The Existing Takeover Code

Takeover Code concerns itself with the various regulations that an investor has to follow in case he acquires a substantial stake or control in the company. (Acquiring Control and Acquiring a substantial stake may not necessarily be the same because a substantial acquisition may take place even when there is no change in control. For example an investor acquiring 15% stake in a company (a substantial stake) may still not acquire control because of the presence of another investor with 50% stake). The Code is detailed in SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997. These are also called as ‘SAST Regulations’ or ‘Takeover Code’. These govern only the listed companies. Under these regulations, if an investor acquires a substantial stake or control in the company (hereby referred to as ‘Trigger points’), then he is compulsorily required to publicise this information by way of a ‘public announcement’ followed by an ‘open offer’ for buying a certain minimum public holding. The minimum limit of making an open offer stands at about 20%. In other words the acquirer will make a public offer to buy a certain percentage (minimum 20%) of the equity capital of the company. The Code also lays down a requirement for any acquirer to give information to the company and the stock exchange, in case his shareholding crosses the limits of 5%, 10%, 14%, 54% and 74%. He also has to disclose information in case he sells 2% or more and at present holds 15-55% stake in the company. The primary motive of this Takeover Code is to provide an opportunity to the minority shareholders to sell their shares at the negotiated price (Negotiated price is generally higher than the prevailing market price, as it also includes the price for control). The Code also helps in creating awareness of such a transaction (both to the shareholders and the market) and also helping the minority shareholders to exit the company. The Code covers three types of takeovers:
• Takeover by Insiders- If current shareholders, holding a significant shareholding increase their shareholdings beyond a certain limit.
• Takeover by Outsiders- If current shareholders, not holding a significant equity shareholding increases their shareholdings beyond a certain limit.
• Takeover by White Knight- If a new investor (who holds no shareholding in company) acquires a certain limit.
With regard to the above takeovers, the different scenarios when the Code would be applied are as follows:
• Acquisition of 15% shareholding- Once a shareholder acquires 15% or more voting rights in the company either through creeping acquisition (acquiring not more than 5% shareholding in a financial year) or through a chunk of shareholding, he has to follow the guidelines of the Code i.e. make a public announcement and open offer.
• Consolidation of shareholding- In case a shareholder with 15%-55% stake acquires more than 5% stake during a financial year, then he has to adhere to the Takeover Code.
• Exceeding of Holdings- In case a shareholder with 55%-75% stake acquires more shares; he has to adhere to this Code. However there is a onetime exception of acquiring 5% equity shares in excess of 55%.
• Acquisition of control with/ without acquisition of shares- The Code is also applicable if control is acquired over a company. for example an agreement with the Target company (the company to be acquired) permitting the acquirer to control the composition of the BOD, etc.
• Indirect acquisition- That is acquiring control in an unlisted company, which has a controlling stake over a listed company. Due to lack of numerical limits, this part is subject to questions for interpretation.

So in case the Takeover Code has to be applied, then the detailed requirements are:
Public announcement: It is to put the company and the public to notice about a substantial acquisition that might have happened. It is to be made in 4 working days of the acquisition by a merchant banker in all editions of English daily, one Hindi daily and one regional language daily. The essence is to provide the shareholders and the public the identity of the acquirer, acquirer`s financial resources and his intent in acquisition. Within 14 days of acquisition, a draft of the letter of offer will be submitted by the merchant banker to SEBI.
Open offer: An open offer has to be made for a minimum 20% of the equity capital of the company. The minimum price that has to offered by the acquirer is-
• The highest of the prices at which the negotiated acquisition might have been done.
• The highest of the prices paid by the acquirer in a public issue, rights issue or preferential issue within last 26 weeks.
• The higher of (a) the average of the weekly high and lows over the last 26 weeks, and (b) the average of the daily high and low prices over the last 2 weeks of the date of the public announcement.

There are a few exceptions to this Takeover Code which include:
• Allotment in pursuance of an application made to a public issue
• Allotment pursuant to rights issue
o To the extent of his entitlement, and
o Upto the percentage specified in regulation 11
• Allotment to the underwriters pursuant to an underwriters agreement
• Inter- se transfer of shares amongst-:
o Relatives within the meaning of Section 6 of the Companies Act, 1956
o Qualifying Indian promoters and foreign collaborators who are shareholders
o Qualifying promoters
• Acquisition of shares in the ordinary course of business by-:
o A registered stock broker of a stock exchange on behalf of clients
o A registered market maker of a stock exchange in respect of shares for which he is a market leader, during the course of market making
o By Public Financial Institutions on their own account
o By banks and public financial institutions as pledges
• Acquisition of shares by way of transmission on succession or inheritance
• Acquisition of shares by government companies within the meaning of Section 617 of the Companies Act, 1956 and statutory corporations
• Pursuant to a scheme-
o Framed under Section 18 of the Sick Industrial Companies (Special Provisions) Act 1985;
o Of arrangement or reconstruction including amalgamation or merger or demerger under any law or regulation, Indian or foreign
• Acquisition of shares in companies whose shares are not listed on any stock exchange.
(Reference: Kothari Vinod, Getting to Grips with Takeover Code, “The Chartered Accountant Student”, pg- 6-8