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How To Buy A Public Listed Company

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The board of the acquirer has to approve the acquisition unanimously in a meeting. If the amount to be spent on acquisition is more than the specified limits of its net worth, the acquirer will require prior approval of shareholders and its lenders, he points out. In case of hostile acquisition, acquirer can start the process by appointing a merchant banker to make an open offer on his/her behalf to all the shareholders of the target company. Alternately, if he/she knows of shareholders in the target company who hold sizable chunks of shares in the target company, he/she may enter into negotiations with these shareholders to acquire their shares.

Saraf says, “In such a case, the stage of making an open offer would come after the share purchase agreements have been acted upon or (if they trigger an open offer then) after the share purchase agreements have been signed but before they are acted upon.”

Sometimes a hostile acquisition would be preceded by the acquirer picking up shares of the target company in the open market, he says. Acquiring company would have to reveal its shareholding in the target company as soon as threshold of disclosure is reached.

Takeover of Damania Airways
The takeover is an example of a company failing to deliver because of insufficient funds.
The NEPC group, owned by the Khemkas, after acquiring management control in Damania Airways (was renamed as Skyline NEPC), made an open offer to acquire 20% in the company at Rs19.60 per share in May 1995.
The ruling price of the Damania shares then was Rs 15.50.
SEBI pressure forced Khemkas to revise price of open offer to Rs 35.25.
Open offer was opened on February 1, 1996, and closed on February 29, 1996. Shareholders submitted 64.6 million shares to NEPC. Payment needed for this was Rs 228 million.
NEPC group could not make payments to all the shareholders.
SEBI issued show cause notice to
NEPC for its failure to meet commitments to shareholders who responded to the open offer.
Khemkas and their group companies were barred from accessing the capital market for five years for violating the takeover regulations in August 2001.

Threshold of Disclosure (as described by Takeover Code)

I) Five percent or more shares or voting rights:
An acquirer, along with the PAC, who acquires shares or voting rights taken together with his existing holding,that would entitle him to more than 5% but less than 15% shares or voting rights of a target company, is required to disclose at every stage (stages being at 5%, 10% and14%) the aggregate of his shareholding to the target company and the stock exchanges within two days of acquisition of shares or voting rights, as the case may be

II) More than 15% but less than 75% shares or voting rights: Any acquirer along with PAC holding more than 15% but less than 75% of shares or voting rights in a target company shall disclose to the company upon acquiring a further 5% or 5% of shares or voting rights during any period of 12 months

III) A promoter or every person having control of a company shall within 21 days from the financial year ending March 31, as well as the record date fixed for the purpose of dividend declaration, has to disclose the number as well as percentage of shares or voting rights held by him/her along
with PAC in that company to the target company

IV) The target company, in turn, is required to inform all the stock exchanges, where the shares of target company are listed, every year within 30 days from the financial year ending March 31 as well as the record date fixed for the purpose of dividend declaration

However, under certain circumstances, Takeover Code is triggered by acquirer.

Trigger points for open offer

I) Voting rights or 15% shares:
An acquirer intending to acquire 15% or more shares or voting rights, which includes his existing shareholding, can do so only after making a public announcement to acquire at least additional 20% of the voting capital of target company from the shareholders through an open offer

Exceptions can be made to the above provision in two cases - I) if the acquirer is already holding less than 75% or more of shares or voting rights; and ii) if the acquirer has deposited in the escrow account 50% of the consideration in cash.

II) Creeping acquisition limit of five percent:
An acquirer holding 15% or more but less than 75% of the shares or voting rights of the company can consolidate his holding up to 5% in any period of 12 months. Beyond five percent, in any financial year
ending March 31, acquirer can do so only after a public announcement to acquire at least additional 20 per cent shares of target company from the shareholders through an open offer. However, in cases where only five per cent or less shares or voting rights may be acquired in aggregate, whether the person acquired it individually or together with PAC, public
announcement (PA) is not required to be made. This is called creeping acquisition

In October 2008, SEBI allowed promoters of companies to increase their stake up to 75% through the creeping acquisition route, without triggering an open offer. Earlier, this limit was capped at 55 percent.

III) Consolidation of holding:
An acquirer, having 75% shares or voting rights of a target company, can acquire additional shares through an open offer after making a PA.

An open offer is made by a PA, which is an announcement given in the newspapers by the acquirer, disclosing his/her intention to acquire a minimum of 20% of shareholding from existing shareholders. PA is to ensure the shareholders of the target company are aware of the exit opportunities available to them in case of a takeover. The acquirer is required to appoint a merchant banker registered with SEBI before making a PA.

The most reliable way of effecting an acquisition over a stock exchange is to do the trade through something called a block window.

Saraf says, “This is more reliable than the ordinary trading mechanism of the stock exchanges because the chances of another seller eating into the transaction or of another buyer buying up the shares on sale (a phenomenon that M&A advisors call “leakage”) are lower when a sale is affected over the block window.”

However, SEBI’s rules prescribe that the price at which a trade can be affected on the block window cannot vary from the last traded price of the scrip on the previous day by more than one percent.

"Generally, the price of the stock moves between the launch of the open offer and the day of its closure and sometimes the differences is such that the price at which the shares have to be sold under the share purchase agreement is higher or lower than the ruling price at the conclusion of the open offer by more than one percent," Saraf says.

Companies Act and Securities laws including SEBI Substantial Acquisition of Shares and Takeovers Regulation, 1997, require compliance for acquisition of publicly listed companies.

T M Rustomjee
Senior Director,
Deloitte Touche, India.

Competitive Bid
Once an open offer is made by a company, any other company (or a person along with PAC) can make a counter offer, often called competitive bid. Competitive bids can be made within 21 days of public announcement of the offer made by the acquirer. Once competitive bid is announced, first bidder has the option to either revise the original offer or withdraw it.

Exemptions from public offer
There are, however, certain exceptions made for the public offer under the SEBI regulations. These are not applicable for allotments in pursuance of an application made to a public issue. Public offer is also not applicable for allotments done in pursuance of an application by the shareholder for rights issue, provided such rights issues do not change in control and management of the company. In case acquirer is targeting a sick company, public offer is not mandatory. Preferential allotment, if done with the approval of at least 75% of the shareholders of the company, is also exempted from making public offer.

“Issue of American Depository Receipts and Global Depository Receipts or Foreign Currency Convertible Bonds are also not subject to public offers,” says Anuj Kumar Baksh, professor, corporate law, Indraprastha University. “However, if these are converted into equity shares, public offers would be mandatory.”

Steps after Public Announcement
Within 14 days of the public announcement, acquirer is required to file a draft offer document with SEBI through its merchant banker along with filing fees (at present fee is Rs 50,000/- per offer document). “The filing of the draft offer document is a joint responsibility of both the acquirer and the merchant banker. The merchant banker has to submit a due diligence certificate and certain registration details,” Mohit Saraf says.

The acquirer has to send the offer document and a blank acceptance form within 45 days from the date of PA to all the shareholders whose names appear in the register of the company. The offer remains open for 30 days. The acquirer is obligated to offer a minimum offer price as is required to be paid by him to all those shareholders whose shares are accepted under the offer, within 30 days from the closure of offer.

Safeguards for shareholders
SEBI has introduced certain safeguard measures for shareholders. The acquirer has to compulsorily open an escrow account before making a PA regarding open offer. Escrow account should have 25 per cent of total amount under consideration if the offer of size is up to Rs 100 crore (Additional 10% if offer size is more than Rs 100 crore). The escrow account has to be in the form of cash deposited with a scheduled commercial bank, with bank guarantee in favor of the merchant banker. The merchant banker is obliged to to confirm that the financial arrangements of the firm are in place for fulfilling the offer obligations. If the acquirer fails to make payment, merchant banker has a right to forfeit the escrow account and distribute one-third of the proceeds in proportion to each of the three parties – target company, regional stock exchanges for credit to investor protection fund, and to the shareholders who have accepted the offer. In addition to this, SEBI may initiate action against the acquirer. This may include barring the acquirer from entering the capital market for a specific period. For instance, NEPC promoters were barred from entering stock market for five years after they failed to buy shares of Damania Airways from shareholders in open offer.

Need for revamp
With the probability of acquisition of Satyam and other companies being high, questions are being asked about the effectiveness of the Takeover Code. Questions are also being raised about it in terms of acquisitions abroad, and foreign companies acquiring publicly listed companies in India. Saraf points out that SEBI’s takeover regulations are not as evolved as the UK’s City Takeover Code. He says UK’s City Takeover Code is more detailed and precise in its prescriptions than SEBI’s takeover regulations.

“The SEBI’s takeover regulations do not cover a host of factual situations which can arise in their implementation. This means that SEBI officials have a wide margin of discretion in applying the regulations,” he says.

There are other glaring loopholes. For instance, time required to complete the takeover process is often quite longer than prescribed in SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. Rustomjee says some four to five months are consumed to complete the process even after open offer is made. The law is also ambiguous on terms like ‘change in control’, ‘persons acting in concert’ and ‘promoters’; and M&A history in India proves how this has been misused many times. What rubs to salt is that enough time is taken for punitive actions as well, rendering the whole process a mockery. NEPC promoters, Khemkas, for instance, were punished five years after they failed to obey their open offers in case of the takeover of Damania Airways. By the time punishment was announced, promoters had folded their business, effectively making punishment useless.

There is no mechanism to prevent misuse of exemptions such as preferential offers and stake transfer, which are often extended to co-promoters. Takeover Code lacks provisions for simple and transparent regulations on how the changes in ownership stake at the global level, affect the application of the Code, leading to a high degree of confusion. Issue of disinvestment of public sector units is also inadequately addressed in the Code. There are suggestions that SEBI should provide for better disclosure norms governing corporate M&A activities. Role of financial institutions in cases of a takeover also need to be defined. The provisions for bailout takeovers, many say, should not limit competition and must bring maximum benefits to sick companies thereby benefiting the economy.

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