Saumil Shah 17 October 2012 Exemptions Under Takeover Regulations ASSOCHAM India National Conference on Merger & Acquisition Takeover Regime in India –

Saumil Shah

17 October 2012

Exemptions Under Takeover Regulations

ASSOCHAM IndiaNational Conference on Merger & AcquisitionTakeover Regime in India – Issues & Challenges

© (2011) KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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Triggers for mandatory open offer

0% 25% 75%

Trigger Creeping acquisition of 5% in FY or voluntary offer

100%

• Open offer is triggered, even though individual shareholding changes, although total shareholding along with PAC remains unchanged

Regulation 3(3)

• In case of direct or indirect acquisition of control, open offer would trigger- shares or voting rights may or may not be acquiredRegulation 4

• Triggering of open offer on indirect acquisitionRegulation 5

Regulation 10(1)(a) – Inter Se Transfer (1/3)

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Amongst Relatives

Spouse, child, parent, brother, sister, or of spouse

Scope restricted as compared to relatives as defined under Companies Act under Old Code

Amongst Immediate Relatives

Relations not covered – Members of HUF, daughter / son in law , grand parents, grand children & their spouses and spouses of siblings

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Takeover Regulations 2011 Earlier Takeover Code

Promoters (Interse), PACs(Interse), PACs & Company in which PACs hold shares proportionately without any differential voting rights

− Disclosed > 3 years as such in shareholding pattern filed under listing agreement / these regulations

− Holding > 3 years – Promoters

− Status > 3 years – PAC

Format for disclosures of person acting in concert – notified

Qualifying promoters, promoters and foreign collaborators

− Provided that transferor(s) and transferee(s) holding shares in target company for at least 3 years

Acquirer and person acting in concert within 3 years of closure of open offer

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100%

50%

Promoter Group

Co. A, Co. B and Co. D are part of promoter

group of Target Co for 3 years.

B is an unlisted Hold Co. of Target Co.

Co. A transfer 48% holding in Co. B to Co. D

1%

48%

Would transfer of 48% shares in Co. B from Co A to Co D trigger open offer?

Illustration– Inter-se Promoter

1%

No

Yes, but exemptWould transfer of entire 100% shareholding in Co B from Co A to Co D trigger open offer?


100%

30%

B is an unlisted promoter company holding of

30% of Target Co.

Co. A holds 100% in Co. B

Co D also a promoter company for 3 years

holds 1% stake in Target Co

Co D infuses capital in Co B and acquires

80% in Co. B1%

80%

Would infusion in Co. B by Co D trigger open offer?

Illustration– Inter-se Promoter

1%

Dilution in Company B not covered under specific exemption

Yes


51%

Promoter A holds 51% and Promoter B holds

1% in Target Co. Promoter A and B are

holding shares in Target Co for more than 3

years

Promoter A makes inter-se transfer of 5%

shares of Target Co to Promoter B

Promoter B makes additional acquisition of

5% stake in Target Co

1%

Would additional 5% acquisition by Promoter B be exempt under creeping acquisition or trigger open offer?

Illustration– Inter-se Promoter transfer

Yes, it would trigger open offer

NoIf additional acquisition by Promoter B precedes inter-se transfer, would it trigger Open offer ?


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Person

Holding Company

Transferor Company

Subsidiaries Target

Subsidiaries

Other companies

Subsidiaries

>=50%

>=50%

• Inter se transfer amongst above entities exempt – subject to common control

• Other holding vehicles not directly covered – LLP, Partnership Firms, HUF, Trusts, etc.

• Earlier concept of ‘group’ under MRTP Act done away with


Transfer of Target Co shares from Co A to

Individual X

− Person/s holding shares in Holding Co –

whether covered under exemption?

Illustration

Subsidiaries30%

>50%Other

subsidiaries

Individual X

70%

Transaction to be done in two tranches

− Co A to Holding Co

− Holding Co to Individual X


Individuals (A, B, C) hold 51% shares in Co A

(say 40: 20 : 40)

Same persons hold 51% shares in Co B in

different proportions (10 : 10 : 80)

− Control of Co B with same persons

Illustration

A

30%

B C

51%

>50%

51%

Whether transfer of Target Co shares from Co A to Co X covered under exemption? Yes

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Case Study

Dr. Reddy’s Holding Ltd

(DRHL)

Dr Reddy (Listed Target)

Dr Reddy (Listed Target)

23.08%

SEBI granted exemption since no change of control or management though no specific exemption

SEBI granted exemption since no change of control or management though no specific exemption

APS TrustProposal to

transfer 83.17% in DRHL to Trust

by way of gift

Reddy Family

83.17%

Other Promoters

2.53%

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Inter-se exemptions – Conditions

Inter-se exemptions subject to following conditions

If shares of target company are frequently traded

− Acquisition price ≤ 125% of volume-weighted average market price for 60 trading days before the issue of notice for proposed inter-se transfers

If shares of target company are infrequently traded

− Acquisition price ≤ 125% price determined under Reg 8(2)(e)

Transferor and transferee should have complied with all disclosure requirements under Takeover Regulations, 2011

Regulation 10(1)(b) – Acquisition in Ordinary Course of Business

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IDBI Trusteeship acted as Trustees for Banks

and FI

IDBI Trusteeship held pledge of shares as

security for loans sanctioned by Banks & FI

Would invocation of pledge by IDBI Trusteeship be exempt?

Case Study– Acquisition in Ordinary Course of Business

Pledge of shares

Disbursement of loan

No, since no express provision providing exemption to Debenture Trustees act as custodians

Regulation 10(1)(c) – Further Acquisitions

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Amongst Relatives

Subsequent acquisition to be contemplated under original agreement

Subsequent acquisition by an acquirer who has made an open offer

Full disclosure made in public announcement and letter of offer

Acquirer & Seller to be same at all stages

Regulation 10(1)(d) – Acquisitions pursuant to scheme of merger, demerger or restructuring

04

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3

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Blanket exemption for all schemes without any conditions under Old Takeover Code


Merger of Co A into Co B

Post merger X can hold 33% or more shares in merged Co

Illustration

X

70%

Y

Merger Before merger Y acquires 1% shares in Co A

Post merger X is allotted 15% shares in Co B – would it be

exempt or attract open offer?

33%

Co X

75%

Co Y

Merger

CO A is a loss making company and holds 75% shares of

Target Co

Co B is profit making company owned by another Group Co

It is proposed to reverse merge Co B into Co A – based on

fair valuation CO Y needs to be issued 75% shares in Co A

Would it be exempt or attract open offer?

100% 100%

Exempt

Attract


Merger of Co A into List Co 1

Based on fair valuation Group X is allotted 26%

shares in List Co

Whether Group X needs to make an open offer for

acquisition in List Co 1?

Whether List Co 1 required to make an open offer

for acquiring shares of List Co 2?

Illustrations

Group YGroup X

70%

Merger

Group Y

50%

Group X

What if a division of Co A is demerged

into Co B resulting in transfer of List Co

shares ?

No

Exempt, if the shareholding of Group X in Co B is >= 33%

Yes

Regulation 10(1) (e) to (h) – Other Acquisitions

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Other Exemptions

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Regulation 10(4) – Buyback of shares

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Amongst Relatives

If results in crossing 25% limit – exempt if shareholder reduces holding within 90 days [Reg 10(3)]

Increase in voting rights pursuant to buy back of shares*

Otherwise exempt – subject to conditions [Reg 10(4)(c)]

− - Acquirer should not have voted in favour of buyback as director or shareholder

− - Voting by postal ballot

− - Not to result in change in control

In case of non compliance, shareholding to be reduced below the level at which open offer triggered

*No specific provision under old Takeover Code

0% 25% 75%

Trigger on buyback

No trigger subject to conditions; to be diluted below level at which open offer triggers in

case of violation

100%

No trigger if does not cross 25%

No trigger if diluted within 90

days

Regulation 10(4) – Acquisition pursuant to Right Issue


Under Old Takeover Code, Exempt if upto entitlement of shareholder and up to creeping

limit - Should not result in change in control

0% 25% 75%

Trigger on rights issue

Exempt upto entitlement and in case of beyond entitlement subject to conditions

100%

No trigger if does not cross 25%

Acquisition of shares beyond entitlement pursuant to a rights issue exempt from Reg 3(2) subject to following:

- Acquirer has not renounced his entitlement

- Right issue price is within prescribed limits

If Acquirer cross 25% pursuant to the rights issue, whether exemption applies?

No exemption from regulation 3(1)

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Co. A (promoter) holds 60% in Target Co.

Co. A acquires 5% shareholding by way of creeping

acquisition

Subsequently, Target Co. undertakes buyback of

shares from outside shareholders.

Pursuant to buyback, Co. A acquires additional

voting rights of 6% in Target Co.

Conditions under 10(4)(c) complied withWhether Co. A would be required to make an open offer?

Illustrations

60%40%55%

16%29%

Co. A (promoter) holds 55% in Target Co.

Co. X non promoter and non PAC holds 29% in

Target

Co A acquires 5% shareholding by way of

creeping acquisition from Co X

Subsequently, Target Co. undertakes buyback of

shares where other public shareholders tender 5%

shares in Target Co; Conditions compliedWhether CO X would be required to make an open offer?

No Yes, but may dilute back to 24% within 90 days

Regulations 10(4) – Other Exemptions


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Exemptions by the Board

Regulation 11 – Exemption by Board

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Thank you

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Saumil Shah 17 October 2012 Exemptions Under Takeover Regulations ASSOCHAM India National Conference on Merger & Acquisition Takeover Regime in India –

Documents

promoter b promoter

company b

b unlisted target

shares of target company

promoter group of target

open offer slide

text8 transfer of target

unlisted promoter company