Sunday, 24 October 2010

Take Over Code: Present & Future

Take Over code. The term you often come across on any financial daily/business channel/ or so to say any kind of business matters.

For many, this is a financial jargon. But in actuality it is one of the commanders of any business venture.

Why this is so important in any business?

This is such a provision which can make or break a business. It gives the individuals a level playing field, how much small he is. The motto is to provide ‘The Philosophy of Equitable and fair treatment of all shareholders should have a primacy over other considerations.’

Take Over is often considered as a growth strategy. It helps the acquirer to branch out its business; exception to this practice is very little.

Before going into details, let’s see what are the differences between the Take Over and the Merger.



It is governed by India’s Companies’ Act 1956 u/s 391-394 under the broader definition of ‘arrangement’

Governed by SEBI’s ‘Substantial Acquisition of Shares and Take Overs’ Regulation popularly known as the Take Over Code

Mutual in nature, the shareholding pattern is split between the Merging and the Merged Companies

Share Holding/Voting Rights lie with the acquirers. Not always mutual in nature. Number of Hostile Take Over takes place

After the merger, control of the company is decided based on what is agreed upon in MoA and AoA

Direct or indirect control over the assets of the acquired company goes to the acquirer

Both the Companies can maintain its own position

One of the companies (mostly the bigger one) plays the dominant role

It protects the interests of investors in shares and deals with the substantial acquisition of shares in a company by an acquirer

What is meant by Takeovers & Substantial acquisition of shares?

SEBI has defined the Take Over as follows:-“When an acquirer takes over the control of the target company, it is termed as takeover. When an acquirer acquires substantial quantity of shares or voting rights of the Target Company, it results into substantial acquisition of shares.

What is a Target Company?

A Target Company is a company whose shares are listed on any stock exchange and whose shares or voting rights are acquired/being acquired or whose control is taken over/being taken over by an acquirer

Who is an Acquirer?

An acquirer means any individual/company/any other legal entity which intends to acquire or acquires substantial quantity of shares or voting rights of Target Company directly or indirectly or acquires or agrees to acquire control over the target company. It includes persons acting in concert (PAC) with the acquirer. Control includes:-

· Right to appoint majority of directors

· Control of management

· Control of policy decisions


The Take Over is of three kinds:-

· Horizontal: When both the companies are in the same business like Bharti Airtel with MTN

· Vertical: When the acquirer and the target company is actually the customer to each other like ACC & Hindustan Limestones

· Conglomerate: When the companies are into different type of businesses like Tata Motors buying out Biocon

The most important part of Take Over Code is Disclosure Norms and Open Offer

It is specified by SEBI that once an acquirer crosses a certain threshold limit of holding shares/voting rights he has to make a declaration for further acquisition of shares. This is known as Disclosure Norms. Regulations 6, 7 & 8 of Take Over Code deal with this.

Open Offer is more important, though the philosophy is same. Once the acquirer crosses a certain percentage of shares/voting rights he has to notify the concerned authority. Regulations 10, 11 and 12 deal with Open Offer norms

In the current scenario, Disclosure Norm is applicable if any acquirer holds more than 5%, 10%, 14%, 54% and 74% of the shares of the target Company by purchasing the shares. The person has to notify the concerned authority within two days of buying additional shares.

At the end of the each financial year, the person with more than 15% shares has to make declaration to concerned authority. This is called Continual Disclosure.

As the Achuthan Committee Recommendations are yet to come into force, as of now Open Offer is triggered when a person is holding more than 15% of shares/voting rights in a Company. As a consequence, the acquirer will have to make an open offer by way of public announcement to buy at least 20% shares of the said company from the general public.

If the acquirer holds more than 15% and less than 55% of the shares in a company, he cannot acquire more than 5% in a single financial year. If he wants to acquire more than 5%, he will have to give Open Offer of atleast 20%.

The permission is given to an individual to gradually increase his share holding in the company, this falls under the category of creeping acquisition and the capping for the same is 5% in each financial year.

Once the Achuthan Committee Recommendations come into force, there will be substantial change in the arena of Take Over.

The Achuthan Committee recommendations are as follows:-

Public offer triggered at 25% (Existing 15%)

Obligations on any acquirer to buyout all minority shareholders instead of existing 20%

Introduction of ‘Ability to control’ concept

Doing away with Non-Compete fees

Improving the definition of ‘Indirect Control’

A committee of independent directors of the target company will evaluate open offer

Let’s examine what could be the changes:-



Threshold level for mandatory open offer raised to 25%

Promoters with low holdings may be forced to raise stakes to pre-empt hostile takeovers

Open Offer increased to 100%

Both Strategic & Portfolio investors will be able to hold larger stake

Voluntary Open Offer size flexible

Allows promoters/investors with <25%>

Acquirer can’t acquire shares in the target company for 26 weeks following completion of Open Offer

Will prevent acquirers from under-pricing offers & later buying shares from secondary market

Acquirer to accept shares in Open Offer proportionately, if response exceeds maximum permissible limit of 75% for promoter shareholding but fall short of delisting threshold of 90%

Could be a dampener as investors can’t be certain of complete acceptance of their shares in Open Offer

Proposal for equal tax treatment on gains due to sale of shares through open offer as well as on those sold in open market

If tax liability is lower, that will encourage more people to tender shares in Open Offer

If acquirers acquire more than 90% of the open offer, the Company will be automatically delisted

Delisting becomes easier, move favours companies and investors such as private equity players who want to wholly own the target

Offer price may be paid in cash, securities such as shares, security, debt etc

Acquirers get more options

[Courtesy: The chart is compiled from The Economic Times and The Mint]

Though there is a little possibility of bringing into force the 100% Open Offer as it may force to redraw the corporate restructuring scene. Sandeep Parekh, former ED-Legal, Sebi, said, “The 100 per cent open offer norm will make takeovers expensive and hence there will be fewer M&As, as most promoters will avoid crossing the 25 per cent threshold.” As some report say, probably the Open Offer will be scaled down to 75%.

India is undergoing a sea change in the arena of Corporate restructuring by means of M&A and Take Over. FII flows as on current date is like never before. Achuthan Committee recommendations are at par with the global scenario, once it comes into practice India will be more mature and can strike a deal with any global player at ease.

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