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Takeover Code exempts preferential allotments

BS Markets Bureau

There is good news for corporates. Preferential allotments that result in a change of control in a company will not attract the provisions of the takeover code, according to the recommendations made by the Takeover Committee of the Securities and Exchange Board of India, which met recently.

However, a change in control because of preferential allotments will have to be ratified at the general body meeting of the shareholders through a special resolution - it will have to be passed by 75 per cent of the shareholders.

Postal ballot has also been allowed to ensure that the maximum number of shareholders participate in the resolution. Former Chief Justice P N Bhagwati, chairman of the committee, said this was done to ensure "corporate democracy".

The draft takeover regulations had said preferential allotments resulting in a change of control would be brought within the purview of the Takeover Code.

Open offer pricing changes are also on the anvil.

According to the recommendations, the minimum offer price will be calculated on the basis of the 26-week average high-low price or two-week average high-low price, whichever is higher.

The reference date is the date of public announcement. Bhagwati said shareholders should get the benefit of any appreciation in the market price after the agreement for acquisition was signed by the parties concerned.

Any payment by the acquirer to the seller in respect of a "non-compete" agreement, which is in excess of 25 per cent of the cost of acquisition, has to be factored into the overall offer price. This additional cost will be added to the offer price arrived at by the Sebi formula.

"Shareholders should get the benefit of the higher price paid," Bhagwati explained.

A significant recommendation pertains to a foreign company acquiring another foreign company that is the holding company of a company located in India, which in turn is the holding company of a subsidiary, also located in India.

Such cases have been deemed to be indirect acquisitions, attracting the provisions of the Takeover Code. The acquiring company will have to make an open offer to the shareholders of the subsidiary company.

The creeping acquisition limit has not been changed and will remain at 10 per cent till September 30, 2002.

There was debate among the members whether the limit should be extended in view of the World Trade Organisation provisions, that become applicable after March 2004. However, no decision was taken and the matter will be referred to the Sebi board.

However, the applicability of the limit - that is, acquiring shares - has been taken to mean the 12 months comprising the financial year, from April to March.

The status quo has been maintained in terms of joint control by two promoters. If one of the promoters goes away, that will not be deemed a change in control.

Inter-se transfer among promoters of different groups of companies will not attract the provisions of the Takeover Code if it is made at a price less than 25 per cent of that arrived at by the Sebi formula. If the price exceeds 25 per cent, it will be referred to the takeover panel.

Acquirers who violate any provisions of the Takeover Code by acquiring shares without adequate disclosures will have their transactions declared null and void.

Sebi will have the right of disposing of the shares through a divestment process in which the acquirers and their associates will not be allowed to participate.

Disclosures have to be made by acquirers at the 5 per cent, 10 per cent and 14 per cent limits.

Above 15 per cent, any purchases and sales of 2 per cent of the outstanding equity will have to be disclosed. Disclosures have to be made to the stock exchanges concerned and the target company within two days of the acquisition. The onus is on the acquirer to ensure that the information reaches them.

Acquirers keen to get on the board of the target company before the offer closes may be allowed to do so only after the competitive bidding is over. If the acquirer is to be on the board during the offer period, 100 per cent of the acquisition price has to be deposited in an escrow account.

Another significant recommendation is that shareholders participating in an open offer can withdraw the tendered shares during the offer period provided they do so before seven days of the closure date.

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