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Timely changes to streamline takeovers

  • Sebi's moves should help bring clarity to the takeover process and assist fund infusion in distressed companies amid the covid crisis.

In response to the covid crisis, the Securities and Exchange Board of India (Sebi) has made several relaxations in regulations to assist an infusion of funds into companies. It has temporarily relaxed pricing norms for issuances and permitted higher levels of creeping acquisitions in some instances. As a regulator, it has been much attuned to the needs of all stakeholders in these troubled times, and one hopes to see more relief on this front. In its latest board meeting on 25 June 2020, Sebi approved certain amendments to the Takeover Code. The proposed amendments, however, are unrelated to the ongoing pandemic and merely address existing anomalies.

Whether an acquirer can acquire on the floor of the stock exchange substantial shares that trigger an open offer has been a question that has received divergent views. Sebi’s latest proposal seeks to set this matter to rest and permit the closing of the underlying trigger transaction on the exchange, provided the acquirer retains the shares in escrow and does not exercise the voting rights. To elaborate, Sebi proposes to amend Regulation 22(2A) of the Takeover Code. Regulation 22(1) prohibits an acquirer from completing the transaction that triggers an open offer until the offer period expires—except inter alia in cases of preferential allotments. Regulation 22(2), however, allows the acquirer to complete the triggering transaction 21 days after filing of the detailed public statement if it deposits 100% of the open offer consideration in escrow. Regulation 22(2A) currently seeks to make an exception to Regulation 22(1), whereby the acquirer can close the underlying transaction even before expiry of the 21-day period, provided (a) the acquirer acquires the shares of the target company through a preferential issue or through the stock exchange settlement process, ‘other than through bulk deals or block deals’; and (b) the shares so acquired are kept in an escrow account and the acquirer does not exercise any voting rights over such shares. Regulation 22(2A) in its current form was baffling as preferential allotments were in any case exempted from Regulation 22(1), and also it was unclear as to what falls within substantial acquisition through the stock exchange settlement process that is neither a block or bulk deal. The proposed amendment by Sebi is helpful as it expands the exemption under Regulation 22 (2A) to bulk and block deals, which was earlier expressly not permitted.

Sebi has also increased the amounts that have to be placed in escrow for indirect acquisitions that trigger an open offer. Currently, as noted above, for a direct acquisition, in case the acquirer wants to take control of the company prior to the completion of offer formalities, it has to fully fund the escrow. However, in case of an indirect acquisition, even though the offer process generally commences only after the underlying parent transaction is complete and the acquirer gains control over the parent entities, the acquirer was only required to fund the escrow on the basis of the same slab as a direct acquisition, which ranges from 10% to 25% of the total consideration payable under the open offer. Sebi now proposes to fix this anomaly by providing that in case of indirect acquisitions, an amount equivalent to 100% of the consideration payable under the open offer must be deposited two working days before the detailed public statement is made. This sounds reasonable as an indirect acquirer has already obtained control of the underlying entities. Sebi has simply balanced the provisions applicable to the two kinds of acquisitions. It is not clear if this amendment will be applicable to fresh offers made after the date of notification, or if it will retrospectively require acquirers who have pending offers to replenish the escrow amounts. The former approach will be more equitable.

The third amendment deals with the payment of interest in the event of delays in making an open offer that is attributable to the acts or omissions of the acquirer. Currently, the regulations provide for a 10% enhancement in the offer price in case of failed delisting offers and indirect acquisitions. But they do not prescribe an interest amount for other delays in making an open offer. Sebi has now prescribed a 10% simple interest if the delay is attributable to the acquirer. The rate of interest is reasonable and in keeping with judicial precedents. However, delays also occur due to the time taken by Sebi to review the offer documents. Hardships caused to shareholders due to such delays remain unaddressed.

The author is partner and head, M&A, Cyril Amarchand Mangaldas

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