A progressive code of a new era

Written by Rekha Bagry | Mahavir Lunawat | Updated: Sep 30 2011, 08:19am hrs
Within less than 2 months from the date when the Sebi Board considered the Takeover Regulations Advisory Committee (TRAC) report and accepted most of the TRAC recommendations, the final text of the new Takeover Code, i.e. the Sebi (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 have been notified on September 23, 2011. The new Takeover Code would be effective on and from October 22, 2011. This article analyses some of the key changes brought in by the new Takeover Code.

Initial threshold and creeping acquisition limit

TRAC recommended an increase in initial trigger threshold from 15% to 25% considering inter alia the following: (1) As per recent trends, the mean and median of promoter shareholdings in listed companies are at 48.9% and 50.5%, respectively, of total equity; (2) Number of companies declared to be controlled by promoters holding 15% or below is less than 8.4%; (3) The promoter shareholding is between 15% and 25% in only about 6.1% companies listed on BSE.

TRAC concluded that the existing trigger threshold of 15% has outlived its contextual relevance. Moreover, globally, the initial trigger threshold limit ranges between 30%-35%. The Sebi Board accepted the TRAC recommendation and increased the initial threshold to 25%.

As far as the creeping acquisition limit is concerned, the same is retained at 5% every year, but with a higher level of consolidation ceiling to maximum permissible non-public shareholding, i.e. 75% in most cases. To elaborate, under the extant Regulations, an acquirer holding 15% or more but less than 55% of the shares or voting rights in the target company could acquire up to 5% of voting control in a financial year without an open offer. Further, in the case of the acquirer holding 55% or above but less than 75%, a one time increase by 5% through market purchases was permitted till 75%. Under the new Takeover Code, the creeping acquisition up to 5% per financial year is permitted to acquirers holding 25% or more, up to the maximum permissible non-public shareholding limit.

The higher initial threshold would aid increased PE investments and help corporates raise further capital. On the flip side, promoters with low shareholding may face immediate difficulties.

Minimum offer size

On this count, Sebi had a different thought process than that of TRAC. While TRAC recommended increasing the offer size to 100% and providing seamless delisting without being subject to multiple offers, the Sebi Board approved a minimum offer size of 26%.

TRAC did recognise the funding pressure that acquirers would have had in a 100% offer size scenario and suggested that an institutionalised policy framework be put in place for funding acquisitions. But perhaps the time is not ripe for this or, at least, industry is not geared up at present. The Sebi move is in response to the industry view that 100% offer size would make M&A activity dearer and Indian acquirers would find it difficult to compete with their global counterparts. Sebi has gone one step further and provided in the new Takeover Code that in the event acquirer lands up having more shares than the maximum permissible non-public shareholding, he would be required to bring down the non-public shareholding to the permissible level and cannot move a delisting offer for a year from the completion of the open offer period. This may cause continuing hardship to a major shareholder who would be subject to a series of offersopen offer under the new Takeover Code followed by public offer for offloading the excess shares and, finally, reverse book building offer for delisting should he wish to go private.

Non-compete fees

In line with the TRAC recommendation, the new Code does not recognise a separate provision for non-compete fees/control premium. Any such payment made to the seller would form part of the negotiated price. An open offer would need to be made by acquirer at a price not lower than the negotiated price including payment towards non-compete fees/control premium.

Indirect acquisition of a listed Indian target would trigger an open offer, regardless of whether the target is a predominant part of the business or entity being acquired. The new Takeover Code does not contain a whitewash provision in case of change in control of the target company. Under such a provision in the extant Regulations, an open offer was not required if the shareholders of the target company passed a special resolution waiving the open offer in case of change in control. Another change introduced in the new Takeover Code regarding indirect acquisitions is differentiating such acquisitions based on their materiality and, accordingly, making them subject to a specific set of conditions as to offer price, timing etc. Where the target is more than 80% in net asset value or turnover or market capitalisation of the overall acquisition, all such cases would be regarded as direct acquisitions. For other indirect acquisitions, the per share value of the target company would need to be computed and factored in for determining the offer price. Cases of indirect acquisitions wherein target value is more than 15% would be subject to the additional requirement of disclosing a detailed share valuation methodology.

Another major change introduced is the manner in which indirect mergers/acquisitions having listed operations in India would be provided exemptions. It is provided that cases of mergers not involving the target would be exempt only if the cash consideration is less than 25% of the total consideration to be paid pursuant to the arrangement, and the pre-arrangement shareholders continue to hold at least one-third of the voting rights in the combined entity. These conditions, would prevent misuse of exemption, but on the other hand may put some fetters to global transactions spanning across geographies.


TRAC did dwell on governance aspects and suggested that a committee of independent directors of the target company should mandatorily provide reasoned recommendations on open offer to shareholders. Further, the acquirer should not alienate assets of either target company or that of subsidiaries within 2 years unless the intention of doing so is stated upfront in offer document, or shareholders approval is taken by special resolution passed through postal ballot. The new Takeover Code incorporates such provisions to further strengthen governance aspects and protect shareholders interest.

The new Takeover Code is expected to provide impetus to capital markets and industry in general. While there remain certain unresolved issues such as seamless delisting, the Code is expected to smoothen the path for acquisitive entrepreneurs and help businesses grow.

Rekha Bagry is Executive Director & Mahavir Lunawat is Senior Manager, Tax & Regulatory Practice (Mergers & Acquisitions), PwC India