The process of revisiting the prevailing takeover code started two years back with SEBI constituting a Takeover Regulations Advisory Committee under the Chairmanship of Late C. Achuthan (TRAC Committee). After months of deliberations and detailed evaluations, SEBI has finalised the Takeover Regulations 2011. The new regulations will be effective from October 22, 2011, which is the 30th day from the date it is notified in the official gazette, i.e., September 23, 2011.
As expressed by various industry players in the last couple of months, the new SEBI takeover regulations (new regulation) adopts a calibrated approach to take care of considerations of all the stakeholders: Public – through bringing uniformity in the pricing by removal of non-compete payment; Acquirer – through keeping the offer size to 26% as against 100% of the capital and Target companies – through increasing the minimum threshold for trigger of open offer from 15% to 25%, facilitating raising capital finance in robust manner. While most of the other recommendations of the TRAC Committee have been accepted, the suggestion to include the ‘ability’ aspect in the definition of ‘control’ is not considered to be retained. The new regulation retains the old definition of ‘control.’
As expected, SEBI has taken care of some of the inadvertent anomalies/drafting errors in the draft regulations submitted by the TRAC Committee viz. introduction of exemption for acquisition of bonus shares for disentitlement to voluntary open offer, rationalisation of merger exemption by providing comparison of shareholding between shareholding of combined entity (instead of target entity) and shareholding prior to implementation of the scheme of arrangement.
The new regulation also provides for grandfathering clause in relation to transaction in the transition period. The new regulation clarifies that all the transactions for which public announcement is already made under existing regulation shall be continued to be governed by that regulation, i.e., without considering the new regulation.
It was expected by industry players that similar grandfathering could also have been made in case of listed entities where promoter shareholding is less than 25%. This is in the context of increase in minimum threshold limit for triggering open offer from 15% to 25%. As the TRAC Committee report indicates, there are as many as 120 listed companies where promoter shareholding is between 15%-20% and equal number of companies with promoter shareholding between 20%-25%. Once the new regulation comes into effect from October 22, 2011, promoters of such companies may not be in position to do creeping acquisition of 5% beyond 25%, as it shall trigger open offer for additional acquisition of 26% stake.
While the companies where promoter shareholding is above 20%, there is still a time period of around four weeks to raise their shareholding up to 25% using the creeping limit under the existing regulation. But it would not be possible in cases where promoter holding is below 20%. In view of this, it would not be surprising if the market observes many promoters using the creeping limits to cross the magic number of 25% shareholding, which should bring some life into the stock market.
In its report, the TRAC Committee has raised an important point for debate about automatic delisting of company in the open offer process. While in the resolution passed in July 2011, SEBI has not retained the automatic delisting proposed in the draft regulations on the reasoning that such requirement is not warranted once the offer size is reduced from 100% to 26%, as one reads the fine print of the new regulation, it is noticed that apart from removing the possibility of automatic delisting, the provisions actually make it impossible to launch a delisting offer under SEBI Delisting Regulations where the promoter shareholding is beyond the maximum permissible non-public shareholding, as prescribed under Securities Contracts (Regulation) Act, 1956 (SCRA) for a period of 12 months.
Interestingly, while removing the automatic delisting, the new regulation has also removed the mechanism of proportionate reduction of shares acquired in the open offer and under any agreement that attracted the obligation to make open offer, and requires bringing down of the non-public shareholding to the level of maximum permissible non-public shareholding. Thus, in a scenario where an acquirer acquires, say 68%, under agreement with the promoter and after open offer, reach shareholding of 94%, he would be under an obligation to reduce the shareholding to 75% by specified methods prescribed under SCRA.
Overall, the new regulation meets the stakeholders’ expectations barring some points highlighted above.