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SEBI Takeover Code 2011

SEBI Takeover Code 2011

The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Code) represent a significant evolution from the 1997 regulations, aiming to modernize and align India's M&A landscape with global best practices. This document summarizes the key changes and their implications.

Background

The need for a revised Takeover Code arose from the rapid changes in the business world, necessitating an update to the decade-old 1997 regulations. The 2011 code seeks to balance the interests of acquirers and target company shareholders, deterring hostile takeovers while providing exit opportunities for dissenting shareholders.

Key Changes and Their Implications

1. Restrictions on Share Acquisition and Voting Rights

  • Increased Threshold Limit: The initial trigger for an open offer increased from 15% to 25%. This provides acquirers with more flexibility before triggering mandatory offer requirements. No transition clause exists for acquirers already holding between 15% and 25%.
  • Creeping Acquisition Limit: A 5% creeping acquisition limit within a fiscal year is permitted for acquirers holding 25% or more, up to the maximum permissible non-public shareholding (typically 75%). Acquisitions exceeding 5% in a fiscal year trigger an open offer. Crucially, the 5% limit is calculated on gross acquisitions, not net of any share sales or dilution. New share issuance to the acquirer counts towards this 5% limit.
  • Acquisition of "Control": The definition of "control" has been clarified. Holding a position of authority alone does not constitute control. Acquisition of control, regardless of shareholding, triggers an open offer obligation. The code recognizes indirect acquisitions of control, with varying criteria based on the target company's value relative to the overall transaction. The "whitewash provision" (exemption from open offer due to a special resolution) available in the 1997 code has been removed.

2. Open Offer Requirements and Triggers

  • Mandatory Open Offer Triggers:
    • Acquisition of 25% or more voting rights/shares.
    • Creeping acquisition exceeding 5% in a fiscal year (for acquirers already holding 25%+).
    • Acquisition of control.
  • Offer Size: The mandatory open offer size is 26% of the target company's shares.
  • Open Voluntary Offer: Acquirers holding 25%+ can make a voluntary offer for a minimum of 10% (reduced from 20%), subject to certain conditions (e.g., post-offer holding not exceeding maximum permissible non-public holding, no share purchases in the preceding 52 weeks).

3. Essential Components of Open Offer Duties

  • Offer Size Calculation: The offer size calculation considers potential increases in outstanding shares up to the tenth working day after the tendering period. Adjustments are made if the actual post-PA share count exceeds the projected count. Valuation is required for indirect acquisitions where the target's value exceeds 15% of the total transaction. Non-compete clauses are included in the agreed price, which forms the basis for offer price calculation.
  • Payment Methods: The offer price can be paid in cash, listed equity shares of the acquirer/PACs, listed investment-grade debt instruments of the acquirer/PACs, or convertible debt securities.
  • Conditional Offers: Acquirers can make conditional offers, subject to minimum acceptance levels. Agreements related to conditional offers must stipulate that no shares will be purchased if the minimum acceptance is not met.
  • Rival Offers: Rival offers can be made within 15 working days of the DPS (Detailed Public Statement) date. Rival offers cannot be conditional unless the initial offer is conditional. All Takeover Code rules apply to rival offers. Acquirers can revise their initial offer in response to a rival offer, provided the revised terms are more favorable to shareholders.
  • Offer Withdrawal: Withdrawal is permitted under specific circumstances, including denial of statutory approvals, death of the acquirer, non-fulfillment of conditions beyond the acquirer's control (as stated in the DPS and LO - Letter of Offer), and other circumstances deemed appropriate by SEBI.

Conclusion

The SEBI Takeover Code 2011 represents a significant step towards modernizing India's M&A regulations. The changes aim to create a more balanced and transparent framework, protecting shareholder interests while facilitating efficient M&A transactions. While the increased threshold and smaller voluntary offer size provide acquirers with more flexibility, the stricter regulations around creeping acquisitions and control acquisition ensure that minority shareholders are not disadvantaged. Effective implementation of the code is crucial for its success. The code's evolution reflects SEBI's ongoing efforts to enhance the sophistication and fairness of the Indian securities market. Further refinements, such as addressing the RBI's restrictions on bank financing for domestic acquisitions, could further enhance the M&A landscape in India.

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