Achuthan Committee on Takeover Regulations submits report to ...

<strong>Achuthan</strong> <strong>Committee</strong> on Takeover Regulations submits report to SEBIThe Takeover Regulations Advisory <strong>Committee</strong> constituted under the Chairmanship of Shri. C.<strong>Achuthan</strong> submitted its report to SEBI Chairman Shri. C. B. Bhave today.Considering the substantive changes recommended upon review of the existing law governingsubstantial acquisition of shares and takeovers, the <strong>Committee</strong> has comprehensively re-writtenthe regulations. The draft Regulations form an integral part of the report.Some of the main recommendations of the <strong>Committee</strong> are summarized below:Triggers for open offersThe <strong>Committee</strong> has recommended an increase in the acquisition threshold for the initial triggerof an open offer from the current level of 15% to 25% of the voting capital of a listed company.While no change has been recommended in the annual creeping acquisition limit of 5%, the<strong>Committee</strong> has recommended that creeping acquisition be permitted only to acquirers whoalready hold more than 25% of the voting capital, subject to the aggregate post-acquisitionshareholding not exceeding the maximum permissible non-public shareholding.Indirect AcquisitionsThe <strong>Committee</strong> has emphasized clarity in the trigger of an open offer pursuant to an indirectacquisition of shares, voting rights in, or control over a target company. The ability to indirectlyexercise voting rights beyond the trigger threshold limits in, or exercise control over a targetcompany, would attract the obligation to make an open offer, regardless of whether such targetcompany is a predominant part of the business or entity being acquired. The <strong>Committee</strong> hasfurther recommended that if the indirectly-acquired target company is a predominant part of thebusiness or entity being acquired, the same would be treated as a direct acquisition for allpurposes. The <strong>Committee</strong> has also formulated parameters for determination of whether theindirectly-acquired target company is a significant part of the acquisition.Offer SizeThe <strong>Committee</strong> has recommended that an open offer ought to be for all the shares of the targetcompany to ensure equality of opportunity and fair treatment of all shareholders, big and small.The exception to this rule is the size of an open offer where the same is voluntary in nature.The current regulations mandate a minimum offer size of only 20%.Voluntary Open OfferRecognizing the need to enable transparent consolidation by persons already holding in excessof 25%, the <strong>Committee</strong> has recommended voluntary offers of a minimum size of at least 10%and a maximum size of such number of shares as would not result in a breach of the maximumnon-public shareholding permitted under the listing agreement. Under the existing regulations,an offer for a percentage lesser than minimum prescribed percentage can only be byshareholders holding more than 55%.

Option to delistThe <strong>Committee</strong> noted that the 100% open offer requirement could result in an acquirer endingup holding beyond the maximum permissible non-public shareholding, which may require theacquirer to either delist or bring down his holding to meet the continuous listing requirements.The <strong>Committee</strong> has recommended that the acquirer may state upfront his intention to delist ifhis holding in the target company were to cross the delisting threshold pursuant to the openoffer.In the absence of any such disclosure or when the response to the open offer is below thedelisting threshold, the acquirer would be required to either proportionately reduce both hisacquisitions under the agreement that triggered the open offer and the acquisitions under theopen offer or to bring down his holding to comply with continuous listing requirements.This option is currently not provided under the regulations, and will provide a seamlessopportunity to new acquirers for delisting.Exemptions from open offer obligationsExemptions have been made precise, streamlined and provided with clear conditions on thebasis of the specific charging provision from which exemptions would be available. Some of theareas where clarity has been brought in include schemes of arrangement, certain inter setransfers, corporate debt restructuring and rights issues.While SEBI would continue to have the power to grant exemption from making an open offer,the requirement of making a reference to Takeover Panel has now been left to the discretion ofSEBI.Offer priceThe minimum price payable as the offer price continues to be regulated. The minimum offerprice is classified between the price payable for direct acquisitions and indirect acquisitions.The major changes proposed are: (i) market price to be based on 12 weeks volume weightedaverage of market prices as against higher of weekly averages of market prices for 26 weeks or2 weeks; (ii) a qualitative improvement and expansion in the look back provision; (iii) in the caseof indirect acquisitions, ascription of value to the target company under certain circumstances.Mode of paymentThe <strong>Committee</strong> has brought in clarity on valuation in case offer price is being paid throughshares. To ensure that the shares given in consideration for the open offer are indeed liquid andan acceptable replacement for cash, eligibility conditions have been stipulated. The <strong>Committee</strong>also noted that although the current regulations provide for exchange offers, the same has notbeen used for want of clarity on whether such issuance would attract provisions of preferentialallotment and public issue requirements. The <strong>Committee</strong> has recommended that SEBI mayconsider making suitable amendments to ICDR/ other regulations as applicable.

Competing offersThe <strong>Committee</strong> has recommended certain changes such as increasing the period for making acompeting bid, prohibiting acquirers from being represented in the board of target company, andpermitting any competing acquirer to negotiate and acquire the shares tendered to the othercompeting acquirer, at the same price that was offered by him to the public.Execution of the agreement that triggers open offerThe <strong>Committee</strong> has recommended that the execution of the agreement that triggered the openoffer obligation may be completed during the pendency of the open offer provided 100% of theconsideration payable under the open offer is deposited in escrow. Currently, an agreementwhich triggers an open offer can be consummated only after completion of the offer formalities.The <strong>Committee</strong> has further recommended that execution of such agreement would have to becompleted within 26 weeks after the offer period. Currently the regulations are silent on thisaspect.Governance IssuesThe current Regulations restrict the target company from undertaking certain transactionsduring the offer period. The <strong>Committee</strong> thought it fit to bring in materiality concept as also toenhance the scope of such restrictions to include transactions by subsidiaries since potentiallymaterial transactions can be undertaken at the level of any subsidiary of the target companywithout approval of shareholders of the target company.The <strong>Committee</strong> has also decided to mandate recommendation on the open offer, by acommittee of independent directors of the target company. This is currently optional.Activities and Timelines in open offer processTimelines of various activities in the open offer process have been rationalized to compress theopen offer period.The <strong>Committee</strong> has also recommended that a short public announcement should be made bythe acquirer on the date of entering in to an agreement followed by a detailed public statementwithin five business days thereafter.The <strong>Committee</strong> was constituted by SEBI in September 2009 to examine and review theTakeover Regulations of 1997 and suggest suitable amendments as deemed fit. Thecommittee comprises the following members:1. Shri C. <strong>Achuthan</strong>, Former Presiding Officer, Securities Appellate Tribunal – Chairman.2. Shri Kumar Desai, Advocate, High Court, Mumbai3. Shri Somasekhar Sundaresan, Advocate; Partner, J. Sagar Associates.4. Shri Y. M. Deosthalee, Group Chief Financial Officer, Larsen and Toubro Ltd.5. Shri Koushik Chatterjee, Group Chief Financial Officer, Tata Steel Ltd.6. Shri Raj Balakrishnan, Managing Director - M&A, DSP Merrill Lynch Ltd.7. Shri Sourav Mallik, Executive Director - M&A, Kotak Mahindra Capital Company Ltd.

8. Shri A. K. Narayan, President, Tamil Nadu Investors’ Association.9. Prof N. Venkiteswaran, Professor, Indian Institute of Management, Ahmedabad.10. Smt. Usha Narayanan, Executive Director, Corporation Finance Department, SEBI.11. Shri J. Ranganayakulu, Executive Director ( Law) , SEBI, and12. Smt. Neelam Bhardwaj, General Manager, Division of Corporate Restructuring, SEBI –Member SecretaryThe report of the <strong>Committee</strong> is available on SEBI’s website (www.sebi.gov.in). Public commentson the same may be sent to trac@sebi.gov.in by August 31, 2010 in the following format:-Sr. No. Draft Provision /Recommendationof the <strong>Committee</strong>1. Insert reference tothe draft provision /paragraph in the<strong>Committee</strong>’s ReportCommentProvidecomment hereyourRationaleSpecify yourreasons / rationalefor the commentMumbaiJuly 19, 2010