CORPORATE LAW -II

Ujjaleshwar Kumar
Kashyap
B.A.LL.B. (Self-finance)

7TH SEMESTER

STUDENTID:202004845

ROLL NO – 65

TOPIC:- TAKEOVER AND SUBSTANTIAL ACQUISITION OF SHARES

SUBMITTED TO :- PROF. QAZI USMAN , FACULTY OF LAW

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 INDEX

1. INTRODUTION

2. CONCEPT OF TAKEOVER

3. PROCEDURE OF TAKEOVER

4. OTHER LAWS GOVERNING TAKEOVER

5. SUBSTANTIAL ACQUISITION OF SHARES

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 INTROUDCTION

The twentieth century began with the process of transformation of entire business scenario.
The economy of India which was hitherto controlled and regulated by the Government was
set free to seize new opportunities available in the world. With the announcement of the
policy of globalization, the doors of Indian economy were opened for the overseas investors.
But to compete at the world platform, the scale of business was needed to be increased. In
this changed scenario, mergers and acquisitions were the best option available for the
corporates considering the time factor involved in capturing the opportunities made available
by the globalization.

In the year 1992, with the enactment of SEBI Act, SEBI was established as regulatory body
to promote the development of securities market and protect the interest of investors in
securities market. Thus SEBI appointed a committee headed by P.N. Bhagwati to study the
effect of takeovers and mergers on securities market and suggest the provisions to regulate
takeovers and mergers.

In its report, the committee stated the necessity of a Takeover Code on the following grounds:

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The confidence of retail investors in the capital market is a crucial factor for its
development. Therefore, their interest needs to be protected, an exit opportunity shall be
given to the investors if they do not want to continue with the new management., full and
truthful disclosure shall be made of all material information relating to the open offer so as to
take an informed decision, the acquirer shall ensure the sufficiency of financial resources for
the payment of acquisition price to the investors., the process of acquisition and mergers shall
be completed in a time bound manner. disclosures shall be made of all material transactions at
earliest opportunity.

In India, the substantial acquisition of shares is governed by the Securities and Exchange
Board of India (SEBI) regulations, specifically the SEBI (Substantial Acquisition of Shares

1
https://www.livemint.com/news/india/sebi-issues-master-circular-on-substantial-acquisition-of-shares-
takeovers-
11676554478652.html#:~:text=Market%20regulator%20Securities%20and%20Exchange,or%20voting%20rights
%2C%20directly%20or

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and Takeovers) Regulations, 2011. These regulations define the rules and procedures for
acquiring a substantial portion of shares in a listed Indian company.

CONCEPT OF TAKEOVER

Takeover implies acquisition of control of a compay which is already registered through the
purchase or exchange of shares. Takeover takes place usually by acquisition or purchase from
the shareholders of a company their shares at a specified price to the extent of at least
controlling interest in order to gain control of the company .

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From legal perspective, takeover is of three types; [i] Friendly takeover , [ii] Bail out
takeover , [iii] Hostile takeover.

[i] Friendly or Negotiated Takeover: - Friendly takeover means takeover of one company
by change in its management & control through negotiations between the existing promoters
and prospective investor in a friendly manner. Thus, it is also called Negotiated Takeover.
This kind of takeover is resorted to further some common objectives of both the parties.
Generally, friendly takeover takes place as per the provisions of Section 395 of the
Companies Act, 1956.

[ii] Bail Out Takeover - Takeover of a financially sick company by a financially rich
company as per the provisions of Sick Industrial Companies (Special Provisions) Act, 1985 to
bail out the former from losses.

[iii] Hostile takeover- Hostile takeover is a takeover where one company unilaterally pursues
the acquisition of shares of another company without being into the knowledge of that other
company. The most dominant purpose which has forced most of the companies to resort to

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https://www.tickertape.in/blog/decoded-substantial-acquisition-of-stake-and-takeovers-regulations-2011/

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this kind of takeover is increase in market share. The hostile takeover takes place as per the
provisions of SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997.

In the context of business, takeover is of three types; [i] Horizontal Takeover, [ii] Vertical
takeover, [ii] Conglomerate takeover:

[i] Horizontal Takeover- Takeover of one company by another company in the same
industry. The main purpose behind this kind of takeover is achieving the economies of scale
or increasing the market share. E.g. takeover of Hutch by Vodafone.

[ii] Vertical Takeover - Takeover by one company with its suppliers or customers. The
former is known as Backward integration and latter is known as Forward integration. E.g.
takeover of Sona Steerings Ltd. By Maruti Udyog Ltd. is backward takeover. The main
purpose behind this kind of takeover is reduction in costs.

[iii] Conglomerate takeover: Takeover of one company by another company operating in

totally different industries. The main purpose of this kind of takeover is diversification.

PROCEDURE FOR TAKEOVER

The Takeover regulations have been made to protect the investors and provide a fair working
environment. The Securities and Exchange Board of India (substantial acquisitions of shares
and Takeovers) Regulations, 2011 governs the mergers and acquisitions transactions which
involve acquisition of a substantial stake in a publicly listed company. SEBI is the market
regulatory for public listed companies. When a company acquires 5% or more of another
listed company (target company) then it has to make a disclosure of all its holdings within 2
days of acquisition of shares. When a company acquires 5% or more shares of the target
company then it is called as substantial acquisitions of shares.

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When the acquirer company acquires 25% shares or more they have to give an open offer to
the shareholders of the company for another 26% shares so that they can get 51% or more
shares and they can takeover the company, they can acquire only 75% shares of the company
as the rest 25% is public shareholding and further proposes to acquire additional shares or

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https://blog.ipleaders.in/takeover-regulations-india/

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voting rights which enables them to exercise more than 5% of voting rights in a financial year
and the acquiring company has to make an open offer in this case too. An Open Offer is made
to the Public shareholders of Target Company pursuant to a Trigger event as prescribed in
regulations to provide them an Exit Opportunity in case the Public shareholders are not
willing to continue with the Company or upcoming Management pursuant to Takeover
Offer.

TENDER OFFERS DEALT BY TAKEOVER REGULATIONS

The Takeover Regulations deal with three types of tender offers

1. Mandatory Tender Offers:

The Takeover Regulations prescribe certain circumstances where an acquirer is obligated to
make a Mandatory Tender Offer to the shareholders of the target company to acquire at least
26% of the shares of the target company.

2. Voluntary Tender Offers:

The Takeover Regulations provide a particular system to acquirers to make Voluntary Offers
to public investors. A Voluntary Offer might be made by a current investor or an acquirer
who holds no shares in the target company.4

The dispatch of a Voluntary Offer is dependent upon the satisfaction of specific conditions.
Hence, if any acquirer or PACs with such acquirer has gained any offers or casting a ballot
privilege of the target company without pulling in a Mandatory Tender Offer in the first 52
weeks, at that point such acquirer won’t be allowed to dispatch a Voluntary Offer. Likewise,
an acquirer who has launched a Voluntary Offer is not permitted to acquire any shares of the
target company during the offer period other than under such tender offer.

An acquirer who has launched a Voluntary Offer is also not permitted to acquire shares of the
target company for a period of 6 months after the completion of the Voluntary Offer, except

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https://www.legalserviceindia.com/article/l183-Takeovers.html

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under another Voluntary Offer. This does not prohibit the acquirer from launching a
competing offer under the Takeover Regulations.

3. Competing Offers:
A competing offer is required to be made within 15 business days of the original tender
offer. A contending offer might be made by any individual (i.e., regardless of whether it be a
current investor or not) without being subject to the restrictions applicable to Voluntary
Offers. There is a restriction on a competing acquirer making an offer or going into an
understanding that could trigger a Mandatory Tender Offer whenever after the expiry of the
said 15 business days and until finish of the first offer. Therefore, time is of the pith. Once a
competing offer has been launched, the two competing offers are treated on par and the target
company would have to extend equal levels of information and support to each competing
acquirer. The Target company can’t support one acquirer over the other(s) or delegate such
acquirer’s chosen people on the top managerial staff of the objective organisation,
forthcoming finishing of the contending offers. A competitive offer can be restrictive upon a
base degree of acknowledgment just if the first delicate offer is additionally contingent. The
‘losing’ competing acquirer is not permitted to sell the shares acquired by him under the
competing offer to the winner of the competing bid. Therefore, any person making a
competing offer will continue to be a shareholder in the target company, regardless of
whether his competing offer has fizzled.

OTHER LAWS GOVERNING TAKEOVER CODE IN INDIA

Following are some other laws which govern takeover in India:-

1. THE COMPANIES ACT, 2013 – Section 261 of Companies Act, 2013 deals with
preparation of scheme of rehabilitation and revival, including the takeover of a
sick company by a solvent company with the authorisation given by NCLT to the
company administrator. Section 230 (11) deals with every form of compromise
and arrangement. Section 250 (3) states that NCLT has the power to direct any
company administrator to take over the assets and management of that company.

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 2. THE COMPETITION ACT OF 2002 – This act governs and regulates those
transactions which have an adverse effect on competition in India.

CONDITIONS UNDER WHICH TAKEOVER WILL TAKE PLACE

Following are the basic requirement on whose fulfilment takeover will take place :-

 The target company must be a listed company.

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 If the acquirer is an indian listed company and the target company is also indian
listed company then these laws will be applicable.

 If the acquirer is a foreign listed company but the target company is indian then
these laws will be applicable.

 If the acquirer is an indian listed company but the target company is a foreign
listed company then these laws will not be applicable.

 If the acquired and the target company are foreign listed companies then these
laws will not be applicable.

FUNDAMNETAL OBJECTIVES OF VARIOUS RULE GOVERNING

TAKE OVER

Following are the basic objectives for various laws governing that govern takeover in India:-

 To give transparent and straightforward lawful structure to encouraging takeover

exercises.

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https://www.mondaq.com/india/shareholders/754950/substantial-acquisition-of-shares-and-take-over-sebi-
regulations-2011-overview

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  To protect the interest of the shareholders in securities and securities market,
considering that the acquirer and different investors need a reasonable, fair and
straightforward structure to secure their inclinations.

 To balance the conflicting objectives and interests of various stakeholders in the

context of substantial acquisition of shares and takeovers of listed companies.

 To provide each shareholder an opportunity to exit its investment in the target

company when a substantial acquisition of shares or takeover of a target company
takes place.

 To guarantee that reasonable and exact revelation of all material data is made by
people answerable for making them to various shareholders to empower them to
settle on educated choices.

 To ensure that the affairs of the target company are conducted in the ordinary
course when a target company is the subject matter of an Mandatory Tender Offer
(MTO).

 To manage and accommodate reasonable and compelling competition among

acquirers burning of assuming control over a similar objective organization.

 To guarantee that only those acquirers who are prepared to do really satisfying
their commitments under the Takeover Guidelines make MTOs.

SUBSTANTIAL ACQUISITION OF SHARES

In India, the substantial acquisition of shares is governed by the Securities and Exchange
Board of India (SEBI) regulations, specifically the SEBI (Substantial Acquisition of Shares
and Takeovers) Regulations, 2011.6 These regulations define the rules and procedures for
acquiring a substantial portion of shares in a listed Indian company. Here are the key aspects
of substantial acquisition of shares in India:

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https://www.tickertape.in/blog/decoded-substantial-acquisition-of-stake-and-takeovers-regulations-2011/

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1. Regulatory Authority: -The primary regulatory authority overseeing substantial acquisition
of shares in India is SEBI. SEBI regulates securities markets and ensures transparency,
fairness, and investor protection in such transactions.

2. Thresholds: In India, an acquirer is required to make a public disclosure if their

shareholding crosses the 5% threshold in a listed company. This threshold is a key trigger for
regulatory compliance.

3. SEBI Regulations: The SEBI (Substantial Acquisition of Shares and Takeovers)

Regulations, 2011, often referred to as the Takeover Code, govern substantial acquisitions of
shares in India. The regulations are designed to protect the interests of shareholders and
ensure transparency in the acquisition process.

4. 7Open Offer Obligations: When an acquirer's shareholding crosses the 25% threshold (in
terms of voting rights), they are required to make an open offer to the shareholders of the
target company to acquire additional shares. The open offer price must not be less than the
highest price paid by the acquirer for the shares during the preceding 26 weeks.

5. Due Diligence: Due diligence is a crucial part of the process for both acquirers and target
companies. It involves a comprehensive review of financial, legal, operational, and
compliance aspects to ensure a smooth acquisition process.

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https://www.barclays.in/content/dam/barclays-in/documents/information/SUBSTANTIAL-ACQUISITION-OF-
SHARES-AND-TAKEOVERS.pdf

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6. Valuation and Pricing: The valuation of shares in an acquisition is based on SEBI
guidelines and factors like market price, book value, earnings, and discounted cash flows.
Pricing must be fair and transparent.

7. Regulatory Approvals: Depending on the nature of the acquisition and the industry,
acquirers may need approvals from other regulatory bodies, such as the Reserve Bank of
India (RBI) or the Competition Commission of India (CCI).

8. Shareholder Rights and Interests: Minority shareholders have rights and protections during
substantial acquisitions. They are entitled to information and must be treated fairly during the
process.

9. Anti-Takeover Measures: Target companies may employ various anti-takeover strategies

to prevent acquisitions, such as poison pills or staggered boards.

10. Compliance and Reporting: Strict compliance with the Takeover Code is essential to
avoid penalties and legal consequences. Acquirers must report the acquisition to SEBI, the
stock exchange, and the target company.

11. Legal Implications: Share acquisitions in India must comply with the Companies Act,
2013, and other relevant laws. Non-compliance can result in legal actions and penalties.

12. Exit Options: Acquirers need to consider exit options, including selling shares in the
secondary market, to realize the value of their investment.

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These regulations and guidelines are in place to ensure transparency, fairness, and the
protection of the interests of all stakeholders involved in substantial acquisitions of shares in
Indian companies. It's essential to consult legal experts and stay updated on the latest
regulatory developments to navigate these complex processes effectively.

General rule of acquisition of shares in a target company

The general rule is that an acquirer or persons in cohort are prevented from buying additional
shares if that gives them voting rights equal to or in excess of 25% in the target company.
However, the rule has an exception. That is, the acquirer or persons in cohort can acquire
additional shares only on making an open offer publicly.

Meaning, as per SEBI Substantial Acquisition of Shares and Takeovers Regulations, any
person or persons having a shared objective looking to buy/acquire shares or control the
voting rights of the target company, such that their combined interest is more than 25%, are
mandated to make a public announcement of an open offer. Note that the title of an ‘officer’
or a ‘director’ of a target company doesn’t give control over the target company to the
personnel holding such p ositions.

What is an open offer?

As per the Substantial Acquisition of Shares and Takeovers Regulations, 2011, an open offer
is an ‘exit opportunity’ offered by an acquirer of shares to the existing shareholders of the
target company so that they can sell their stock positions and exit the company should the
developments not interest them. The offer price at which the existing shareholders can sell
their stocks is ascertained by a person appointed by SEBI. This allows a fair procedure.
Besides, an open offer also discloses significant developments that would happen in the
company in the near future to the existing shareholders.

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 What is a trigger point?

A trigger point is when the acquirer of shares is mandated to make an open offer via a public
announcement. As per the Substantial Acquisition of Shares and Takeovers Regulations
2011, trigger point kicks in when an acquirer, who is an existing shareholder:

 Holds 25% voting rights on owning equity shares in a company and wants to
buy over 5% more voting rights in a financial year OR

 Holds less than 25% shares or voting rights in the target company and wants to
buy more such that their total shareholding exceeds 25% interest in the target
company.

CONCLUSION

Takeovers haven’t been prohibited anywhere within the code nor has it been discouraged.
The whole intention of the Indian law makers has been to forestall the premiums of investors
and speculators during such acts. However, while doing this the policy makers adopted a
really protective policy which successively made hostile takeovers resemble a feared
apparition. This over protectionism wasn’t favoured by major economy players within the
world owing to the recent trends of globalisation and opening up of domestic markets for
international players. So to cater to the needs of changing society the policy makers have
come up with a new Takeover Code which would be implemented by 2011 in all
probabilities. We have also seen different types of takeovers and how important takeover and
acquisitions are for the increasing Indian economy but in the right way.

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REFERENCES

1. https://www.livemint.com/news/india/sebi-issues-master-circular-on-substantial-
acquisition-of-shares-takeovers
211676554478652.html#:~:text=Market%20regulator%20Securities%20and%20Exchange,or
%20voting%20rights%2C%20directly%20or
3 https://www.tickertape.in/blog/decoded-substantial-acquisition-of-stake-and-takeovers-
regulations-2011/
4 https://blog.ipleaders.in/takeover-regulations-india/
5https://www.legalserviceindia.com/article/l183-Takeovers.html
6https://www.mondaq.com/india/shareholders/754950/substantial-acquisition-of-shares-and-
take-over-sebi-regulations-2011-overview
7https://www.tickertape.in/blog/decoded-substantial-acquisition-of-stake-and-takeovers-
regulations-2011/
8https://www.barclays.in/content/dam/barclays-in/documents/information/SUBSTANTIAL-
ACQUISITION-OF-SHARES-AND-TAKEOVERS.pdf

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