Study Notes

Securities and Exchange Board of India

(Substantial Acquisition of Shares and Takeovers)

Regulations 2011
Part 1
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 – Part 1

Introduction

 These regulations are made by the Board in exercise of power conferred by Section 30
and Section 11(2h) of SEBI Act.
 These regulations shall apply to direct and indirect acquisition of shares or voting
rights in, or control over target company.
 These regulations shall not apply to direct and indirect acquisition of shares or voting
rights in, or control over a company listed without making a public issue, on the
Innovators Growth Platform of a recognised stock exchange
 These regulations prescribes a systematic framework for acquisition of stake in
listed companies.
 By these laws the regulatory system ensures that the interests of the shareholders of
listed companies are not compromised in case of an acquisition or takeover by
acquirer. It also protects the interests of minority shareholders, which is also a
fundamental attribute of corporate governance principle.
 It is not possible for each of the stakeholders in the company to guard their interests in the
company from all forms of third party. Thus, in case third party (Acquirer) proposes any
such acquisition or control over listed companies, such Acquirer would provide exit
opportunity to Shareholders of that listed company prior to completion of such
transaction.

Acquirer to make
Acquirer/ open offer to Listed
Person acting shareholders in
case it crosses Company
in concert
certain threshold

 The SEBI Takeover Regulations ensures that public shareholders of a listed company
are treated fairly and equitably in relation to a substantial acquisition in, or takeover of,
a listed company thereby maintaining stability in the securities market.
 The objective of the takeover regulations is to ensure that the public shareholders of a
company are mandatorily offered an exit opportunity at the best possible terms in case
of a substantial acquisition in, or change in control of, a listed company

Types of Corporate Takeovers

Friendly Takeover: This type of takeover takes place with the consent of target listed company.
It is either by way of agreement between two management or between two groups. Friendly
takeover often termed as negotiated takeover.

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SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 – Part 1

Hostile Takeover: This is the takeover which usually takes place when the acquirer does not
offer the target listed company the proposal. Rather the acquirer continues to acquire silently to
have control over the target listed company.

Friendly
Takeover

Hostile Bail out

Takeover Takeover

Bailout Takeover – This takeover is made by a financially strong acquirer to takeover sick
company. In this takeover, generally the acquirer has advantage of negotiating the price as all
lenders / creditors / suppliers of financially sick company would like to recover their amount.

Mergers and Takeovers - Mergers and takeovers (or acquisitions) are very similar corporate
actions. A takeover, or acquisition, is usually the purchase of a smaller company by a larger one
whereas a merger involves the mutual decision of two companies to combine and become one
entity; it can be seen as a decision made by two "equals."

Types of Mergers

Horizontal Merger: A horizontal merger occurs when companies operating in the same or
similar industry combine together. The purpose of a horizontal merger is to more efficiently utilize
economies of scale, increase market power, and exploit cost-based and revenue-based
synergies.

Reasons for merging horizontally:

 Increase market share and reduce competition in the industry

 Further utilize economies of scale (thus reducing costs
 Increase diversification
 Reshape the company’s competitive scope by reducing intense rivalry
 Realize economies of scope

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 SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 – Part 1

 Share complementary skills and resources

Vertical Merger: A vertical merger takes place when two companies that previously sold to or
bought from each other combine under single ownership. The companies are generally at different
stages of production. A manufacturer may decide to merge with a supplier of important
components or raw materials, for example, or with a distributor or retailer that sells its products.

When the supplier acquires the customer, it is an example of forward integration. When the
customer acquires the supplier, it is an example of backward integration.

The main aim of a vertical merger is not to increase revenue, but to improve efficiency or reduce
costs.

HORIZONTAL MERGER

TEXTILE
TEXTILE PRODUCER TEXTILE PRODUCER B V
PRODUCER C
A E Backward
SHIRT SHIRT R Integratio
SHIRT
MANUFACTURER A MANUFACTURER B MANUFACTURER T
C I
C Forward
CLOTHING STORE A L Integratio
CLOTHING STORE B CLOTHING STORE
C E

Conglomerate Merger: Conglomerate merger or Diagonal merger involves a merger between

two businesses that are not related to each other. The two companies are in completely different
industries or in different geographical areas. Conglomerate merger is helpful for companies to
extend their corporate territories, to gain synergy, expand their product range, etc. It is also termed
as Conglomerate Integration.

It can be further divided into pure and mixed conglomerate mergers. When two firms having
nothing in the common merge, it is termed as a pure conglomerate merger. On the other hand,
when the interest of companies merging together is, market expansion to gain more customers
or expanding their product range, it is termed as a mixed conglomerate merge

Reverse Merger: When a larger or healthier company merges into a smaller or weaker company,
it is called a reverse merger. One reason for such a transaction is to let the weaker company
continue to carry forward its losses to set off against future profits of the merged entity.

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SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 – Part 1

A reverse merger process is carried out to merge a thriving and potentially scalable private
company with a dormant or “shell” company listed on the exchange. The foremost objective of a
reverse merger process is to bypass the extensive procedures and regulations imposed by the
government on a company seeking to issue an IPO. The private companies achieve this by
acquiring greater than 51% of the equity share capital of the public shell company or commanding
a control over the board of directors.

Think of a reverse merger as a back door entry for a private company wanting quick entry to the
arena of listed entities. The private company is able to save on significant amounts of time, money
and management expertise when it opts for a reverse merger against an IPO. Also, going for an
IPO does not always guarantee a listing on the exchange. Insufficient funds raised during an IPO
may cause all effort to go in vain. A reverse merger is therefore, an inexpensive and simple route
to gain access to the exchange.

Amalgamation

Amalgamation is the combination of one or more companies into a new entity. An amalgamation
is distinct from a merger because neither of the combining companies survives as a legal entity;
a completely new entity is formed to house the combined assets and liabilities of both companies.

An amalgamation is an arrangement in which:

I. The assets / liabilities of two or more firms become vested in another firm.

II. As a legal process, it involves joining of two or more firms to form a new entity or absorption
of one/ more firms with another.

III. The outcome of this arrangement is that the amalgamating firm is dissolved / wound-up
and loses its identity and its shareholders become shareholders of the amalgamated firm.

Amalgamation is distinct from merger because a merger is a combination of two or more firms in
which only one firm would survive and the other would cease to exist, its assets / liabilities being
taken over by the surviving firm. A Merger is an arrangement in which the assets /liabilities being
taken over by the surviving firm.

Amalgamation Existing companies A and B are wound up and a new company C is formed to
take over the businesses of A and B
Absorption Existing company A takes over the business of another existing company B
which is wound up
External A New Company X is formed to take over the business of an existing
reconstruction company Y which is wound up.

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SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 – Part 1

SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011

Ch I Preliminary (Regulation 1 and 2)
Ch II Substantial acquisition of Shares, Voting Rights or Control, Threshold limit for open
offer, Exemptions (Regulations 3 to 11)
Ch III Open offer process (Regulations 12 to 23)
Ch IV Obligations of Directors, Target Company, Acquirer, Manager (Regulations 24 to 27)
Ch V Disclosures of Shareholding and Control (Regulations 28 to 31)
Ch V-A Power to Relax Strict Enforcement of the Regulations (Regulation 31A)
Ch VI Miscellaneous (Regulations 32 to 35)

Important Definitions

 Acquirer means any person who, directly or indirectly, acquires or agrees to acquire
whether by himself, or through, or with persons acting in concert with him, shares or voting
rights in, or control over a target company

 Acquisition means directly or indirectly, acquiring or agreeing to acquire shares or voting

rights in, or control over, a target company.

● Control includes the right to appoint a majority of the directors or beyond this to
control the management and policy outcomes exercisable by a person or in
concert, directly or indirectly, including by virtue of their shareholding or management
rights or shareholders agreements or voting agreements or in any other manner
 provided that a director or officer of said target company shall not be considered
in control over the target company, merely by holding such position.

Judicial Decisions made on "Control"

K. Sreenivasa Rao v. SEBI (2002 112 Comp Case 327 AP.):

In this case, the decision was that when an acquirer acquires the control over a target
company, there is the obligation to make a public announcement on the acquirer who agrees
to buy.

In M/s. Clearwater Capital Partners Ltd. v. SEBI, (Appeal No. 21 of 2013, (CCI) dated
Feb. 12, 2014):
In the case mentioned previously, the granting of voting rights to Clearwater was the ultimate
holding, which amounts to handing over the control over the target company.

In Re: Jet Airways Ltd Order No. WTM/RKA/CFD-DCR/17/2014 dated May 8, 2014:
In this case, the preferential allotment of 24% shares of Jet to Etihad was to occur. There was
the issue of whether 24% shares allotted to Etihad would amount to control over management
and policy decisions of Jet. SEBI upheld that the rights which are acquired by Etihad do not
result in a change in control and do not attract Reg. 2(1) (e) read with Reg. 4 of the Code.

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SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 – Part 1

 Enterprise value means the value calculated as market capitalization of a company

plus debt, minority interest and preferred shares, minus total cash and cash
equivalents

Enterprise value = Market capitalization + Debt + Minority Interest + Preferred shares

- Total cash and cash equivalents

 Frequently traded shares means shares of a target company, in which the traded
turnover on any stock exchange during the twelve calendar months preceding the
calendar month in which the public announcement is required to be made under
these regulations, is at least ten per cent of the total number of shares of such class
of the target company

 Maximum permissible non-public shareholding – means such percentage

shareholding in the target company excluding the minimum public shareholding required
under the Securities Contracts (Regulation) Rules, 1957

 Identified date means the date falling on the tenth working day prior to the
commencement of the tendering period, for the purposes of determining the
shareholders to whom the letter of offer shall be sent

 Immediate relative means any spouse of a person, and includes parent, brother, sister
or child of such person or of the spouse

 Manager to the open offer means a merchant banker

 Offer Period - means the period between

 the date of entering into an agreement, formal or informal, to acquire shares,

voting rights in, or control over a target company requiring a public
announcement, or the date of the public announcement, as the case may be, and
 the date on which the payment of consideration to shareholders who have
accepted the open offer is made, or the date on which open offer is withdrawn,
as the case may be.

Offer Period and Tendering Period are different. Offer period is wider and includes
tendering period.

 Tendering period means the period within which shareholders may tender their shares
in acceptance of an open offer to acquire shares made under these regulations

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SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 – Part 1

 Persons Acting in Concert (PAC): They may be classified into two categories

Depending upon common objective or purpose Deemed PAC as per sub- regulation (2)

1. persons who, with a common objective or purpose of acquisition of shares or voting

rights in, or exercising control over a target company, pursuant to an agreement or
understanding, formal or informal, directly or indirectly co-operate for acquisition of
shares or voting rights in, or exercise of control over the target company.
2. Without prejudice to the generality of the foregoing, the persons falling within the
following categories shall be deemed to be persons acting in concert with other
persons within the same category, unless the contrary is established, –
(i) a company, its holding company, subsidiary company and any company under
the same management or control;
(ii) a company, its directors, and any person entrusted with the management of the
company;
(iii) Directors and associate of directors of company mentioned above
(iv) promoters and members of the promoter group;
(v) immediate relatives;
(vi) a mutual fund, its sponsor, trustees, trustee company, and asset management
company;
(vii) a collective investment scheme and its collective investment management company,
trustees and trustee company;
(viii) a venture capital fund and its sponsor, trustees, trustee company and asset
management company;
(ix) an alternate investment fund and its sponsor, trustees, trustee company and
manager;
(x) a merchant banker and its client, who is an acquirer;
(xi) a portfolio manager and its client, who is an acquirer;
(xii) banks, financial advisors and stock brokers of the acquirer or of any company
which is a holding company or subsidiary of the acquirer, and where the acquirer is an
individual, of the immediate relative of such individual. However, this shall not apply to
a bank whose sole role is that of providing normal commercial banking services or
activities in relation to an open offer under these regulations;
(xiii) an investment company or fund and any person who has an interest in such
investment company or fund as a shareholder or unit holder having not less than 10%
of the paid-up capital of the investment company or unit capital of the fund, and any
other investment company or fund in which such person or his associate holds not
less than 10 per cent of the paid-up capital of that investment company or unit
capital of that fund. However, this shall not be applicable to holding of units of mutual
funds registered with the SEBI.

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SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 – Part 1

 Target Company means a company and includes a body corporate or corporation

established under a Central legislation, State legislation or Provincial legislation for the
time being in force, whose shares are listed on a stock exchange.

 Wilful Defaulter means any person who is categorized as a wilful defaulter by any
bank or financial institution or consortium thereof, in accordance with the
guidelines on wilful defaulters issued by the Reserve Bank of India and includes any
person whose director, promoter or partner is categorized as such