Bhagwati panel for greater shareholder role

MUMBAI MAY 9. The change in management control of a company can be brought about only pursuant to a special resolution passed by the company's shareholders in a general meeting and postal ballot should be allowed in respect of such meetings, according to recommendations made by the Justice P.N. Bhagwati Committee which was set up to review provisions of SEBI (Substantial acquisitions of shares and takeovers) regulation 1997 in June 1998.

The committee, after deliberations, submitted the report and draft amendments to SEBI on May 8, 2002. It constituted of representatives from chambers of Commerce and Industry, investor associations, legal experts, merchant bankers, institute of Chartered Accountants of India and SEBI.

It has recommended that the present exemption for preferential allotment be continued subject to the condition that any resolution for preferential issue should provide for postal ballot to enable greater shareholder participation. Also, banks/financial institutions should be encouraged to consider financing takeovers.

An offer should always be for 20 per cent or above; but the offer may be subject to an acceptance level of less than 20 per cent.

Further, the scope of Regulation 3 namely the exemption provisions should be expanded to cover acquisitions by a person in pursuance to an open offer for exchange of share, in excess of creeping acquisition limit pursuant to offer of safety net made by the promoters/merchant bankers and by international development organisations such as IBRD, ADB, CDC, IFC.

The acquirers/persons acting in concert are all jointly and severally responsible for fulfilment of obligations under the regulations and the term `voting rights' which is not defined in the Regulations would carry the meaning as per definition in the Companies Act, 1956. Also, offer period may be reckoned to be from the date of the MoU, if any, to the date of completion of all formalities. For the purpose of these regulations, the term `shares' would not include preference shares.

The offer document should include an undertaking from the acquirer not to strip substantial assets except with prior approval of shareholders of the target company.

Acquirers may be allowed to enter the management after the period of competitive bidding is over. Such changes may be allowed only when 100 per cent of consideration payable, assuming full acceptances, is deposited in escrow in cash where the consideration payable is in cash or in the form of securities where the consideration payable is by way of issue, exchange and/or transfer of securities.

The investors may be allowed to withdraw the form of acceptance tendered up to three working days prior to the date of closure of offers. Disclosures should be made at every stage when the acquirer crosses the 5, 10 and 14 per cent limit, the committee recommended. For acquirers holding 15 per cent and above, purchases or sales at every 2 per cent level should be disclosed.

Interse transfer amongst different promoters or groups made at a price not exceeding 25 per cent as determined in terms of Regulation 20 alone would merit automatic exemption. Other cases may be referred to the panel.

Any payment in respect of non-compete agreement in excess of 25 per cent of consideration paid to persons other than the target company shall be deemed to form part of the consideration paid for acquisition of shares and should be factored in for purposes of reckoning offer price.

The regulations may be amended to make a provision for enabling SEBI to make reference to the panel for interpretation of the regulations. Any acquisition of shares in breach of Regulation 10, 11 or 12 of the Takeover Regulations shall be null and void.

Where exemption under Regulation 3 is not available for any reasons whatsoever and an acquisition is made in breach of Regulations 10, 11 or 12, such acquisition shall be null and void. Where it is not possible to restore status quo ante for any reason, SEBI should direct appointment of a merchant banker for the purpose of causing disinvestment of shares acquired in breach of Regulations either through public auction or market mechanism, in its entirety or in small lots, or through offer for sale. Any profit made in the process should be put in the Investor Protection Fund.

Where SEBI is satisfied that as a result of acquisition of any shares, violation of Regulation 10, 11 or 12 is likely to take place, SEBI may direct the target company or the depository not to give effect to transfer of any such shares and not to permit the acquirer or any nominee or any proxy of the acquirer, to exercise any voting or other rights attaching to such shares. For non-compliance with the disclosure requirement in Regulation 6, 7 and 8 the SEBI may have the power to direct disinvestment of such shares as are in excess of the trigger point for reporting requirement, as well as to impose monetary penalty.

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