There was a constant buzz in favour of the transfer of shares from Ranbaxy Laboratories Limited (Ranbaxy) to Daiichi Sankyo Company Limited (Daiichi) on the stock exchange. The key questions are: why is the transfer on the stock exchange important to Ranbaxy or to any other firm in a similar situation, and what is the practical feasibility of the same? The answer to the first question is simple: there is a saving since gains arising on transfer of long term capital assets are not subject to capital gain tax. But if the equity shares are held by a body corporate, liability on account of MAT may still be attracted. As for the feasibility of the transfer, it needs more deliberation.
A transaction involving takeover of a company is concluded after detailed negotiations between the parties. The price arrived is based on what the acquirer perceives to be the appropriate price for acquiring the shares and consequent control over the company. This price may vary from the prevailing market price at the time of deal closure. Regulation 22(16) of the SEBI Takeover Code states that if the acquirer, pursuant to an agreement , acquires shares beyond 15%, then such agreement shall contain a clause that in case of non-compliance of any provisions of the SEBI Takeover Code, the agreement for such sale shall not be acted upon by the acquirer or the seller. Hence, the acquirer has to wait till completion of open offer process before he can acquire the shares.
A successful open offer generally takes 3-4 months to be completed. In the interim, there is a possibility that the market price of the shares of the target company varies from the negotiated price. Therefore, is it practically possible to transfer promoter?s shares on the stock exchange?
A classic example of transfer of promoter?s shares on the stock exchange was the acquisition of shares of Asian CERC Information Limited (ACERC) in August 2006. The acquirer acquired the promoter held shares of ACERC on a recognised stock exchange. The shares were kept in an escrow account with the depository participant while the consideration for the said acquisition was deposited in a designated bank account.
In case of the open offer being unsuccessful, the escrow agent was to reverse the transaction by selling the shares of ACERC. In case of there being a difference between the market price at the date of reversal of the transaction and date of transfer of the shares in the depository account by the promoter entities of ACERC, the respective party was to be compensated by the other.
How is such a huge quantum of shares transacted on the stock exchange? The routes available are transfer of shares through a ?block deal?. A trade with a minimum quantity of 5,00,000 shares or minimum value of Rs 5 crores executed through a single transaction on a separate trading window during a specified time of the stock exchange will constitute a ?block deal? or ?bulk deal?. The orders executed on this window can be at a price difference of +1% from the previous day?s closing price and the acquirer and seller are identified persons. SEBI has made it mandatory for the stock exchange to disclose details of all transactions in a scrip where total quantity of shares transacted is more than 0.5% of the number of equity share of the company listed on the stock exchange.
In case of stocks traded in the future and options segment, there is no restriction on intra day price fluctuation and therefore, irrespective of the difference between the negotiated price and the market price, the shares can be transacted on the stock exchange under the bulk deal route. There is however, no identity between the acquirer and seller.
Hence, in case the prevailing market price is the same as the negotiated price or in a range of +1% from the previous day?s closing price, it is possible to acquire the requisite number of shares on the floor of the stock exchange and by following the escrow mechanism.
The author is senior manager, PwC. The article is co-authored Malti Gidwani, manager, PwC