tax benefits; by acquiring shares through direct negotiation with the controlling holder; or through an open offer or market purchases of enough voting rights to change management. If the target's management will not negotiate, the buyer may bid directly to shareholders and buy from the market. The target may then be kept as a subsidiary or division, dissolved, or merged.
The laws involved. The Companies Act, 2013; the SAST Regulations, 2011; FEMA, 1999; the RBI and RBI Act, 1934; the Income Tax Act, 1961; the Competition Act, 2002; and SEBI's Master Circular of November 23, 2021. Mergers, demergers and business transfers are governed by the Companies Act; acquisitions of shares or control in listed companies are governed by the takeover code.
What the takeover code is for. Greater transparency, fairness and equitable treatment of all investors; timely and accurate disclosure; prevention of frivolous offers; and enforcement. It envisages acquisitions for change in control of management, consolidation of holdings, and substantial acquisition of shares or voting rights.
The three triggers for an open offer.
| Trigger | Rule |
|---|---|
| Crossing 25% | Acquirer with persons acting in concert reaching 25% or more of voting rights must first make a public announcement of an open offer |
| Creeping acquisition | A holder of 25% or more (below the maximum permissible non-public shareholding) acquiring more than 5% in a financial year must make an open offer |
| Control | Acquiring control, directly or indirectly, requires an open offer regardless of shareholding |
For companies listed on the Innovators Growth Platform, "twenty-five per cent" is read as forty-nine per cent. Acquisition under a resolution plan approved under section 31 of the Insolvency and Bankruptcy Code is exempt.
The open offer itself. At least 26% of total shares; at a price not lower than the highest of the negotiated price, the 52-week volume-weighted average price paid, the 26-week highest price paid, and — for frequently traded shares — the 60-trading-day volume-weighted average market price; secured by an escrow account; run by a manager to the open offer.
Exemptions. Regulation 10 lists general exemptions (inter-se transfers among qualifying persons, ordinary-course acquisitions by underwriters, brokers, market makers and stabilising agents, schemes of arrangement, SARFAESI, delisting, transmission and more). SEBI may grant other exemptions on an application with an affidavit and a non-refundable fee of Rs 5 lakh.
A worked example
Illustrative figures. Vindhya Steel Ltd has 20 crore shares. An acquirer has built a 24.9% stake (4.98 crore shares) through market purchases and wants another 1%.
Timing. In a market purchase, the public announcement must be made before placing the purchase order with the stock broker that would take its voting rights past 25%. Buying first and announcing later is a breach.
Offer size.
Minimum offer = 26% × 20 crore = 5.2 crore shares
Offer price. The acquirer has paid a 52-week VWAP of Rs 268 and a 26-week highest price of Rs 295; the 60-trading-day VWAP on the exchange with maximum volume is Rs 310; there is no negotiated price. The offer price must be at least the highest: Rs 310.
Consideration at full acceptance = 5.2 crore × Rs 310 = Rs 1,612 crore
Escrow.
25% of first Rs 500 crore = Rs 125.0 crore
10% of balance Rs 1,112 crore = Rs 111.2 crore
Escrow = Rs 236.2 crore
SEBI fee on the draft letter of offer (consideration above Rs 1,000 crore):
Rs 5 crore + 0.125% × (1,612 − 1,000) crore = Rs 5 crore + Rs 0.765 crore = Rs 5.765 crore
If every share is tendered the acquirer ends at 24.9% + 1% + 26% = 51.9% — control, obtained on terms every shareholder was offered.
Why NISM asks about it
Chapter 7 (Other Merchant Banking Activities – Mergers, Acquisitions & Takeovers), 15% of the paper, is built on this term; Chapter 2 (Introduction to the Merchant Banking) introduces the takeover code's key regulations.
Chapter 7's review questions test it directly: "Takeover is the acquisition of substantial ______ for the purpose of seeking management control" — shares or voting rights; "Merger is necessarily amongst two equal or comparable stature companies" — False; the SAST Regulations ensure transparency, fairness and equitable treatment — True.
Common exam traps
- Takeover is about control, not merely size of stake.
- Acquisition and takeover are used interchangeably; the workbook says the only difference is connotation (hostile vs friendly).
- A merger need not be between equals. The pure "merger of equals" is one kind; the workbook's review question marks "necessarily equal" as False.
- Control triggers an open offer on its own, even below 25%.
- 25% becomes 49% for companies on the Innovators Growth Platform.
- Market purchases: the announcement comes before the order that crosses the threshold.
- The minimum offer is 26% of total shares, not 26% of the public shareholding.
- Competition Commission approval is the acquirer's responsibility, not the merchant banker's — the manager may only follow up and disclose its status.
Check yourself
1.A takeover is the acquisition of substantial ________ for the purpose of seeking management control of the company.
- a)Shares or voting rights
- b)Rights
- c)Debentures
- d)None of the above
Show the answer
Answer: (a) Shares or voting rights
'Takeover' is the acquisition of substantial shares or voting rights for the purpose of seeking management control of the company.
Shares or voting rights — the two are not the same thing, which is why the definition names both. Voting rights can be acquired without acquiring shares, through agreements and other arrangements.
Option C is wrong because debentures carry no voting rights and so cannot deliver management control, though convertible debt instruments feature in the offer price parameters: where the acquirer holds 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.
How a takeover is effected: 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.
Or by agreement: 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.
And afterwards: the target company may be maintained as a subsidiary or division or dissolved or be merged.
The SAST Regulations pick up the same language. The 25% and 5% triggers are expressed in shares or voting rights, and a third trigger attaches to control alone: 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.
Note the distinction the workbook draws: takeovers involve change in management control of the target company while acquisitions usually result in change in control when majority stakes are acquired.
2.According to the workbook, what is the difference between an 'acquisition' and a 'takeover'?
- a)There is no tangible difference; 'takeover' typically refers to a hostile deal where the target resists, while 'acquisition' is used for friendly or negotiated deals
- b)An acquisition always involves a merger, a takeover never does
- c)A takeover requires court approval, an acquisition does not
- d)An acquisition is of a larger company by a smaller one, a takeover the reverse
Show the answer
Answer: (a) There is no tangible difference; 'takeover' typically refers to a hostile deal where the target resists, while 'acquisition' is used for friendly or negotiated deals
A difference of connotation only. The workbook: 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.
- Acquisition always a merger — no; an acquired target may be maintained as a subsidiary or division or dissolved or be merged.
- Court approval for takeovers — court/tribunal applications are a feature of mergers, not of takeovers as such.
- Smaller buying larger — the workbook says an acquisition usually refers to a purchase of a smaller firm by a larger one.
Its friendly example: Walt Disney Corporation bought Pixar Animation Studios in 2006.
3.A merchant banker is involved in which of the following activities?
- a)All of the above
- b)Mergers
- c)Takeovers
- d)Acquisitions
Show the answer
Answer: (a) All of the above
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.
And the role is central: 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.
Five specific functions in a merger: (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.
Plus liaison work: mergers involve statutory compliances and application to the Court/Tribunal. It also involves liasoning with accountants, lawyers or company secretaries.
In an open offer the role is defined by regulation: the merchant banker's role involves managing the public offer and ensuring compliance with the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.
Chapter 3 lists these among the permitted activities — managing of acquisitions and takeovers under the... (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, buy-back, delisting, compliances... in respect of any scheme of arrangement, and issuance of fairness opinion.
Seven laws and regulators govern this work: The Companies Act, 2013 · The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 · The Foreign Exchange Management Act, 1999 · The Reserve Bank of India and the RBI Act, 1934 · The Income Tax Act, 1961 · The Competition Act 2002 · Master Circular SEBI dated November 23, 2021.
Where this is taught
Free preparation for NISM Series IXRelated terms
- Competing offerAn open offer made by another person within 15 working days of the first acquirer's detailed public statement, for at least as many shares as the first acquirer would end up holding.
- 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.
- 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.
- Manager to the open offerThe 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.
- 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.
- 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.
- 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.
- DisinvestmentThe direct or indirect sale by the Central Government, a State Government or a government company of shares, voting rights or control in a public sector undertaking.
- MergerA combination of two or more companies into a single entity in which one or both lose their identity — not necessarily between companies of equal or comparable stature.
- 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.
- Dissenting shareholdersShareholders who voted against the resolution for a change in objects, or a variation in the terms of a contract referred to in the prospectus — and who must therefore be offered an exit.
- Taking privateA buyout of a listed company by acquiring the shares held by the public — in India through SEBI's delisting process for promoters, or a Takeover Code open offer for an external acquirer.