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

1. Triggers for mandatory open offer0%
25%
75%
Trigger
Creeping acquisition of 5% in FY or voluntary offer
100%
Regulation 3(3)
Open offer is triggered, even though individual shareholding changes, although total shareholding along with PAC remains unchanged
Regulation 4
In case of direct or indirect acquisition of control, open offer would trigger- shares or voting rights may or may not be acquired
Regulation 5
Triggering of open offer on indirect acquisition

2. Regulation 10(1)(a) – Inter Se Transfer (1/3)
Amongst Relatives
Amongst Immediate Relatives
Spouse, child, parent, brother, sister, or of spouse
Scope restricted as compared to relatives as defined under Companies Act under Old Code
Relations not covered – Members of HUF, daughter / son in law , grand parents, grand children & their spouses and spouses of siblings
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3. Regulation 10(1)(a) – Inter Se Transfer (2/3)
Takeover Regulations 2011
Earlier Takeover Code
Regulation 10(1)(a) – Inter Se Transfer (2/3)
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

4. Illustration– Inter-se Promoter
Promoter Group
Co. A
Co. D
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
100%
Co. B
(Unlisted)
48%
50% 1% 1%
Target Co.
Would transfer of 48% shares in Co. B from Co A to Co D trigger open offer? No
Would transfer of entire 100% shareholding in Co B from Co A to Co D trigger open offer?
Yes, but exempt
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5. Illustration– Inter-se Promoter
Co. A
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
100%
Co. B
(Unlisted)
80%
30% 1% 1%
Target Co.
Would infusion in Co. B by Co D trigger open offer?
Yes
Dilution in Company B not covered under specific exemption
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6. Illustration– Inter-se Promoter transfer
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
Promoter A
Promoter B
51% 1%
Target Co.
Would additional 5% acquisition by Promoter B be exempt under creeping acquisition or trigger open offer?
Yes, it would trigger open offer
If additional acquisition by Promoter B precedes inter-se transfer, would it trigger Open offer ? No
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7. Regulation 10(1)(a) – Inter Se Transfer (3/3)
Person
>=50%
>=50%
Holding Company
Other companies
Transferor Company
Subsidiaries
Subsidiaries
Subsidiaries
Target
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
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8. Illustration Individual X
Transfer of Target Co shares from Co A to Individual X
Person/s holding shares in Holding Co – whether covered under exemption?
70%
Holding Co
>50%
Other subsidiaries
Co A
30%
Subsidiaries
Transaction to be done in two tranches
Co A to Holding Co
Holding Co to Individual X
Target Co.
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9. Illustration
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 A B C
51%
51%
Co A
Co B
30%
>50%
Target Co
Co X
Whether transfer of Target Co shares from Co A to Co X covered under exemption?
Yes
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10. Dr. Reddy’s Holding Ltd (DRHL) Dr Reddy (Listed Target)
Case Study
Reddy Family
83.17%
Other Promoters
Dr. Reddy’s Holding Ltd (DRHL)
APS Trust
Proposal to transfer 83.17% in DRHL to Trust by way of gift
23.08%
2.53%
Dr Reddy (Listed Target)
SEBI granted exemption since no change of control or management though no specific exemption

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

12. Regulation 10(1)(b) – Acquisition in Ordinary Course of Business
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
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13. Case Study– Acquisition in Ordinary Course of Business
IDBI Trusteeship
IDBI Trusteeship acted as Trustees for Banks and FI
IDBI Trusteeship held pledge of shares as security for loans sanctioned by Banks & FI
Pledge of shares
Scheduled Commercial Bank
Disbursement of loan
Target Co.
Would invocation of pledge by IDBI Trusteeship be exempt?
No, since no express provision providing exemption to Debenture Trustees act as custodians
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14. Regulation 10(1)(c) – Further Acquisitions
Amongst Relatives
Subsequent acquisition by an acquirer who has made an open offer
Subsequent acquisition to be contemplated under original agreement
Acquirer & Seller to be same at all stages
Full disclosure made in public announcement and letter of offer
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15. Regulation 10(1)(d) – Acquisitions pursuant to scheme of merger, demerger or restructuring
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
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16. Illustration Merger of Co A into Co B
Post merger X can hold 33% or more shares in merged Co X Y
33%
100%
100%
Co A
Co B
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?
Merger
70%
Target Co.
Exempt
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?
Co X
Co Y
Co A
Co B
Merger
75%
Attract
Target Co.
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17. Illustrations Group X Group Y Group X Group Y Merger Co A List Co 1
Co B
50%
70%
Target Co.
List Co 2
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?
What if a division of Co A is demerged into Co B resulting in transfer of List Co shares ?
Exempt, if the shareholding of Group X in Co B is >= 33% No
Yes
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18. Regulation 10(1) (e) to (h) – Other Acquisitions
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
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19. Other Exemptions 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)
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20. Regulation 10(4) – Buyback of shares
Increase in voting rights pursuant to buy back of shares*
Amongst Relatives
If results in crossing 25% limit – exempt if shareholder reduces holding within 90 days [Reg 10(3)]
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 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
*No specific provision under old Takeover Code
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21. Regulation 10(4) – Acquisition pursuant to Right Issue0%
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
Under Old Takeover Code, Exempt if upto entitlement of shareholder and up to creeping limit - Should not result in change in control
If Acquirer cross 25% pursuant to the rights issue, whether exemption applies?
No exemption from regulation 3(1)
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22. Other Public Shareholders
Illustrations
Public Shareholders
Other Public Shareholders
Co. A
Co. X
Co. A
16%
55%
40%
60%
29%
Target Co.
Target Co.
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
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. A would be required to make an open offer?
Whether CO X would be required to make an open offer? No
Yes, but may dilute back to 24% within 90 days
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23. Regulations 10(4) – Other Exemptions
10(4)(d)
Acquisition of shares in target company in exchange for shares of another target company pursuant to open offer
10(4)(e)
Acquisition of shares by promoters from state-level financials institutions or by companies promoted by them pursuant to an agreement between them
10(4)(f)
Acquisition of shares from registered VCF or foreign venture capital investor
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24. Exemptions by the Board
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25. Regulation 11 – Exemption by Board
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)
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26. Thank you
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