The Achuthan Committee on Takeover Regulations has recommended an increase in the acquisition threshold for the initial trigger of an open offer from the current level of 15 per cent to 25 per cent of the voting capital of a listed company.
While no change has been recommended in the annual creeping acquisition limit of 5 per cent, the committee has recommended that creeping acquisition be permitted only to acquirers who already hold more than 25 per cent of the voting capital, subject to the aggregate post-acquisition shareholding not exceeding the maximum permissible non-public shareholding.
The Takeover Regulations Advisory Committee, constituted under the Chairmanship of C. Achuthan, submitted its report to C. B. Bhave, Chairman, Securities and Exchange Board of India (SEBI), here on Monday. Considering the substantive changes recommended upon review of the existing law governing substantial acquisition of shares and takeovers, the committee has comprehensively re-written the regulations.
The committee has emphasised clarity in the trigger of an open offer pursuant to an indirect acquisition of shares, voting rights in, or control over a target company. The ability to indirectly exercise voting rights beyond the trigger threshold limits in, or exercise control over a target company, would attract the obligation to make an open offer, regardless of whether such target company is a predominant part of the business or entity being acquired.
The committee has further recommended that if the indirectly-acquired target company is a predominant part of the business or entity being acquired, the same would be treated as a direct acquisition for all purposes. The committee has recommended that an open offer ought to be for all the shares of the target company to ensure equality of opportunity and fair treatment of all shareholders, big and small. The exception to this rule is the size of an open offer where the same is voluntary in natureRecognising the need to enable transparent consolidation by persons already holding in excess of 25 per cent, it has recommended voluntary offers of a minimum size of at least 10 per cent and a maximum size of such number of shares as would not result in a breach of the maximum non-public shareholding permitted under the listing agreement.
The committee noted that the 100 per cent open offer requirement could result in an acquirer ending up holding beyond the maximum permissible non-public shareholding, which may require the acquirer to either delist or bring down his holding to meet the continuous listing requirements. It has recommended that the acquirer may state upfront his intention to delist if his holding in the target company were to cross the delisting threshold pursuant to the open offer.
In the absence of any such disclosure or when the response to the open offer is below the delisting threshold, the acquirer would be required to either proportionately reduce both his acquisitions under the agreement that triggered the open offer and the acquisitions under the open offer or to bring down his holding to comply with continuous listing requirements. Now this option is not provided under the regulations, and will provide a seamless opportunity to new acquirers for delisting.
However, exemptions have been made precise, streamlined and provided with clear conditions on the basis of the specific charging provision from which exemptions would be available. While SEBI would continue to have the power to grant exemption from making an open offer, the requirement of making a reference to the Takeover Panel has now been left to the discretion of SEBI.
The minimum price payable as the offer price continues to be regulated. The minimum offer price is classified between the price payable for direct and indirect acquisitions. The major changes proposed are: market price to be based on 12 weeks volume weighted average as against higher of weekly averages of market prices for 26 weeks or two weeks; a qualitative improvement and expansion in the look back provision; and in the case of indirect acquisitions, ascription of value to the target company under certain circumstances.
The committee has brought in clarity on valuation in case the offer price is being paid through shares. To ensure that the shares given in consideration for the open offer are indeed liquid and an acceptable replacement for cash, eligibility conditions have been stipulated. The committee also noted that although the current regulations provide for exchange offers, the same has not been used for want of clarity on whether such issuance would attract provisions of preferential allotment and public issue requirements. It has recommended that SEBI may consider making suitable amendments to ICDR/other regulations as applicable.
The committee has recommended certain changes such as increasing the period for making a competing bid, prohibiting acquirers from being represented in the board of the target company, and permitting any competing acquirer to negotiate and acquire the shares tendered to the other competing acquirer, at the same price that was offered by him to the public.
The committee has recommended that the execution of the agreement that triggered the open offer obligation may be completed during the pendency of the open offer provided 100 per cent of the consideration payable under the open offer is deposited in escrow. The committee has further recommended that execution of such agreement would have to be completed within 26 weeks after the offer period. The current regulations restrict the target company from undertaking certain transactions during the offer period. The committee thought it fit to bring in materiality concept as also to enhance the scope of such restrictions to include transactions by subsidiaries since potentially material transactions can be undertaken at the level of any subsidiary of the target company without the approval of shareholders of the target company.
The committee has also decided to mandate recommendation on the open offer, by a committee of independent directors of the target company. At present, this is optional.
Timelines of various activities in the open offer process have been rationalized to compress the open offer period.
The committee has also recommended that a short public announcement should be made by the acquirer on the date of entering in to an agreement followed by a detailed public statement within five business days thereafter.
