THE IMPACT OF SEBI (SUBSTANTIAL ACQUISITIONS OF SHARES AND

TAKEOVERS) REGULATIONS, 2011 ON CORPORATE INDIA

Last year, the SEBI notified the Securities and Exchange Board of India (Substantial
Acquisitions of Shares and Takeovers) Regulations, 2011 based on the draft recommended
by the Takeover Regulations Advisory Committee. Offers for which public announcement
has been made under the repealed regulations shall continue and would be completed under
the repealed regulations. It is expected that the New Takeover Code is going to change the
landscape of corporate India and will pave the way for increased investment. This article
highlights the important features of the New Takeover Code and its impact on the corporate
India.
1. Introduction
The Securities and Exchange Board of India (SEBI) on 19th July, 2010 set-up the Takeover Regulations
Advisory Committee (TRAC) which came up with various striking changes and recommendations in
order to bring the present Takeover Guidelines at par with the International standards. Most of the
proposals made by the TRAC headed by the late C. Achuthan, were accepted by the SEBI with some
deviations in respect of certain norms. On 23rd September, 2011, the SEBI notified the Securities and
Exchange Board of India (Substantial Acquisitions of Shares and Takeovers) Regulations, 2011 (New
Takeover Code). New Takeover Code will come into force on the 30th day from 23rd September, 2011,
i.e., it will be in force from 22nd October, 2011. Any open offer for which a public announcement has
been made under the repealed regulations would be completed under the norms of the Earlier Code.
2. Impact on corporate India
Regulatory approvals should be at par with the International standards; should be transparent and should
elicit corporate governance in order to have all round improvement in the economy, to increase the GDP
growth, to attract more foreign direct investments, to increase cross border transactions and to meet the
complexities and challenges which are being faced by the Corporates. M&A transactions are indications
of a robust economy. Further, to face the global competition and to make it transparent, regulators in
India have already come out with the notification of "Combination" under the Competition Act and now
in the pipeline are the regulations like the New Companies Bill, Direct Tax Code and Goods and Service
Tax Act and various other laws which are being amended. India has always attracted and earned a name
as the best investment destination, be it for private equity, FDI or for cross border transactions. The New
Takeover Code provisions, which were debated for more than two years and after considering the
recommendations from the industry lobby, after due deliberations, are being rolled out and are expected
to replace some of the redundant provisions of the earlier Code, in tune with the increased economic
activity. The regulations provided herein are best suited to facilitate fair competition and should pave the
way for increased investment activities.
3. Important changes in the New Takeover Code and their impact on corporate India and
others
3.1 Threshold Limit - The New Takeover Code has reset the trigger for open offer at 25 per cent,
whereas the threshold limit prescribed by the Earlier Code was at 15 per cent.
3.1-1 Impact on Investors - The direct impact of the increase in threshold limit is a very good measure,

as the strategic investors can leverage and increase their stake up to the revised threshold limit without
triggering the open offer criteria. Since the investors and private equity participation can be done in a
listed company up to 24.99 per cent without triggering the open offer criteria, it is a novel step towards
liberalization, as it will pave the way for increased investment and thereby pave the way for economic
development. Given this scenario, the strategic investors who are having a long-term view can easily
acquire up to 24.99 per cent and can even negotiate with minority shareholders who hold anything
between say 1 to 5 per cent and can consider to consolidate their holdings and trigger the open offer (as
it will cross 25 per cent) for takeover of the target company. Such kind of strategic buyouts are possible
and the valuations of these buyouts would be much higher than the market value of the transactions.
Further, one more impact can also be seen since the market value/stock prices are currently hovering at
low levels, the strategic investors who have mind set for long-term view may be interested and, in fact,
are having an opportunity to increase their shareholding coupled with the intention of having significant
stake in such companies and, thus, would have a say in these companies.
3.1-2 Impact on promoters - Since the promoters require additional funds for their expansion and
diversification, the increase in the threshold limit has helped them to attract PEs and strategic investors.
Further, the new limits will permit Institutional Investors and others to hold a larger stake and, thus, it
will help them to have a say in the affairs of the company. The strategic investors are also at ease to
invest up to the revised threshold limit, thus, it facilitates and attracts more investment. On the flip side,
the increase in the open offer threshold limit to 25 per cent will be a very significant development and it
will have an impact on the promoters who have low shareholding and high public float in the capital
structure. Hence, the promoters who have lesser stake in the company will have to struggle for retaining
the companies and keeping them free from the clutches of hostile acquirers or struggle for retaining
good companies.
3.1-3 Impact on acquirers - Since the New Takeover Code has reset the threshold limit to 25 per cent,
the acquirers can increase their stake up to 24.99 per cent and, thus, be able to block passing of the
special resolutions in the target companies without any difficulty. A resolution shall be a special
resolution when the votes cast in favour of the resolution (whether on a show of hands or on a poll, as
the case may be) by members who, being entitled so to do, vote in person, or where proxies are allowed,
by proxy, are not less than three times the number of the votes, if any, cast against the resolution by
members so entitled and voting. In day-to-day management of the affairs of the company, certain
resolutions are required to be passed only through special resolutions. Certain resolutions are to be
passed only as special resolutions in order to conduct the affairs of the company, e.g., in a target
company the promoters hold 40 per cent stake and by means of the regulation of the New Takeover
Code, an acquirer (called as hostile acquirer) can increase its holding up to 24.99 per cent without
triggering the open offer criteria. In this case, the acquirer has got effectively 38 per cent voting rights in
the target company and, thus, can easily block passing of the special resolutions. Here the assumption is
that the minority shareholders from the public may not attend the meeting and tender their votes whether
on a show of hands or on a poll, which will be the case invariably in most of the shareholders' meetings.
Thus, the New Takeover Code allows acquiring up to 24.99 per cent without triggering the open offer
criteria and will open the door for the acquirer to negotiate with the promoters of the target company and
to have a say in the company's affairs. An acquirer in this case may even demand position on the Board
of Directors, etc.
3.2 Open Offer Trigger criteria - The norms stipulate the minimum size of an open offer at 26 per cent
up from the earlier 20 per cent. That means open offers made pursuant to a substantial acquisition of the
target company would have to be for 26 per cent of the target company's share capital as against the
minimum 20 per cent requirement under the Earlier Code. The TRAC had recommended 100 per cent of

the remaining public shareholding. Now, the New Takeover Code has set the trigger criteria at 26 per
cent against the recommendation of 100 per cent of TRAC. When TRAC recommended 100 per cent, it
was strongly opposed by the Corporate India stating that it would increase the acquisition cost and also
because of the non-availability acquisition finance for the takeover. Further, it was debated that because
of 100 per cent requirement, it will hinder the M&A transactions and large number of transactions would
be affected.
3.2-1 Effect of new Trigger criteria - The New Takeover Code requires the acquirer to make an open
offer to acquire at least 26 per cent of the remaining shares, once it crosses the threshold limit of 25 per
cent. With this law in force, now it is possible and it will lead to acquisition of more than 51 per cent
shareholding by the acquirer, which is a simple majority. Here it is assumed full acceptance of the open
offer by the public shareholders, leading to acquiring of either 51 per cent or more than 51 per cent
shareholding by the acquirer. (Though in practice in the open offer not all the public shall accept and
subscribe to such public offer). Nevertheless, it is to be noted that the Regulation has enabled that an
acquirer may acquire 51 per cent, which should be appreciated and it is a possibility. This is in contrast
with the Earlier Code wherein the open offer requirement was only 20 per cent and on acquisition of 15
per cent stake in the target company, the acquirer could reach at the best 35 per cent which is far below
the simple majority. Thus, it is a very good step in the New Takeover Code that the acquirer has been
given an opportunity to hold simple majority, i.e., more than 50 per cent stake directly and, thus, the
resolutions requiring only the simple majority can easily be passed in the target company.
3.3 Voluntary offers - The New Takeover Code allows voluntary public announcement of an open offer
(applicable to offers that are not triggered by an acquisition) which is pegged at minimum of 10 per cent
of the total share capital of the company but is capped at 75 per cent of the total capital in order to meet
the requirements of minimum public shareholding as per the Securities Contract (Regulation) Act, 1957
applicable to listed companies. Thus, it will provide flexibility to the holders (holding 25 per cent or
more) to increase their shareholding at minimum of 10 per cent without having an obligation to follow
the vigorous procedures to offer additional 26 per cent stake.
3.3-1 Impact on acquirers - The voluntary offer is a way to facilitate consolidation of holdings in excess
of 5 per cent creeping acquisitions by the holders who are holding 25 per cent or more in the target
company. However, the acquirer shall not be eligible to voluntarily make a public announcement of an
open offer for acquiring shares under these regulations, in case the acquirer has acquired shares of the
target company in the preceding fifty two weeks without attracting the obligation to make a public
announcement of an open offer. Further, there is also a restriction that an acquirer who has made a public
announcement under this regulation shall not be entitled to acquire any shares of the target company for
a period of six months after completion of the open offer, pursuant to another voluntary open offer.
However, such restriction shall not prohibit the acquirer from making a competing offer upon any other
person making an open offer for acquiring the shares of the target company. In case of competitive bid,
the offer size may be increased to 100 per cent and there is no restriction placed by the Code. Thus, it is
seen that the New Takeover Code has recognised and allowed voluntary offers and has emphasised on
that such offer cannot be subject to the norms similar to the open offer size.
3.4 Creeping acquisitions - The New Takeover Code has simplified the process of creeping acquisition
norms prevalent in the Earlier Code. In the earlier Code, creeping acquisition was allowed in the range
of 1555 per cent and one time increase of 5 per cent was allowed only through the Stock Exchanges
beyond 55 per cent. In the New Takeover Code, 5 per cent consolidation of shareholding in a financial
year (on gross basis) is to be allowed up to 75 per cent for shareholders holding 25 per cent. Thus, it has
enabled the promoters to exercise the creeping acquisition limits up to the maximum non-public

shareholding limit.
3.4-1 Options available to the promoters up to 21st October, 2011 - The New Takeover Code will come
into force on 22nd October, 2011 and, hence, in order to avail of the benefits of the creeping acquisition,
the promoters currently holding more than 21 per cent but less than 25 per cent shares in the target
company will have to compulsorily acquire further shares within the creeping acquisition limit of 5 per
cent under the guidelines of the Earlier Code in order to avoid the trigger of open offer criteria, once the
New Takeover Code is implemented. Thus, the New Takeover Code helps the promoters to consolidate
their shareholding up to the maximum permissible level of 75 per cent, which was difficult under the
earlier Code.
3.4-2 Impact on market price and volumes - The opportunity given to the promoters to consolidate their
holding up to75 per cent may have negative impact on the market price of the shares because of the
reduction in the public float. Further, it may impact the trading volumes of the scripts due to reduced
public float of 25 per cent.
3.5 Offer Price - The offer price shall be the highest of the negotiated price, volume weighted average
price of the last 52 weeks prior to the public announcement, highest price payable or paid in the last 26
weeks before the public announcement or the volume weighted average price of 60 trading days prior to
the public announcement.
3.6 Control - The definition of 'Control' as mentioned in the recommendation has been retained. Thus,
now it has been clarified that a director or an officer of a target company shall not be considered to be in
control over such a target company merely by virtue of holding such position.
3.7 Acquisition of control and exemptions - Certain acquisitions shall be exempt from the obligation to
make an open offer subject to fulfilment of certain conditions. In particular, the exemption available
from the open offer requirement in case of change in control without the acquisition of substantial
shares, through a special resolution passed by the shareholders by way of postal ballot process provided
under the Companies (Passing of the Resolution by Postal Ballot) Rules, 2001 has been withdrawn. So,
according to the New Takeover Code, only through an open offer to the shareholders of the Target
Company, change in management control can be effected which is in contrast to the Earlier Code which
provides for change in control through a special resolution passed by way of a postal ballot. Further, the
New Takeover Code provides exemption from open offer in case of acquisition of shares of the target
company up to the entitlement of the shareholders under a rights issue. Also, the exemption is also
extended to all the shareholders for acquiring shares beyond their entitlement pursuant to the rights
issue, subject to fulfilment of certain conditions relating to pricing restrictions.
3.8 Indirect Acquisitions - The New Takeover Code has prescribed separate rules for announcement and
pricing requirements for indirect acquisitions. In case where the target company's (i) net asset value as a
percentage of the consolidated net asset value, (ii) proportionate sales turnover as a percentage of the
consolidated sales turnover, (iii) proportionate market capitalization as a percentage of the enterprise
value, is more than 80 per cent, on the basis of the most recent audited annual financial statements, then
the indirect acquisition will be regarded as a direct acquisition of the target company for all purposes and
timing, pricing and other provisions applicable to direct acquisitions will have to be complied with
accordingly. For the purpose of (iii) above, the market capitalization of the target company shall be
taken into account on the basis of the volume-weighted average market price of such shares on the stock
exchange for a period of sixty trading days preceding 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, as traded on the stock exchange where the maximum
volume of trading in the shares of the target company is recorded during such period.
3.9 Competitive Offers - According to the New Takeover Code, competitive offers will have to be made
within 15 working days of the date of the detailed public statement made by the acquirer who has made
the first public announcement. The competing offer shall not be regarded as a voluntary open offer and
the provisions of the Takeover Code Regulations shall apply accordingly.
4. Conclusion
The New Takeover Code, 2011 is a welcome measure and will impact various intermediaries involved in
acquisitions; would facilitate competition and encourage investment. The timeline mentioned for
completing the offer is an attempt to reduce the time taken in relation to the open offer process.
However, whether it can be practically achieved will depend upon other regulatory approvals required,
including the approval from the Competition Commission of India under the Competition Act. The SEBI
has also correspondingly amended clause 35 of the Listing Agreement to incorporate the details of
convertible securities held by the promoter and promoter group and entities holding more than 1 per cent
of the issued capital of the target company. The Listing Agreement has also been amended requiring
requisite disclosures to be made by the entities holding more than 5 per cent of the issued capital of the
target and, thus, all the regulations are mapped at one go. Barring some difficulties for the acquirer as
stated above, the overall regulations prescribed in the New Takeover Code are laudable ones and would
definitely
contribute
to
the
growth
of
the
Corporate
India.