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Saumil Shah 17 October 2012 Exemptions Under Takeover Regulations ASSOCHAM India National Conference on Merger & Acquisition Takeover Regime in India –

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Presentation on theme: "Saumil Shah 17 October 2012 Exemptions Under Takeover Regulations ASSOCHAM India National Conference on Merger & Acquisition Takeover Regime in India –"— Presentation transcript:

1 Saumil Shah 17 October 2012 Exemptions Under Takeover Regulations ASSOCHAM India National Conference on Merger & Acquisition Takeover Regime in India – Issues & Challenges

2 © (2011) KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 1 Triggers for mandatory open offer 0%25%75% Trigger Creeping acquisition of 5% in FY or voluntary offer 100% Open offer is triggered, even though individual shareholding changes, although total shareholding along with PAC remains unchanged Regulation 3(3) In case of direct or indirect acquisition of control, open offer would trigger- shares or voting rights may or may not be acquired Regulation 4 Triggering of open offer on indirect acquisition Regulation 5

3 Regulation 10(1)(a) – Inter Se Transfer (1/3) 2/7/20142 Amongst Relatives Spouse, child, parent, brother, sister, or of spouse Scope restricted as compared to relatives as defined under Companies Act under Old Code Amongst Immediate Relatives Relations not covered – Members of HUF, daughter / son in law, grand parents, grand children & their spouses and spouses of siblings

4 3 Regulation 10(1)(a) – Inter Se Transfer (2/3) Takeover Regulations 2011 Earlier Takeover Code Promoters (Interse), PACs(Interse), PACs & Company in which PACs hold shares proportionately without any differential voting rights Disclosed > 3 years as such in shareholding pattern filed under listing agreement / these regulations Holding > 3 years – Promoters Status > 3 years – PAC Format for disclosures of person acting in concert – notified Qualifying promoters, promoters and foreign collaborators Provided that transferor(s) and transferee(s) holding shares in target company for at least 3 years Acquirer and person acting in concert within 3 years of closure of open offer

5 2/7/2014GO HEADER & FOOTER TO EDIT THIS TEXT4 Co. A Co. B (Unlisted) Co. B (Unlisted) Target Co. 100% 50% Co. D Promoter Group Co. A, Co. B and Co. D are part of promoter group of Target Co for 3 years. B is an unlisted Hold Co. of Target Co. Co. A transfer 48% holding in Co. B to Co. D 1% 48% Would transfer of 48% shares in Co. B from Co A to Co D trigger open offer? Illustration– Inter-se Promoter 1% No Yes, but exempt Would transfer of entire 100% shareholding in Co B from Co A to Co D trigger open offer?

6 2/7/2014GO HEADER & FOOTER TO EDIT THIS TEXT5 Co. A Co. B (Unlisted) Co. B (Unlisted) Target Co. 100% 30% Co. D B is an unlisted promoter company holding of 30% of Target Co. Co. A holds 100% in Co. B Co D also a promoter company for 3 years holds 1% stake in Target Co Co D infuses capital in Co B and acquires 80% in Co. B 1% 80% Would infusion in Co. B by Co D trigger open offer? Illustration– Inter-se Promoter 1% Dilution in Company B not covered under specific exemption Yes

7 2/7/2014GO HEADER & FOOTER TO EDIT THIS TEXT6 Promoter A Target Co. 51% Promoter B Promoter A holds 51% and Promoter B holds 1% in Target Co. Promoter A and B are holding shares in Target Co for more than 3 years Promoter A makes inter-se transfer of 5% shares of Target Co to Promoter B Promoter B makes additional acquisition of 5% stake in Target Co 1% Would additional 5% acquisition by Promoter B be exempt under creeping acquisition or trigger open offer? Illustration– Inter-se Promoter transfer Yes, it would trigger open offer NoIf additional acquisition by Promoter B precedes inter-se transfer, would it trigger Open offer ?

8 Regulation 10(1)(a) – Inter Se Transfer (3/3) 2/7/20147 Person Holding Company Transferor Company Subsidiaries Target Subsidiaries Other companies Subsidiaries >=50% Inter se transfer amongst above entities exempt – subject to common control Other holding vehicles not directly covered – LLP, Partnership Firms, HUF, Trusts, etc. Earlier concept of group under MRTP Act done away with

9 2/7/2014GO HEADER & FOOTER TO EDIT THIS TEXT8 Transfer of Target Co shares from Co A to Individual X Person/s holding shares in Holding Co – whether covered under exemption? Illustration Target Co. Co A Holding Co Subsidiaries 30% >50% Other subsidiaries Individual X 70% Transaction to be done in two tranches Co A to Holding Co Holding Co to Individual X

10 2/7/2014GO HEADER & FOOTER TO EDIT THIS TEXT9 Individuals (A, B, C) hold 51% shares in Co A (say 40: 20 : 40) Same persons hold 51% shares in Co B in different proportions (10 : 10 : 80) Control of Co B with same persons Illustration Target Co Co A A 30% BC 51% Co X >50% Co B 51% Whether transfer of Target Co shares from Co A to Co X covered under exemption?Yes

11 10 Case Study Dr. Reddys Holding Ltd (DRHL) Dr Reddy (Listed Target) 23.08% SEBI granted exemption since no change of control or management though no specific exemption APS Trust Proposal to transfer 83.17% in DRHL to Trust by way of gift Reddy Family 83.17% Other Promoters 2.53%

12 11 Inter-se exemptions – Conditions Inter-se exemptions subject to following conditions If shares of target company are frequently traded Acquisition price 125% of volume-weighted average market price for 60 trading days before the issue of notice for proposed inter-se transfers If shares of target company are infrequently traded Acquisition price 125% price determined under Reg 8(2)(e) Transferor and transferee should have complied with all disclosure requirements under Takeover Regulations, 2011

13 Regulation 10(1)(b) – Acquisition in Ordinary Course of Business 2/7/ Acquisition in Ordinary Course Registered Underwriter Registered Stock Broker on behalf of his client Registered Merchant Banker – Market making or subscription Person acquiring pursuant to a scheme of safety net Registered Merchant Banker – acting as a stabilising agent Registered market maker of stock exchange Scheduled commercial bank – acting as escrow agent Invocation of pledge by Scheduled Commercial bank or FI

14 2/7/2014GO HEADER & FOOTER TO EDIT THIS TEXT13 IDBI Trusteeship Scheduled Commercial Bank Target Co. IDBI Trusteeship acted as Trustees for Banks and FI IDBI Trusteeship held pledge of shares as security for loans sanctioned by Banks & FI Would invocation of pledge by IDBI Trusteeship be exempt? Case Study– Acquisition in Ordinary Course of Business Pledge of shares Disbursement of loan No, since no express provision providing exemption to Debenture Trustees act as custodians

15 Regulation 10(1)(c) – Further Acquisitions 2/7/ Amongst Relatives Subsequent acquisition to be contemplated under original agreement Subsequent acquisition by an acquirer who has made an open offer Full disclosure made in public announcement and letter of offer Acquirer & Seller to be same at all stages

16 Regulation 10(1)(d) – Acquisitions pursuant to scheme of merger, demerger or restructuring 2/7/ Scheme Merger / Demerger Involving Target Not involving Target - Cash consideration less than 25% of total consideration – - post-scheme, at least 33% of voting rights in combined entity to be held by same persons who held it earlier SICA Blanket exemption for all schemes without any conditions under Old Takeover Code

17 2/7/2014GO HEADER & FOOTER TO EDIT THIS TEXT16 Merger of Co A into Co B Post merger X can hold 33% or more shares in merged Co Illustration Target Co. Co A X Co B 70% Y Merger Before merger Y acquires 1% shares in Co A Post merger X is allotted 15% shares in Co B – would it be exempt or attract open offer? 33% Target Co. Co A Co X Co B 75% Co Y Merger CO A is a loss making company and holds 75% shares of Target Co Co B is profit making company owned by another Group Co It is proposed to reverse merge Co B into Co A – based on fair valuation CO Y needs to be issued 75% shares in Co A Would it be exempt or attract open offer? 100% Exempt Attract

18 2/7/2014GO HEADER & FOOTER TO EDIT THIS TEXT17 Merger of Co A into List Co 1 Based on fair valuation Group X is allotted 26% shares in List Co Whether Group X needs to make an open offer for acquisition in List Co 1? Whether List Co 1 required to make an open offer for acquiring shares of List Co 2? Illustrations List Co 1 Group Y Co A Group X List Co 2 70% Merger Target Co. Co B Group Y Co A 50% Group X What if a division of Co A is demerged into Co B resulting in transfer of List Co shares ? No Exempt, if the shareholding of Group X in Co B is >= 33% Yes

19 Regulation 10(1) (e) to (h) – Other Acquisitions 2/7/ Acquisition pursuant to provisions of SARFAESI Act, exempt Acquisition pursuant to delisting of shares - exempt Acquisition by way of transmission, succession or inheritance - exempt Acquisition of voting rights or preference shares carrying voting rights - exempt

20 Other Exemptions 2/7/ Regulation 10(2) Acquisition pursuant to corporate debt restructuring – exempted from obligation to make an open offer under regulation 3 Regulation 10(3) Increase in voting rights pursuant to buy back of shares – exempted, provided the voting rights falls below threshold of 25% within 90 days (No specific provision under old takeover code)

21 Regulation 10(4) – Buyback of shares 2/7/ Amongst Relatives If results in crossing 25% limit – exempt if shareholder reduces holding within 90 days [Reg 10(3)] Increase in voting rights pursuant to buy back of shares* Otherwise exempt – subject to conditions [Reg 10(4)(c)] - Acquirer should not have voted in favour of buyback as director or shareholder - Voting by postal ballot - Not to result in change in control In case of non compliance, shareholding to be reduced below the level at which open offer triggered *No specific provision under old Takeover Code 0%25%75% Trigger on buyback No trigger subject to conditions; to be diluted below level at which open offer triggers in case of violation 100% No trigger if does not cross 25% No trigger if diluted within 90 days

22 Regulation 10(4) – Acquisition pursuant to Right Issue 2/7/2014GO HEADER & FOOTER TO EDIT THIS TEXT21 Under Old Takeover Code, Exempt if upto entitlement of shareholder and up to creeping limit - Should not result in change in control 0%25%75% Trigger on rights issue Exempt upto entitlement and in case of beyond entitlement subject to conditions 100% No trigger if does not cross 25% Acquisition of shares beyond entitlement pursuant to a rights issue exempt from Reg 3(2) subject to following: - Acquirer has not renounced his entitlement - Right issue price is within prescribed limits If Acquirer cross 25% pursuant to the rights issue, whether exemption applies? No exemption from regulation 3(1)

23 2/7/ Public Shareholders Target Co. Co. A Co. A (promoter) holds 60% in Target Co. Co. A acquires 5% shareholding by way of creeping acquisition Subsequently, Target Co. undertakes buyback of shares from outside shareholders. Pursuant to buyback, Co. A acquires additional voting rights of 6% in Target Co. Conditions under 10(4)(c) complied with Whether Co. A would be required to make an open offer? Illustrations 60%40% Other Public Shareholders Target Co. Co. A 55% 16% Co. X 29% Co. A (promoter) holds 55% in Target Co. Co. X non promoter and non PAC holds 29% in Target Co A acquires 5% shareholding by way of creeping acquisition from Co X Subsequently, Target Co. undertakes buyback of shares where other public shareholders tender 5% shares in Target Co; Conditions complied Whether CO X would be required to make an open offer? NoYes, but may dilute back to 24% within 90 days

24 Regulations 10(4) – Other Exemptions 2/7/2014GO HEADER & FOOTER TO EDIT THIS TEXT23 Acquisition of shares in target company in exchange for shares of another target company pursuant to open offer 10(4)(d) Acquisition of shares by promoters from state-level financials institutions or by companies promoted by them pursuant to an agreement between them 10(4)(e) Acquisition of shares from registered VCF or foreign venture capital investor 10(4)(f)

25 2/7/ Exemptions by the Board

26 Regulation 11 – Exemption by Board 2/7/ If Government or regulatory authorities have superceded the board of directors of target company and the new directors decide on a plan to protect the interest of all the stake holders and fulfilling other conditions (2) Acquirer (1) or the target company(2) shall file application with the Board alongwith all other relevant documents and fees Subject to conditions as it deems fit in the interest of investors (1)

27 Thank you 2/7/201426


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