Foreign acquirers and the Takeover Code

By Uday Walia, S&R Associates

The acquisition of an Indian listed company by a foreign company is regulated by the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (Takeover Code).

Public announcement

Under regulation 10 of the Takeover Code, a foreign company cannot acquire 15% or more of the voting rights of an India listed company without making a public announcement. If the acquirer already owns more than 15%, (but less than 55%) of the voting rights of the target, regulation 11 of the code says that it cannot acquire more than 5% of the voting rights of the target in any financial year without making a public announcement.

Uday Walia,Partner,S&R Associates
Uday Walia
S&R Associates

The public announcement must comply with the requirements of regulation 16 of the code. It should include the percentage of shares to be acquired from the public, the minimum offer price, the mode of payment of consideration, the identity of the acquirer and its promoters, and the existing shareholding of the acquirer. The public announcement should also include the salient features of the agreement entered into by the acquirer for the acquisition of control, the object and purpose of the acquisition and the highest and average price paid by the acquirer. In addition it should state the names of persons acting in concert with the acquirer for the purchase of shares in the target during the 12-month period prior to the date of the public announcement.

Offer price and ‘control’

The offer price in the open offer is required to be the highest of: (i) the price agreed upon by the acquirer to acquire shares or voting rights of the target; (ii) the price paid by the acquirer or persons acting in concert with it for the acquisition of shares or voting rights of the target during the 26 weeks preceding the date of the public announcement; and (iii) the average of the weekly high and low of the closing prices of the shares of the target as quoted on the stock exchange where its shares were most frequently traded during the 26 weeks or the two weeks preceding the date of public announcement.

If the acquirer chooses to acquire shares or voting rights in a company that controls the target (the promoter) the acquirer will get voting rights in the target only if the acquisition has given the acquirer control over the promoter and hence control over the shares of the target held by the promoter. The term “control” as defined in the Takeover Code includes “the right to appoint majority of the directors or to control the management or policy decisions exercisable by a 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 or in any other manner”. The Supreme Court in Technip SA v SMS Holdings (Private) Limited confirmed that the test in such circumstances was whether there was a change of control.

If such an acquisition results in an indirect change of control in the target, regulation 12 of the Takeover Code states that the acquirer will be required to make an open offer to acquire at least 20% of the target’s shares. Under regulation 20(12), “the offer price for indirect acquisition or control shall be determined with reference to the date of the public announcement for the parent company and the date of the public announcement for acquisition of shares of the target company, whichever is higher, in accordance with the above provisions”. The Securities Appellate Tribunal in Hamlet Holdings II SpA v SEBI held that “public announcement” does not apply to the acquisition of a parent if the parent is not an Indian listed entity and does not mean the date on which the Indian stock exchanges were notified of this acquisition.

Under regulation 20 of the Takeover Code, the offer price payable by the acquirer under an open offer can be paid in cash or in securities of the acquirer if the acquirer is itself a listed company.

Regulatory approvals

The consolidated Foreign Direct Investment Policy that came into effect on 1 April states that prior approval from the Reserve Bank of India (RBI) is required for the purchase or sale of shares by a person not resident in India.

Also, if the acquirer is a person resident outside India and the offer price includes listed shares of the acquirer, prior approval of the government’s Foreign Investment Promotion Board will be required.

Proposed amendments

On 19 July, the Takeover Regulations Advisory Committee (TRAC) of SEBI published a report suggesting amendments to the code. Public comments are invited until 31 August. If the indirectly acquired target company is a predominant part of the business of the entity being acquired, TRAC proposes that such an acquisition should be treated as a direct acquisition. TRAC then proposes that the open offer requirements will vary depending on whether it is a direct acquisition or an indirect acquisition.

Uday Walia is a partner at S&R Associates, a New Delhi-based law firm.


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