An Insight Into the Takeover Code and Substantial Acquisition of Shares

 along with the aggregate shareholding after such
The Takeover Code or substantial acquisition ofacquisition /sale. An acquirer who has made a public
shares.offer and seeks to acquire further shares under Reg.
 11(1) shall not acquire such shares during the period of
 6 months from the date of closure of the public
Name: Sukant Vikramoffer at a price higher than the offer price.
Class: 5th year BBA LLB(3) Consolidation of holding:
Symbiosis Law SchoolAn acquirer who is having 75% shares or voting
 rights of target company, can acquire further shares
Introduction ----or voting rights only after making a public
With the announcement of the policy of globalization,announcement specifying the number of shares to be
the doors of Indian economy were opened for theacquired through open offer from the shareholders
overseas investors. But to compete at the worldof a target company .
platform, the scale of business was needed to beIn order to appreciate the implications arising here
increased. In this changed scenario, mergers andfrom, it is pertinent for us to consider the meaning of
acquisitions were the best option available for thethe term ‘public announcement’..
corporates considering the time factor involved inPenal Provisions
capturing the opportunities made available by theIn the event of non-compliance of the provisions of
globalization.SEBI (Substantial Acquisition of Shares & Takeover)
But soon the predators with huge disposable wealthRegulations, 1997, commonly known as Takeover
started exploiting this opportunity to the prejudice ofCode, the acquirer is liable for the penal provisions
retail investor. This created a need for somecontained in the code itself. Regulation 45 of SEBI
regulation to protect the interest of investors which(Substantial Acquisition of Shares & Takeover)
were done through -:Regulations, 1997 is dealing with the penal provisions
1.Enactment of SEBI Act, 1992for the non-compliance of the obligations contained in
2.Enactment of SEBI (Substantial acquisition of sharesthe Regulations.
and takeover) Regulations, 1992.As per regulation 45 of the Regulations, for failure to
In the light of then present circumstances, the needcarry out obligations under the regulations, following
for some law to regulate takeover was strongly felt.consequences may follow:
Moreover to achieve its objectives as stated in SEBI1. The acquirer faces the consequences of the
Act, 1992, SEBI enacted SEBI (Substantial Acquisitionescrow amount being forfeited besides penalties.
of Shares and Takeover) Regulations, 1994 in2. The Board of Target Company shall be liable for
exercise of powers conferred under section 30 ofaction in terms of regulation and Act.
the Act which laid down a procedure to be followed3. The intermediary would face suspension or
by an acquirer for acquiring majority shares orcancellation of registration.
controlling in another company, so that process of 
takeover is carried out in a fair and transparentThe penalties stated above may include:
manner.1. Criminal prosecution under section 24 of the SEBI
Thereafter, these regulations have been amended aAct.
number of times to address the changing 
circumstances and needs of corporate sector. InIn addition to any award of penalty by the
1997 SEBI Takeover Code has been rechristened byAdjudicating Officer under the Act, if any person
enacting SEBI (Substantial Acquisition of Shares andcontravenes or attempts to contravene or abets the
Takeover) Regulations, 1997 substituting SEBIcontravention of the provisions of this Act or of any
(Substantial Acquisition of Shares and Takeover)rules or regulations thereof., he shall be punishable
Regulations, 1994.with imprisonment for a term which may extend to
 one year, or with fine or with both. Further, non
 compliance of the directions of the Adjudicating
Merger&Acquisition Trends in Current Scenario ----Officer shall be punishable with imprisonment for a
Structured Reconstructionterm which shall not be less than one month, but
In India it was only in 20th century that the conceptwhich may extend to three years or with fine which
of takeover took birth but even then the concept ofshall not be less than two thousand rupees, but
hostile takeovers was not known to anybody. Thiswhich may extend to ten thousand rupees or with
concept emerged when Swaraj Paul started effortsboth.
to takeover Escorts Ltd. and DCM Ltd. He was the1. Monetary penalties under section 15H of the SEBI
first hostile raider among the raiders of Indian stockAct.
market. Although Paul could not succeed in his efforts 
because the incumbents fend him off by using theIf a person fails to disclose the aggregate of his
technicalities of rules governing non-residents but thisshareholding in the body corporate before he
created a need for a takeover code.acquires any shares of that body corporate, or make
This need was further accentuated in 1990s whena public announcement to acquire shares at a
the government initiated the policy of liberalizationminimum price, he shall be liable to a penalty of
and globalization which resulted in growth of Indiantwenty-five crore rupees or three times the amount
economy at an increased pace, and it created aof profits made out of such failure, whichever is
highly competitive business environment, whichhigher
motivated many companies to restructure their1. Directions under section 11B of the SEBI Act.
corporate strategies by including the tools of mergers 
and takeovers.The Board may, in the interest of securities market,
In the meantime, SEBI was established in 1992 as agive directions, without prejudice to its right to
body corporate under the SEBI Act, 1992 with theprosecute under section 24 of the SEBI Act
main objectives to- i) protect the interest ofincluding:a.) Directing the person concerned not to
investors in securities market, and ii) to provide forfurther deal in securities.b.) Prohibiting disposal of
the orderly development of securities market. Thussecurities acquired in violation of these regulations.c.)
while the possibility of takeover of a companyDirect sale of securities acquired in violation of these
through share acquisition is desirable in newregulations.
competitive business environment for achieving1. Directions under section 11(4) of the Act;
strategic corporate objectives, there has to be well 
defined regulation so that the interest of allThe authority may give the directions to the person
concerned are not jeopardized by sudden takeoverin default & the directions may include the following:
threats.1.  
In the light of then present circumstances, the need2. Suspend the trading of any security in a recognised
for some law to regulate takeover was strongly felt.stock exchange;
Moreover to achieve its objectives as stated in SEBI3. Restrain persons from accessing the securities
Act, 1992, SEBI enacted SEBI (Substantial Acquisitionmarket and prohibit any person associated with
of Shares and Takeover) Regulations, 1994 insecurities market to buy, sell or deal in securities;
exercise of powers conferred under section 30 of4. Suspend any office-bearer of any stock exchange
the Act which laid down a procedure to be followedor self-regulatory organisation from holding such
by an acquirer for acquiring majority shares orposition;
controlling in another company, so that process of5. Impound and retain the proceeds or securities in
takeover is carried out in a fair and transparentrespect of any transaction which is under
manner.investigation
Thereafter, these regulations have been amended a6. Attach bank accounts of persons involved in
number of times to address the changingviolation for a period not exceeding one month.
circumstances and needs of corporate sector. In7. Direct any intermediary or any person associated
1997 SEBI Takeover Code has been rechristened bywith the securities market in any manner not to
enacting SEBI (Substantial Acquisition of Shares anddispose of or alienate an asset forming part of any
Takeover) Regulations, 1997 substituting SEBItransaction which is under investigation
(Substantial Acquisition of Shares and Takeover) 
Regulations, 1994. 
 1. Cease and desist order in proceedings under
What is meant by Takeovers & Substantialsection 11D of the Act;
acquisition of shares? 
When an "acquirer" takes over the control of theA Cease and desist order can also be passed under
"target company", it is termed as Takeover. Whensection 11D of the SEBI Act from committing or
an acquirer acquires "substantial quantity of shares orcausing any violation of the SEBI (Substantial
voting rights" of the Target Company, it results intoAcquisition of Shares & Takeover) Regulations, 1997.
substantial acquisition of shares. The term1. Adjudication proceedings under section 15HB of the
"Substantial" which is used in this context has beenAct.
clarified subsequently 
Meaning of substantial quantity of shares or votingA residual clause has been provided in the Act,
rightswherein it is mentioned that if any violation act is not
 The said Regulations have discussed this aspect ofspecifically covered under the provisions, then the
‘substantial quantity of shares or votingperson may be held liable for a penalty which may
rights’ separately for two different purposes:extend to one crores rupe
(I) For the purpose of disclosures to be made by 
acquirer(s): 
(1) 5% or more shares or voting rights: 
A person who, along with ‘persons acting inPerceived pros and cons of takeover
concert’  (“PAC”), if any, acquiresPerceived pros and cons of a takeover differ from
shares or voting rights (which when taken togethercase to case but still there are a few worth
with his existing holding) would entitle him to morementioning.
than 5% or 10% or 14% shares or voting rights ofPros:
target company, is required to disclose the aggregate1. Increase in sales/revenues (e.g. Proctor & Gamble
of his shareholding or voting rights to the targettakeover of Gillette)
company and the Stock Exchanges where the shares2. Venture into new businesses and markets
of the target company are traded within 2 days of3. Profitability of target company
receipt of intimation of allotment of shares or4. Increase market share
acquisition of shares .5. Decrease competition (from the perspective of the
2) More than 15% shares or voting rights:acquiring company)
An acquirer who holds more than 15% shares or6. Reduction of overcapacity in the industry
voting rights of the target company, shall within 217. Enlarge brand portfolio (e.g. L'Oréal's takeover of
days from the financial year ending March 31 makeBodyshop)
yearly disclosures to the company in respect of his8. Increase in economies of sale 
holdings as on the mentioned date. 
The target company is, in turn, required to pass onCons:
such information to all stock exchanges where the1. Reduced competition and choice for consumers
shares of target company are listed, within 30 daysin oligopoly markets. (Bad for consumers, although
from the financial year ending March 31 as well as thethis is good for the companies involved in the
record date fixed for the purpose of dividendtakeover)
declaration.2. Likelihood of job cuts.
(II) For the purpose of making an open offer by the3. Cultural integration/conflict with new management
acquirer4. Hidden liabilities of target entity.
(1) 15% shares or voting rights: 
An acquirer who intends to acquire shares which 
along with his existing shareholding would entitle himMergers and Acquisitions are a natural process of
to more than 15% voting rights, can acquire sucheconomy. There is no point in fighting about them in
additional shares only after making a publica free economy. At the same time, the basic point
announcement (“PA”) to acquire at leastthat it thwarts or in a way hampers the substantial
additional 20% of the voting capital of the targetgrowth of the small retail businesses is also very true.
company from the shareholders through an openToo much of centralization of economic activities is
offer.bad either by government or Private individuals and
(2) Creeping limit of 5%:companies.  It may give us the efficiency of
An acquirer who is having 15% or more but less thaneconomy to give additional benefits or facilities when
75% of shares or voting rights of a target company,buying from large conglomerates , but will kill the
can consolidate his holding up to 5% of the votingeffectiveness of economy that allows many people
rights in any financial year ending 31st March.to participate, thereby depriving them of livelihood.
However, any additional acquisition over and aboveIn fact it would turn a huge amount of people into
5% can be made only after making a publicbio-mass of bigger businesses used and thrown at
announcement. However in pursuance of Reg. 7(1A)will, killing the entreprenuership of people that is
any purchase or sale aggregating to 2% or more ofneeded to sustain a large economy such as ours.
the share capital of the target company are to beHence the solution is to exercise care and concern on
disclosed to the Target Company and the Stockwhich sectors efficiency is important and in which
Exchange where the shares of the Target companysectors effectiveness is important.
are listed within 2 days of such purchase or saleToday’s two big parties do not have that sense.