A Q&A guide to public mergers and acquisitions law in India.
The country-specific Q&A looks at current market activity; the regulation of recommended and hostile bids; pre-bid formalities, including due diligence, stakebuilding and agreements; procedures for announcing and making an offer (including documentation and mandatory offers); consideration; post-bid considerations (including squeeze-out and de-listing procedures); defending hostile bids; tax issues; other regulatory requirements and restrictions; as well as any proposals for reform.
To compare answers across multiple jurisdictions, visit the Country Q&A tool. This Q&A is part of the PLC multi-jurisdictional guide to mergers and acquisitions law. For a full list of jurisdictional Q&As visit www.practicallaw.com/acquisitions-mjg.
The global slowdown subsequent to the 2008 economic crisis has significantly impacted investments in emerging markets, which are traditionally perceived as high-risk investments. However, despite a series of economic shocks which have had an effect across the globe, such as the Irish and the Italian sovereign debt crises, and the continuous sovereign downgrades by credit rating agencies, certain emerging markets, including India, have managed to post positive growth throughout this otherwise turbulent period. At the peak of the Euro zone debt crisis, India was posting a GDP in the range of 8%, with current projections expecting a growth in excess of 7%.
This positive growth phenomenon is perhaps reflected in the trend of the increasing foreign direct investment (FDI) over the previous two financial years. Reports indicate that in 2011, FDI has increased by 37% to about US$27.5 billion from US$21 billion in 2010 (as at 1 March 2012, US$1 was about EUR0.74). The continuous liberalisation policies of the Indian government, permitting investors additional flexibility in the investment strategies, have increased investor confidence.
Nevertheless, India has not been totally spared in the times of global economic deterioration. Following the rising inflation due to rising global prices, slowing economy, expanding fiscal deficits and rollback of consumer subsidies, Standard & Poor's (S&P) has recently downgraded India's credit outlook from stable to negative. The age-old issue of corruption, as recently demonstrated in the mass-cancellation of telecom licences and accounting frauds at Satyam and Adidas India continue to quell investor confidence. The highly contentious controversy over proposed capital gains taxation of international acquisitions has resulted in many investors going back to the drawing board. The recently introduced General Anti-Avoidance Rules (a law to prevent tax fraud and evasion), a welcome step which will be implemented in 2013, remains a black hole due to numerous ambiguities which may have a substantial impact on transaction structures and possibly increase transaction costs.
However, despite the various negative developments which, among others, have led to the S&P downgrade, there is likely to be limited impact on the growth curve of strategic M&A in India. In fact, the very same negative factors have turned numerous asset and services based companies and conglomerates into the perfect acquisition targets. The lowered S&P grading will make credit more expensive, thereby forcing Indian corporate entities to actively seek alternative sources of funding to sustain their growth.
Despite the global economic slowdown, strategic investments in India have accounted for the top M&A transactions in 2011. In addition, overseas acquisitions have seen an increase in terms of deal value, primarily for hedging against the domestic market slowdown and in view of the global target valuations becoming more attractive for Indian conglomerates, which are attempting to establish a global presence and are seeking business synergies globally. In addition, numerous Indian conglomerates are in the process of consolidating and restructuring their assets, presumably with a view to increasing the value of their portfolio. Foreign fund investments are on the rise, particularly after a recent spate of fundraising by various venture capitalists and private equity players, although India is no longer one of the top three destinations for new fund raisings.
As at March 2012, the M&A deal value has reportedly crossed the US$16 billion mark, seemingly due to the major internal restructuring undertaken by the Vedanta group in February 2012.
Some of the top M&A deals reported in India for the year 2011 are:
The acquisition of a 70% stake in Ssangyong by Mahindra & Mahindra for US$463 million. Ssangyong is reportedly the fourth largest South Korean automobile manufacturer.
The acquisition of Cairn India by Vedanta group for US$8.6 billion, which is arguably the biggest M&A deal in the Indian energy sector to date.
The acquisition of Australia's Hancock Coal by GVK Power for US$1.26 billion, reportedly one of the largest overseas acquisitions by an Indian infrastructure entity.
The acquisition by British Petroleum of a 30% stake in 23 gas field blocks owned and operated by Reliance Industries for US$7.2 billion, enabling British Petroleum to enter into the Indian gas market, which is allegedly one of the fastest growing gas markets in the world.
The main means of obtaining control of a public company include:
Mergers and amalgamations. Two or more companies can merge their assets, liabilities and shareholdings into an existing company or form a completely new company. In India, the terms merger and amalgamation are used synonymously. The discerning feature of a merger/amalgamation is that all assets and liabilities of the amalgamating companies immediately before the amalgamation become the assets and liabilities of the amalgamated company. Mergers/amalgamations are subject to court approval; appropriate petitions must be filed before a court of competent jurisdiction for approval of the proposed merger/amalgamation. In addition, shareholder and creditor approval is also required. Contractual mergers are not legally possible in India.
Demergers. Demergers involve the transfer of an "undertaking" (which may include a unit or a division or a business activity, taken as a whole) by a company to another company, typically as a going concern. The demerged undertaking is usually merged with the resulting company pursuant to the demerger. The shareholders of the demerged company are issued shares in the resulting company as consideration for the demerged undertaking. As with mergers and amalgamations, demergers are a product of a court order and, accordingly, appropriate petitions need to be filed before a court of competent jurisdiction for approval of the proposed merger/amalgamation (and shareholder and creditor approval is needed). In addition to a court-approved demerger, an "undertaking" may be transferred as a going concern by way of a slump sale as well as for cash or exchange of assets other than securities of the purchasing company. Slump sale acquisitions may be contractual or through court-approved petitions.
Acquisitions. Acquisitions can take the following forms:
Takeover. A takeover involves buying shares of a publicly listed target company from its existing shareholders. Takeovers which result in acquisition of more than 25% of shares or voting rights, or control over a target company, trigger the requirement of an open offer to the existing shareholders as a minority shareholder protection mechanism, since many listed companies are still predominantly family owned and promoter-driven. Control is defined as the power to appoint the majority of the directors or control management decisions. Acquisition of an indirect interest in the target (for example, by acquiring the holding company of the target), also triggers the open offer requirement to minority shareholders. Acquisitions which do not result in a change of control of the target can be conducted through private negotiations between the existing shareholders and the investor;
Leveraged buyout. This involves an acquisition by the investor of a controlling interest in the target's equity, with a significant percentage of the purchase price being financed through debt finance. The assets of the target (and sometimes of the acquirer) are used as security for the borrowed capital;
Bailout takeover. In a bailout takeover, the investor acquires a financially weak but recoverable industrial company (that is, a company engaged in a regulated industry operating one or more factories) for the purposes of revival or rehabilitation. If a financially weak industrial company has approached the courts for reconstruction, an investor can petition the court for acquisition of the struggling industrial company. Presently, only industrial companies can be acquired by investors through a bailout takeover.
Private placement. In a private placement, a public company sells newly issued shares directly to a pre-determined investor under negotiated terms. Investors need not purchase equity from the existing shareholders and in addition, it enables the target company to raise funds.
Public offer. This involves an investor acquiring shares listed on a stock exchange offered by the target company to the general public through a voluntary public offer.
Indian law does not specifically prohibit hostile bids or takeovers. However, hostile takeovers are not common in India. The reasons for this may be attributed to the open offer and disclosure requirements under the Securities and Exchange Board of India (SEBI) (Substantial Acquisition of Shares and Takeovers) Regulations 2011 (Takeover Code).
If an investor acquires "control" over a target company, or more than 25% of the share capital or voting rights of the target company, the investor must make an open offer to the existing shareholders for the purchase of 26% of the share capital of the target company. The Takeover Code controls creeping acquisitions by existing shareholders by requiring public disclosure of shareholding if more than 2% of the share capital of the target company is acquired. Disclosure of an intent to acquire increases transaction costs, therefore hostile takeovers become ineffective.
However, a competitive bid can be made under the Takeover Code after an investor has made its open offer to the existing shareholders. Such a bid may end up being hostile (that is, shareholders may opt to accept the competitive bid over the original bid, even though the management of the target company does not recommend the competitive bid). A competitive offer must be made within 15 days of the original offer.
In addition, foreign investment limits set out under the Foreign Direct Investment Policy of India (FDI Policy) for investment in the various industrial sectors act as a deterrent for hostile takeovers in certain industries.
Mergers and public takeovers are regulated under the following laws:
The Companies Act 1956 (Companies Act).The Companies Act sets out the legal procedure with respect to mergers and amalgamations from a corporate governance perspective. Under the Companies Act, a scheme for merger or amalgamation must be approved by the High Court, subject to the following procedure:
the board of directors and the shareholders of the merging companies must approve the proposed merger or amalgamation;
the merging and the merged companies must inform the stock exchanges on which they are listed about the merger;
the merging companies must file an application, approved by the boards of directors of the merging companies, with the relevant High Court;
the shareholders and creditors of the merging and the merged companies must hold separate meetings to approve the merger or amalgamation scheme;
the High Court must pass an order to sanction the merger or amalgamation scheme, which must then be filed with the Registrar of Companies (RoC);
the assets and liabilities of the merging companies must be transferred to the merged company in accordance with the approved merger or amalgamation scheme, with effect from a specified date, which is usually set out in the scheme itself; and
the merging company's shares and debentures and/or cash must be exchanged for the shares and debentures of the merged company.
The Takeover Code. The provisions of the Takeover Code govern secondary public acquisitions, mandatory open offer obligations and disclosure requirements in creeping acquisitions. The principal aims of the Takeover Code are to:
regulate takeovers in India;
ensure transparency of takeovers;
protect the interests of minority shareholders; and
provide the existing shareholders with information about the impending change in control of the company, along with an opportunity to exercise their exit options if they do not wish to retain their individual shareholding after the change in control.
The Securities and Exchange Board of India (SEBI) (Issue of Capital and Disclosure Requirements) Regulations 2009 (ICDR). Shares of a listed company can be acquired through secondary sales at the stock exchange or by subscribing to an initial public offer made by the target company. Secondary market purchases may trigger obligations under the Takeover Code. If the target company wishes to issue new shares to specific investors, then that issue must be on a preferential basis. The conditions under the ICDR are in addition to the requirement of shareholders' approval of the preferential allotment by 75% majority as provided under the Companies Act. Preferential allotments under the ICDR are generally subject to the following conditions:
preferential issue cannot be made to a person who has sold any shares of the target company within six months prior to the "relevant date" (which is 30 days prior to the date on which the shareholders approve the preferential allotment);
if the target company's shares have been listed on a stock exchange for six months or more, the price of the shares must be fixed at a minimum value based on certain determining factors;
the pre-preferential shareholding of the investor will be locked-in for six months after the preferential allotment and the shares issued under the preferential allotment will be locked-in for one year from the date of issue. Shares issued on a preferential basis to promoters or promoter groups will be subject to a three-year lock-in from the date of allotment.
The Competition Act 2002 (Competition Act). The Competition Act regulates business combinations which may have an appreciable adverse effect on competition within a relevant market in India. A "combination" may result from a merger or an acquisition, provided that the resulting entity satisfies certain asset value or turnover thresholds as provided under the Competition Act. If the resultant entity were to be a combination, then detailed disclosures need to be made by the investor and the target company before the merger or an acquisition. Once the disclosures are made, a waiting period of 210 days begins before the merger or acquisition can take place. The Competition Commission of India (CCI) will scrutinise the disclosures along with other market information to ascertain if the combination has caused or will likely cause appreciable adverse effect on competition in the relevant market in India. The CCI considers the following factors, among others:
the actual and potential competition through imports;
the extent of entry barriers to the market;
the level of the combination's presence in the market;
the extent of effective competition in the market;
the possibility of the combination removing vigorous and effective competition in the market;
whether the benefits of the combination outweigh its adverse impact.
The CCI has overarching powers over the proposed transaction, including the power to modify the terms of, or directing the parties to not proceed with, the merger or acquisition. Generally, acquisitions by public financial institutions, foreign institutional investors, bank or venture capitalists are not considered combinations and the level of disclosure is more lenient in those cases. In addition, acquisitions of less than 25% of the target company's share capital or acquisitions by a person who already holds more than 50% of the target company's share capital are generally exempted from the disclosure requirements under the Competition Act.
Exchange control laws. These include:
Foreign Exchange Management Act 1999;
relevant notifications or circulars of the Indian government and the Reserve Bank of India; and
specific rules relating to acquisitions of rights shares or bonus shares issued by an Indian company, and the issue of shares under mergers, amalgamations and demergers.
The Income Tax Act 1961 (IT Act). The IT Act sets out the applicable taxes in relation to:
mergers and amalgamations;
slump sales (that is, the transfer of an undertaking for a lump-sum consideration) and asset sales;
transfers of shares; and
These laws are intended and designed to ensure quality and timely disclosures of price-sensitive information so as to make M&A deals more transparent and protect the interests of all classes of shareholders and creditors.
There is no provision under the Takeover Code, or any other law in force in India, that require due diligence to be conducted on a target company. Accordingly, there is no obligation on the target company to comply with any requests for documents made by the acquirer, unless agreed under contract and subject to the restriction on disclosures of non-public, price sensitive information under the SEBI (Prohibition of Insider Trading) Regulations 1992 (Insider Trading Regulations). However, in case of competitive bids, the target company must provide the competitive acquirer with all information and assistance provided to the original acquirer (Takeover Code).
The Insider Trading Regulations define price sensitive information as any information which relates directly or indirectly to a company and, which if published, is likely to materially affect the price of securities of a company. Price sensitive information includes periodical financial results of the company, any major expansion plans or execution of new projects and amalgamation, mergers or takeovers. An insider (defined to include any person who has received or has had access to such unpublished price sensitive information) is prohibited from communicating such information to any person or dealing in the securities of the company himself. In addition, no company can deal in the securities of another company while in possession of unpublished price sensitive information. Therefore, the acquirer will have to conduct an extensive due diligence on the target company and should adopt a cautious approach while doing that to avoid violating the Insider Trading Regulations. The target company can only disclose information which is either in the public domain or is not price sensitive.
Generally, an investor may want to inspect the following:
Financial due diligence:
the target company's audited financial accounts;
the target company's quarterly income statements, to the extent they are publicly available and filed with the SEBI;
unaudited information given in press publications;
information regarding the target company's shareholding patterns, authorised share capital, and paid-up share capital; and
information concerning the target company held by, or available to, stock exchanges.
Legal due diligence:
the target company's memorandum and articles of association;
the target company's prospectus;
documents evidencing the registration of charges and other corporate and regulatory filings held by, or available to, the:
Commercial due diligence:
information published in newspapers;
information in the general trade directory;
market reports; and
market information. This comprises information acquired from suppliers, customers and market experts.
There is no obligation on the target company to comply with any requests for documents made by the acquirer, unless agreed under contract. The information sought under both recommended and hostile bids should ideally be similar, although due diligences are seldom conducted without the contractual consent of the target company and subject to disclosure restrictions under the Takeover Code and the Insider Trading Regulations.
The following information is in the public domain:
Corporate information. Information relating to the corporate records of a company is available on the website of the Ministry of Corporate Affairs (www.mca.gov.in). The website contains, among others, the following information and documents:
incorporation documents, including the certificate of incorporation, and memorandum and articles of association;
authorised and paid-up share capital;
details of directors;
annual returns and all other statutory forms filed with the RoC;
financial statements, including the:
profit and loss account; and
Intellectual property information. Information relating to intellectual property, whether registered or pending registration, can be obtained from the:
Department of Industrial Policy and Promotions' website (http://ipindia.nic.in (www.practicallaw.com/7-519-6507)) in relation to:
geographical indications of goods.
Ministry of Human Resource Development's website (www.copyright.gov.in) in relation to copyright.
Certain disclosures and advertisements must be made in a certain manner at specific time periods (Takeover Code). There are no restrictions on the publication of additional statements, circulars or publicity brochures relating to the open offer apart from the disclosures and advertisements under the Takeover Code. However, the Takeover Code provides that any statement, circular or publicity brochure must not omit any relevant information or contain any misleading statement.
The obligation to issue a public announcement (in a prescribed format) arises when the acquirer "agrees" to acquire the shares, voting rights or control of the target company. The public announcement must be made on the same day as the agreement. The agreement can be formal or informal and can even be oral. Therefore, any statement in public regarding the agreement to acquire the shares, voting rights or control of the target company may trigger the disclosure (as well as public offer) obligations under the Takeover Code.
It is not uncommon for an acquirer to execute a memorandum of understanding or undertaking with the target company's key shareholders. However, such a memorandum of understanding or undertaking may be deemed as an agreement to acquire the shares, voting rights or control, in which case the disclosure obligations under the Takeover Code will be triggered and a public announcement will have to be made on the same day as the execution of such a memorandum or undertaking.
A memorandum of understanding typically includes:
The deal's principal terms and conditions.
The pricing and valuation methods.
The payment terms.
Confidentiality and non-disclosure provisions.
The governing law.
Normally, a memorandum of understanding is not legally binding unless it is specifically agreed between the parties. However, certain provisions of the memorandum, such as the governing law, confidentiality and non-disclosure provisions, can be made binding on the parties.
Whether the memorandum of understanding is legally binding or not is irrelevant for the purposes of the disclosure obligations and public announcement under the Takeover Code. Provided the agreement to acquire the shares, voting rights or control is established, the disclosure obligations will be triggered. Therefore, parties typically attempt to execute a definitive share purchase agreement straight away.
An acquirer can build up a stake of up to 25% of the target company's share capital, beyond which the mandatory public offer obligation under the Takeover Code will be triggered. If an acquirer acquires a 5% stake or more of the target company's share capital, then the aggregate shareholding and voting rights must be disclosed. In addition, an existing shareholder holding 5% or more of the target company's capital must disclose every additional acquisition (or disposal) of 2% or more of the target company's capital. This disclosure must be made within seven days of the acquisition/disposal. An acquisition/disposal of any convertible securities, including derivatives, or by way of an encumbrance is subject to the same disclosure obligations. A derivative which is convertible or exchangeable for shares at a future date, with or without the option of the holder of such derivative, is considered a convertible security under the Takeover Code.
A formal agreement between the acquirer and the target company is not mandatory under the Takeover Code and is not very common. It is advisable to have a legally binding agreement to document each party's specific rights, responsibilities and commitment concerning the bid. Such agreement may set out the break fees and the reverse break fees (see Question 10). However, the acquisition agreement is typically concluded between the selling shareholder and the acquirer.
Such an agreement typically includes:
The obligation of each party to implement the bid and carry out its responsibilities under the bid.
Remedies in the case of a breach of obligations.
Obligations relating to complying with legal provisions and governmental regulations.
The payment of break fees and reverse break fees.
Each party's representations and warranties.
Conditions precedent to closing the deal.
Closing events and activities.
Rights on termination and consequences of termination.
The target company's board cannot be restrained from recommending or considering other competing offers or negotiating with other acquirers who have made competing offers. However, the Takeover Code does not provide for a "go shop" period for the target company and, therefore, the target company can be restrained from soliciting competitive offers from other potential acquirers under a non-solicitation, non-compete or exclusivity agreement with the acquirer. Those obligations can also be incorporated into the main agreement between the acquirer and the target.
Although Indian law does not provide for break fees or reverse break fees, the acquirer and the target company or the selling promoter group can contractually agree to such fees. Generally, break fees and reverse break fees are not common in India.
Break fees are subject to the following potential restrictions:
The draft letter of offer, which contains the terms of any break fee, must be submitted to the SEBI. The SEBI has the power to require changes to the letter of offer and to change the terms relating to the break fees if it considers them to be unreasonable.
Break fees are limited to compensation for losses that are reasonably foreseeable as the natural loss resulting from non-performance. In most cases, the party breaching the letter of intent or memorandum of understanding must reimburse the expenses incurred by the other party in connection with the transaction.
If the non-breaching party is a foreign party and the party paying the break fees is an Indian company (or vice versa in case of a reverse break fee), prior approval of the Reserve Bank of India may be required to pay the break fees (or reverse break fees).
The acquirer must ensure that firm financial arrangements have been made for fulfilling the payment obligations under the open offer prior to making the public announcement.
The acquirer must create an escrow account towards security for performance of the payment obligations under the open offer within 2 days before issuing the detailed public statement. The security amount is usually a percentage of the total offer consideration which is pre-determined under the Takeover Code.
If the acquirer does not fulfil any of its obligations under the open offer, the SEBI may direct the merchant banker appointed to administer the open offer to forfeit the escrow account (and take actions such as invoking the bank guarantee and selling escrowed shares to realise the value in cash). The escrow amount in cash will be distributed equally between the target company, the shareholders (on pro rata basis) who may have accepted the offer and to the Investor Protection and Education Fund (established under the SEBI (Investor Protection and Education Fund) Regulations, 2009).
Generally, a bid is made public when the acquirer agrees to acquire the shares, voting rights or control of the target company (see Question 6). A public announcement must be made in the prescribed format on the date on which the acquirer agrees to acquire the shares, voting rights or control of the target company. In the absence of such an agreement, the bid is made public on the date when the public announcement is made.
Before making the public announcement, the acquirer must appoint a merchant banker registered with the SEBI to:
Make the public announcement of the bid.
Manage the acquirer's escrow amount if it fails to meet its obligations under the bid.
In the case of an indirect acquisition or change in control, the public announcement must be made within four working days from the earlier of:
The date when the primary acquisition was contracted.
The date on which the intention/decision to acquire was publicly announced.
The detailed public statement must be published (through the appointed merchant banker) within five working days of the public announcement.
The public announcement (in the prescribed format) is made on all stock exchange(s) where the target company's shares are listed. Within one working day of the public announcement, a copy of the public announcement must be sent to:
The registered office of the target company.
The detailed public statement must be published in:
One English national daily newspaper with wide circulation.
One Hindi (national language) national daily newspaper with wide circulation.
One regional language daily newspaper with wide circulation, at the:
place where the target company's registered office is situated; and
location of the stock exchange on which the maximum volume of trading of the target company's shares is recorded during the preceding 60 trading days.
The following timeline applies:
Within two working days prior to the filing of the detailed public statement, the acquirer must open an escrow account.
Within five working days from the date of the detailed public statement, the acquirer must file the draft letter of offer with the SEBI (through the appointed merchant banker), along with a non-refundable fee. The draft letter of offer must be simultaneously sent to the target company and all the stock exchanges on which the target company's shares are listed.
The SEBI gives its comments on the draft letter of offer within 15 working days. If it does not respond within 15 working days, it will be assumed that the SEBI has no comments.
Within seven working days of receiving comments from the SEBI, the letter of offer must be dispatched to the shareholders (whose names appear on the register of members on an identified date).
The tendering period must start within 12 working days from the receipt of comments from the SEBI and remains open for 20 days.
Shareholders who have tendered their shares cannot withdraw during the tendering period.
The acquirer can make upward price revisions until three days before the commencement of the tendering period.
On receipt of the detailed public statement, the board of directors of the target company must form a committee of independent directors to provide a reasoned recommendation on the open offer, which must be issued not later than two working days before the commencement of the tendering period.
Every acquisition by the acquirer (or by/with persons acting in concert) of shares of the target company during the offer period (that is, the period between the agreement to acquire and payment of offer consideration) must be disclosed to the target company and the stock exchanges on which the shares of the target company are listed within 24 hours of such acquisition.
One working day before the commencement of the tendering period, the acquirer must publish an advertisement in the same newspapers where the detailed public statement was published, announcing the schedule of activities for the open offer and status of approvals.
On expiration of the tendering period, the acquirer must complete all requirements under the Takeover Code, including the payment of consideration.
Within five working days of the expiry of the offer period, the acquirer must issue a post-offer advertisement, giving details of the aggregate number of shares tendered, accepted and the date of payment of consideration.
A competitive bid can be made within 15 days of the detailed public statement of the first offer. On the public announcement of a competitive bid, the original acquirer can announce an upward revision of its offer. The SEBI must give its comments on the competitive draft letter of offer on the day it is filed. When competitive bids are made, the tendering period for all bids follows the schedule of the last competitive bid which was made prior to the expiry of the 15-day period.
An open offer must be for a minimum of 26% of the target company's share and voting capital in certain circumstances (Takeover Code) (see Question 16).
An open offer may be conditional on a minimum level of acceptance. If the open offer is subject to an agreement, then the agreement must contain a provision that in the event the desired level of acceptance of the open offer is not attained, the acquirer will not acquire any shares and the agreement will stand rescinded.
When an offer is made conditional on a minimum level of acceptance, the acquirer (and any person acting in concert):
Is prohibited from purchasing any shares of the target company except under the open offer and subject to any underlying agreement.
Must keep 100% of the offer consideration for the minimum level of acceptance, or 50% of the total offer consideration (whichever is higher) in the escrow account.
Lose the entire escrow amount if it does not fulfil its obligations under the Takeover Code.
The offer cannot be made subject to other pre-conditions. However, if the acquisition agreement (which attracts the obligation to make the open offer) is subject to conditions which are not met (for reasons outside the reasonable control of the acquirer) and that results in the rescission of the agreement, then the acquirer has the right to withdraw the open offer.
A letter of offer is addressed to the target company's shareholders. It will contain details regarding the:
Acquirer and persons acting in concert with the acquirer, along with their financial position.
Number of shares to be acquired from the public.
Offer price and its justification.
Purpose of the acquisition.
Acquirer's future plans, if any, regarding the target.
Resulting change in control over the target company, if any.
Procedure that the acquirer will follow in accepting the shares tendered by the selling shareholders.
Period for completing all formalities relating to the offer.
The Takeover Code does not make any distinction between a hostile bid and a recommended bid. However, in case of a hostile bid, the board of directors of the target company may provide the shareholders with additional materials or information.
There are no requirements for the target company's board to inform or consult its employees about the offer.
An acquirer, along with persons acting in concert, must make a mandatory open offer for 26% of the share capital or voting rights of the target company when:
It wishes to acquire 25% or more of the target company's share capital or voting rights.
It acquires control over the target company.
The common forms of consideration offered in a public takeover include:
Cash (determined in accordance with the pricing guidelines set out in the Takeover Code).
Issue, exchange or transfer of listed shares in the share capital of the acquirer or any person acting in concert.
Issue, exchange or transfer of listed secured debt instruments issued by the acquirer or any person acting in concert with a rating not inferior to the investment grade as rated by a credit rating agency registered with the SEBI.
Issue, exchange or transfer of convertible debt securities entitling the holder to acquire listed shares in the share capital of the acquirer or of any person acting in concert.
A combination of the above.
If any shares that have been acquired or agreed to be acquired by the acquirer (and persons acting in concert with it) during the 52 weeks immediately preceding the date of public announcement constitute more than 10% of the voting rights in the target company and have been paid for by cash, the open offer will entail an option for the shareholders to require payment of the offer price by cash.
The SEBI does not specifically approve the offer price. However, it ensures that all relevant guidelines are taken into account when the offer price is determined and that the justification for these guidelines is disclosed in the offer document.
In case of a direct acquisition, the offer price will be the highest of the following:
The highest negotiated price per share under the agreement which triggered the offer.
The volume-weighted average price paid/payable for acquisitions by the acquirer during 52 weeks immediately preceding the public announcement.
The highest price paid by the acquirer for any acquisition during the 26-week period immediately preceding the public announcement.
The volume-weighted average market price of such shares for a period of 60 trading days immediately preceding the public announcement as traded on a stock exchange where the maximum volume of trading in the shares of the target company is recorded, provided that these shares are frequently traded (that is, traded turnover during the preceding 12 months is at least 10% of the total number of shares of such class).
Where shares are not frequently traded, the price determined by acquirer and the appointed merchant banker taking into account various valuation parameters.
The individual share value calculated in accordance with the Takeover Code.
The Takeover Code does not draw any distinction between domestic and foreign acquirers. A foreign acquirer must comply with the pricing guidelines set out under the FDI Policy, in addition to the pricing guidelines under the Takeover Code. In addition, there are certain procedural and reporting requirements under the FDI Policy which must be complied with by the target company when it receives consideration from a foreign acquirer.
An acquirer cannot compulsorily purchase the shares of the remaining minority shareholders. In addition, under the Takeover Code and Securities Contracts (Regulation) Rules 1957, the public shareholding in the target company must not fall below 25%, that is, the acquirer's maximum shareholding is limited to 75%. If the acquirer's shareholding exceeds 75%, then the Takeover Code provides for a time-bound reduction of the acquirer's shareholding down to 75%.
However, the acquirer can squeeze out the minority in two circumstances:
Through de-listing the shares in accordance with the de-listing process under the SEBI (Delisting of Equity Shares) Regulations 2009 (Delisting Regulations) (see Question 22).
If the target is merged with a shell subsidiary and the dissentient shareholders are bought out under the Companies Act.
The Takeover Code does not restrict an acquirer from launching a new offer, provided that the offer period of the earlier offer has expired.
The shares of a company in India can be de-listed either compulsorily or voluntarily. Generally, shares cannot be de-listed unless such shares have been listed on a recognised stock exchange for a minimum of three years.
The de-listing procedure has been set out in the Delisting Regulations. Compulsory de-listing occurs when either:
The company does not comply with the guidelines of the relevant stock exchange(s).
Trading in the company's shares has remained suspended for more than six months.
The company has incurred losses during the preceding three consecutive years and has negative net worth.
The shares of the company have remained infrequently traded during the preceding three years.
The company or any of its promoters/directors have been convicted for failure to comply with any of the provisions of the Securities Contracts (Regulation) Act 1956, the SEBI Act 1992 or the Depositories Act 1996.
The procedure for compulsory de-listing can be summarised as follows:
The decision to de-list is taken by a panel of representatives of the:
stock exchange recognised under the Securities Contracts (Regulation) Act 1956 on which the shares are listed;
Ministry of Corporate Affairs or the RoC.
The stock exchange publishes a notice, giving at least 15 days for representing grievances, in:
an English national daily newspaper with wide circulation; and
a regional language newspaper of the region where the stock exchange is located.
After considering the representations, the stock exchange passes the order to de-list the shares in question.
When the shares of a company are compulsorily de-listed, the promoters must acquire the de-listed shares from the public shareholders at a price determined by an independent valuation expert appointed by the stock exchange. The shareholders have the option to retain their shares.
In voluntary de-listing, the company voluntarily intends to de-list its shares or is merged with, or acquired by, another company. The procedure for voluntary de-listing is as follows:
The company's board of directors must approve the de-listing.
The shareholders must approve the de-listing by 75% majority passed through postal ballot.
Application must be made to the relevant stock exchange for in-principle approval of the proposed de-listing.
On receiving the in-principle approval from the stock exchange, the promoters must appoint a merchant banker and open an escrow account where the estimated total consideration must be deposited.
The promoters must make a public announcement in:
an English language daily newspaper;
a daily newspaper in Hindi; and
a regional daily language newspaper.
A letter of offer is despatched to the public shareholders within 45 days of the public announcement. The offer period must not be later than 55 working days from the public announcement and must remain open for three to five working days. The offer price is determined by the book building method as provided for under the Delisting Regulations.
The promoters must reach a post-offer shareholding of 90% for the de-listing to be successful.
There are several defences available to the target company's board against a hostile takeover. The most effective methods are those with built-in defensive measures that make it difficult to take over the company ("shark repellents").
The two well-known methods are:
The poison pill (shareholders' rights plan). The target company gives existing shareholders the right to buy the target company's shares at a price lower than the prevailing market price if a hostile bidder buys more than a pre-determined amount of the shares. This is to devalue the shares and dilute the percentage of the target company's equity that the hostile bidder owns to an extent that makes any further acquisition prohibitively expensive. Under the Takeover Code, the target company is not permitted to issue or allot shares during the offer period, unless the issuance is upon conversion of convertible securities issued prior to the public announcement of the open offer. Therefore, a poison pill is theoretically permissible under the Takeover Code, provided that the convertible securities are issued prior to the public announcement of the open offer.
The white knight. Under this mechanism, a third company makes a friendly takeover offer to the company facing a hostile takeover.
Other defences available to the target are the:
Pac-Man defence. The target company thwarts a takeover bid by buying shares in the acquirer company and taking it over.
Golden parachute. This is a tactic which makes the acquisition more expensive and less attractive. A provision is included in the contract of the executive officers under which they are entitled to receive a large bonus in cash or shares if the company is acquired.
Stamp duty is payable on certain documents in connection with the sale of shares. The rate of stamp duty varies from state to state. For example, a sale of shares in the state of Delhi is subject to stamp duty as follows:
Share transfer form executed between the selling shareholder(s) and the acquirer: 0.25% of the consideration for the shares being transferred. However, no share transfer forms are required in the event of electronic or dematerialised shares, and so this stamp duty implication does not arise.
Share purchase agreement between the selling shareholder(s) and the acquirer: 0.01% of the consideration.
Share certificates: 0.1% of the total value of the shares.
Certain other regulatory approvals and permissions may be required for a public acquisition. These can considerably delay the timing of a public offer and the target may need to comply with reporting requirements once the acquisition is complete.
There are certain procedural and reporting requirements under the FDI Policy that the target company must comply with when it receives consideration from a foreign acquirer. In addition, a foreign acquirer's investment may be subject to maximum investment caps in certain industries (see Question 26). The consideration must come as inward remittance through normal banking channels.
Under the Competition Act, combinations (acquisitions, mergers or amalgamations) which meet certain asset value and turnover thresholds must be reported to the CCI for clearance (see Question 4).
Mandatory approvals under the Companies Act and other sector specific regulations may be required.
There are certain restrictions on the foreign ownership of shares. The FDI Policy sets out maximum investment caps in certain industrial sectors. For example, in the civil aviation sector, foreign ownership is limited to 74% of the company's shareholding, with the remaining 26% of the shareholding held by an Indian resident or an Indian company.
There are also certain sectors where foreign investment is completely prohibited, such as the lottery and real estate businesses.
Permission from the Indian government and/or the Reserve Bank of India is required where a foreign investor seeks to invest beyond the sectoral caps, or in a sector where foreign investment is generally prohibited.
Repatriation of profits is governed by the provisions of the amended Foreign Exchange Management (Current Account Transactions) Rules 2000. Dividends are freely repatriable without any restrictions.
However, repatriation is not permitted if a remittance is subject to the requirement of dividend balancing (that is, offsetting the outflow of foreign exchange for dividend payments against export earnings). Currently this does not apply to any industry.
There are no restrictions or disclosure requirements imposed on persons dealing with securities of the parties to the bid following the offer.
The reforms brought about by the new Takeover Code are expected to encourage mergers and acquisitions by providing a level playing field for retail investors as well as potential acquirers.
Main area of responsibility. The main areas of responsibility of the SEBI include:
T +91 11 2692 0500
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Qualified. India, 1980
Areas of practice. M&A; joint ventures; banking & finance; capital markets; corporate restructuring; general corporate advisory; infrastructures; oil & gas; private equity; project finance; real estate; regulatory policies & takeovers.
T +91 11 2692 0500
F +91 11 2692 4900
Qualified. India, 2001
Areas of practice. M&A; private equity.
T +91 11 2692 0500
F +91 11 2692 4900
Qualified. India, 2008
Areas of practice. General corporate; M&A.