Module : Merger,

g , Acquisition
q and
Corporate Restructuring

Session 7-8
Bhagwati Committee Report 1997
Salient Features of Takeover Regulations 1997

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Objectives
j

„ Bhagwati
g Committee was set up
p
‰ to regulate corporate restructuring transactions.
‰ to examine areas of deficiencies in the existing
g
regulations and suggest amendments.
‰ to review the guidelines issued earlier by the
Securities and Exchange Board of India (SEBI),

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Bhagwati Committee (BC) : the
making
ki off a regulation
l ti

‰ 1994 Acquisition of Shares and

Takeovers Regulations .
‰ August
g 1996 The draft code
‰ January 1997 Takeover Regulations
of SEBI
‰ These regulations were modeled closely
along the lines of the UK City Code of
Takeovers

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BC principles guiding the operation and
interpretation of regulations.
regulations
1. Equality of treatment and opportunity to all shareholders;
2
2. Protection of interests of minority shareholders;
3. Fair and truthful disclosure of all material information by the acquirer in all
public announcements and offer documents;
4. No information to be furnished by the acquirer and other parties to an offer
exclusively
l i l tto one group off shareholders;
h h ld
5. Availability of sufficient time to shareholders for making informed decisions;
6. An offer to be announced only after the most careful and responsible
consideration;
7. The acquirer and all other intermediaries professionally involved in the offer, to
exercise highest standards of care and accuracy in preparing offer documents;
8. Awareness of the limitations on freedom in the process of substantial
acquisition of shares;
9. All parties to an offer to refrain from creating a false market in the securities of
the target company; and
10. No action will be taken by the target company to frustrate an offer without the
approval of the shareholders.
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Terms Defined by BC

‰ Acquirer: any person who directly or indirectly acquires or agrees to

acquire equity or voting rights or control over the target company directly
or indirectly. This definition covers indirect acquisition of listed companies
by acquiring unlisted holdings of investment companies as well.
‰ Control: Control is defined to include the right to appoint majority of the
directors or to control the management
g or policy
y decision exercisable by y
person or persons acting individually or in concert, directly or indirectly,
including by virtue of their shareholding or management rights or
shareholders’ agreements or voting agreements.
‰ Persons Acting in Concert: According to the Committee to be acting in
concert with an acquirer persons must fulfill certain ‘bright
bright line
line’ tests.
tests They
must have community of interest which could be acquisition of shares or
voting rights beyond the threshold limit or gaining control over the
company and their very act of acquiring the shares or voting rights in a
company must serve this common objective.The Committee also
suggested
t d that
th t persons acting
ti in
i concertt should
h ld bbe grouped d tto convey th
the
presumption of relationship.

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Terms Defined by BC
Promoter:
‰ P
Promoter t means theth persons in
i overallll control
t l off th
the company,
relations of the promoter, and where promoter is a corporate body, a
subsidiary or holding company which holds 10 percent of the equity
and any corporate body in which a group of individuals who hold 20
percent or more of equity also hold 20 percent or more of the equity of
the promoter.
Public Shareholding:
‰ The Committee defined it to mean shareholding in the hands of any
person other than the acquirer and persons acting in concert with him
(shares include convertible debenture and GDRs).
Target Company:
‰ It is defined as the listed company which is the subject matter of
acquisition or takeover
takeover.

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Recommendations of the
Committee
„ The Bhagwati Committee recommended the exemption of acquisition of
shares under Section 81A of the Companies Act
„ The Committee also recommended that public offer must be made in case
where preferential offers result in change in control of a company and in such
cases the preferential price must also be taken into account in determining
the offer price.
„ The Committee has not recognized the discrimination between preferential
allotment and consolidation. The rate of acquisition is limited in the case of
consolidation while none exists under preferential allotment.
„ The Committee recommended that the distinction between acquisition
th
throughh negotiation
ti ti and
d market
k t transaction
t ti should
h ld bbe abandoned.
b d d
„ The Committee Recommended in the final report that persons holding not
less than 15% percent and not more than 75 percent may acquire up to 5
percent in a year without attracting mandatory public offer requirement.
„ Since investor protection is a mandate of SEBI
SEBI, takeover which entails a
change in management according to the Committee should necessarily be
the concern of SEBI. The shareholders of the target company should have
the right to decide whenever there is a change in incumbent management
without attracting open offer.

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Recommendations of the
Committee
„ A merchant banker of Category I should be appointed before making any public
announcement of offer.
offer The merchant banker should be an independent person so
that he can exercise independent due diligence in the discharge of his
responsibilities.
„ It is suggested by the Committee that the merchant banker should look out for the
financial soundness of the acquirer. If the acquirer is a defaulter and blacklisted by
financial institutions as compared to acquiring company which enjoys substantial
credit limits supported by personal guarantees of the directors, the financial
institutions may not be willing to swap the guarantees. The attitude of the financial
institutions should be checked by the merchant banker.
„ Public announcement of the offer was recommended to be made not later than
f
four working
ki days
d off the
th agreement.
t
„ The public announcement should also disclose the highest and average price paid
during the 12 month period prior to public announcement.
„ According to the Committee once a minimum level offer price is set it may be paid
in cash, shares or debt instruments. Option is to be given to the investor. If the
payment for consideration by a shareholder is made in cash, the acquirer would
have to make the payment of the minimum offer price be retained with the
additional disclosure about the highest price paid by the acquirer in the open
market during the 12 months prior to the public announcement.

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Salient Features of Takeover
R
Regulations
l i (1997)
„ Persons Acting in Concert
‰ According to the Takeover Regulations 1997 Persons acting in
concert with other person include
„ A company or holding company or subsidiary
„ A company y with anyy of its directors or any
y persons which is
entrusted with the management of funds of the company,
„ Directors of the above company
„ Mutual funds with sponsor or trustee or asset management
company
„ Foreign Institutional Investors (Flls) with sub-accounts
„ Merchant Bankers with their clients as acquirer
„ The common objective or purpose of persons acting in
concert are
‰ Substantial acquisition of shares
‰ Voting rights
‰ Gaining control over the target company

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Salient Features of Takeover
R
Regulations
l i (1997)
„ Timing for Public Announcement of Offer
‰ The Takeover Regulations 1997 has laid down that the
merchant baker has to make the public announcement not
later than 4 working days of acquisition. Global acquisitions,
whereby a public announcement for global acquisition could
be made within three months from the date of requisition. But
the offer based on both dates, (4 days and 3 months) should
be calculated and the offer should be made at the highest
price.
price
‰ Public announcement of offer should be made in national
dailies in English, Hindi and other regional languages. Such
advertisement has to be submitted before issue byy the
merchant banker to SEBI 2 days before issue.
‰ The public announcement has also to be sent to all the stock
exchanges in which shares of target company are listed

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Salient Features of Takeover
Regulations (1997)
„ Letter of Offer
„ The Takeover Regulations 1997 also emphasized
that within 14 days of the public announcement, a
draft letter of offer must be sent to the target
company and the stock exchanges where the
shares are listed. This should be placed before the
b d off di
board directors
t off th
the ttargett company.
„ The contents of the public announcement of offer
are designed to provide shareholders with an
information base about the acquirers plan to enable
the investors to take an investment decision.

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Salient Features of Takeover
Regulations (1997)
„ Exemption from Public Offer but Reporting to SEBI
Mandatory
‰ The Takeover Regulations 1997 exempts the following
from public offer but made it mandatory to report to SEBI:
„ Allotment in public issues, rights issue
„ Preferential allotment
„ Allotment – to issue underwriter
„ Interse transfers among promoters will not be available if the
transfer takes place at a 20% premium to the market price.
„ Group companies
„ Relatives
„ Transfer from state level financial institution to co-promoters of
company.

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Salient Features of Takeover
Regulations (1997)
„ Exemptions (from making an offer) Where
Reporting to SEBI is not Mandatory
‰ The following transactions are exempted from making an
offer and are not required to be reported to SEBI.
„ allotment to underwriter pursuant to any underwriting
agreement
„ acquisition of shares in ordinary course of business by
‰ Regd. Stock brokers on behalf of clients
Regd
‰ Regd. Market makers
‰ Public financial institutions on their own account
‰ Banks and FIs as pledges
‰ A
Acquisition
i i i off shares
h b
by way off transmission
i i on succession
i or
by inheritance
‰ A scheme framed under section 18 of SICA 1985
‰ Acquisition of shares in companies whose shares are not listed

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Salient Features of Takeover
Regulations (1997)
‰ Form of Payment
„ The Takeover Regulations 1997 laid down that the offer to acquire shares
may be paid in
„ Cash
„ Exchange/or Transfer of shares
„ Exchange and transfer of debt with credit rating
„ A combination
‰ Determination of Minimum Offer Price (MOP) in Open Offer
„ According to the Takeover Regulations 1997 MOP is the highest if,
„ The negotiated price under the agreement entered into by the acquirers or
persons acting in concert which triggered the open offer.
„ Highest price paid by acquirer for any acquisitions including by way of public
or rights issue during 20 week period prior to the date of public
announcement.
„ P i paid
Price id b
by acquirer
i under
d a preferential
f ti l allotment
ll t t made
d tto hi
him or persons
acting in concert during 12 months up to closure of offer.
„ The changes notified (September 2002) dropped the average of weekly high
and low of the closing price collected in the stock exchange during 26 weeks
preceding
p g the p
public announcement.

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