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An overhaul of the Takeover Code

Nitu AgarwalShuchita Bhushan

The Securities and Exchange Board of India (Sebi) has finally notified the much anticipated Sebi (Substantial Acquisitions of Shares and Takeovers) Regulations, 2011 (the new code). The new code replaces the old takeover code of 1997 and will be effective from October 22 2011. It is substantially based on the recommendations made by the Takeover Regulatory Advisory Committee constituted by Sebi.

The new code has introduced some key changes, the most significant of which is the raising of the takeover trigger limit for open offer from 15% to 25%. This would definitely signal relief to strategic investors interested in investing in a higher stake and also to companies looking for further capital. The other significant change is the increase in the minimum offer size from 20% to 26%.

New parameters for computation of the offer price have been added under the new code with some separate parameters for direct and indirect acquisitions. The new code also now specifies a mechanism for differentiating indirect material acquisitions from non-material acquisitions based on their materiality to the main deal.

The new code has made a significant change to the creeping acquisition limit permitting consolidation up to 5% per financial year by a shareholder having a shareholding between 25% and 75% so long as the maximum non-public shareholding limit of 26% is not breached.

The new code has also introduced some welcome changes as regards corporate governance issues. While under the old code the directors of the target company had the option of not making any recommendations on the offer to shareholders, under the new code, it is mandatory for independent directors to make a recommendation on the open offer.

The new code also explicitly provides for a separate regime for voluntary offers for shareholders holding shares or voting rights in the target between 25% and 75%, provided that the shareholding post open offer should be such as would allow the acquirer to exercise an additional 10% of the voting rights and simultaneously should not breach the minimum public shareholding limit.

It will no longer be possible to do a whitewash case of a change in control. Under the old code, the change in control does not trigger the open offer requirement if a shareholders' special resolution is passed by the company subject to certain conditions. This whitewash mechanism has been dropped under the new code on the recommendation of the Committee.

The changes in disclosure requirements are likely to ruffle many feathers. The old code merely required disclosure of any pledge created on promoters' shares. The definition of pledge under the new code has been expanded to include encumbrances and accordingly any encumbrance over promoter shareholding would need to be disclosed.

Admittedly, the new code has been enacted with the view of promoting capital market interests and protecting the legitimate interests of all stakeholders. While some changes are welcome, others do not meet the said cornerstone. Also, the new code continues to be inimical and not just hostile to greenmail offers.

Nitu Agarwal and Shuchita Bhushan

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