After promising changes in early August, the Securities and Exchange Board of India (SEBI) has notified a set of new takeover rules that will come into effect on October 23, 2011. Like the old rules, the new rules cover two types of securities transactions: those triggering requirements to make an open offer to purchase shares from the public, and those triggering disclosures to stock exchanges.
Open Offers
Key open offer provisions in the new rules relate to triggers and exemptions, open offer size, price and payment terms, and the open offer process generally. These provisions are summarized below.
Open Offer Triggers: As SEBI promised in August, the new rules have increased the threshold triggering a mandatory open offer. Now a party will be required to make an open offer only if it acquires 25% of a target company's voting rights (up from the earlier 15% level). In addition, if a party already holds at least 25% of the target's voting rights, a mandatory open offer will be triggered if that party acquires (on a gross basis) more than 5% of the target's voting rights in any financial year (April—March).
Open Offer Exemptions: As was the case under the earlier rules, acquisitions resulting from certain types of transactions are exempt from the open offer requirements (e.g., transfers to relatives, the acquisition of shares by invoking a pledge made to a scheduled commercial bank or public financial institution, or under a scheme or arrangement pursuant to a court order). However, the specific exemptions have been modified in the new rules. For instance, the conditions that applied to some of the earlier exemptions have been varied (e.g., by adding prior notification requirements) and in some cases new exemptions have been added (e.g., covering certain types of buy-back related increases in shareholding). Also, as was the case under the earlier rules, SEBI has retained the authority to exempt application of the open offer requirements in particular cases (for reasons to be recorded in writing).
Open Offer Size: Under the new rules, the minimum size of a mandatory open offer is 26% of the target's voting rights. This said, if a party already holds at least 25% of the target's voting rights, that party can make a "voluntary" open offer for just 10% (or more) of the target's voting rights, provided certain additional conditions are met. These additional conditions relate to the party's acquisition of the target company's stock in the preceding 52 weeks, and vary according to the circumstances in which the "voluntary" open offer is made (e.g., if competitive offers are being made). If a conditional open offer is made, and the minimum level of acceptance set out in the conditional offer is not achieved, any agreement triggering the open offer requirement has to also be rescinded.
Price and Payment Terms: The new rules contain extensive provisions that specify the basis on which the minimum offer price for such open offers has to be computed. This basis varies depending on the type of acquisition being undertaken. The offer price can be paid in cash or in specified securities of the acquirer or in a combination of these various forms. However, certain additional conditions have to be met for the non-cash payments to be made. Also, all shareholders have to be given the same exit price and any amounts paid as a control premium or non-compete fees have to be considered when computing the minimum offer price.
Open Offer Process: An independent merchant banker has to manage the open offer process and the process requires the acquirer to open an escrow account to secure performance of its open offer obligations. The new rules also contain detailed provisions with regard to the timing of the open offer and the information that has to be provided with the open offer. Two key changes connected with the open offer process are that: (i) competing open offers have to be made within 15 working days of the detailed public announcement made by the acquirer making the first open offer, and (ii) a committee of independent directors of the target company has to provide reasoned recommendations on each open offer.
Disclosures to Stock Exchanges
The new rules modify the earlier public disclosure requirements to a limited extent.
For example, while the acquisition of 5% or more of a target company continues to trigger a disclosure requirement, new disclosure requirements now apply to the acquisition or disposal of 2% or more of a listed company by any party that already holds 5% or more of that company. (Creating a pledge or similar encumbrance over any shares would amount to an acquisition or disposal for purposes of these public disclosure requirements.) In addition, the annual disclosure requirements now only apply to holdings of 25% or more of a listed company (as opposed to the earlier 15% threshold).
Similarly, if a promoter creates a pledge or similar encumbrance over any shares held by the promoter, the promoter has to make a public disclosure of such encumbrance within 7 working days. This disclosure must be made not just to the company (as was previously the case) but also to the concerned stock exchanges. (Under the earlier rules, it was the company that was required to notify the stock exchange about pledges on promoter holdings.)