An internal group was formed to closely look into the provisions of the Regulations and suggest measures which may take care of the interest of the investors. The Group deliberated and finalized their recommendations. The recommendations of the Group in this regard are placed at Annexure. The views expressed by the Group are mainly of the group and not necessarily of SEBI.

Interested persons and entities may send their comments on the draft amendments to the e-mail address : amitt@sebi.gov.in or manaswinim@sebi.gov.in by fax (022) 22829520 or by post to the General Manager, Corporation Finance Department, Division of Corporate Restructuring, Securities and Exchange Board of India, Mittal Court, ‘B’ Wing, 224 Nariman Point, Mumbai 400 021, before March 3, 2004.

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SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, provides for certain parameters for determination of offer price depending upon the frequency of trading of the shares of the target company in the stock exchanges. However, in certain cases wherein one set of shareholders were stated to have been given a price much higher than the then prevailing market price. Though the offer price in such cases was in conformity with the provisions of the Takeover Regulations, the difference between the offer price and the price paid to a particular shareholder, created an apprehension that the existing provisions dealing with the determination of offer price may not address such issue.

It was observed from the Bhagwati Committee Report that the period of six months for determination of minimum offer price was fixed after much deliberation. The Group observed that the minimum period considered as parameter for determining price varied from a minimum of 4 months in Australia to a maximum of 12 months in U.K. Assuming that the existing period of 6 months has to be stretched, in an attempt to safeguard the interests of the shareholder, it would be debatable as to what would be the right period. Therefore, the Group felt that it may not be appropriate to tinker with the existing requirement of 6 months period.

The Group thereafter examined the possible reasons for discrimination in the prices offered to various shareholders of the same target company. The Group observed that the discrimination in favour of one set of shareholders was due to the fact that acquisition was made through off-market transactions and not through the regular stock market mechanism. The said off market transactions avoided transparency and also did not contribute to price discovery and as a result, investors could not get the benefit of the best possible price. It was felt that, had the transactions been carried out through stock market mechanism, the other set of shareholders (not party to off-market transactions) would have got an equal opportunity to exit at a price which would have been non-discriminatory.

In this regard, it was deliberated as to whether transactions through off-market be disallowed in toto. It was felt that it would not be feasible to do so as such transactions are permitted under Securities Contracts (Regulation) Act, 1956 and would have to be dealt by modifying/amending securities laws after elaborate discussions. However, it was unanimously felt that there is an urgent need to regulate the off market transactions, which might result in substantial acquisition of shares. The group felt that a lower threshold limit may be specified for acquisition through off market i.e. other than through stock market mechanism. Once an acquirer crosses the said threshold limit by acquiring through off market deals, he would be obligated to make an open offer in terms of the Takeover Regulations. When an offer is made pursuant to the said acquisition, the price of such acquisition would become one of the parameters for determining the open offer price. This would enable all other shareholders to get the price after taking into account the price paid for off market deals. This would provide equality of treatment to all the shareholders of the target company.

However, such a restriction of lower threshold limit may hamper the process of strategic investments, such as, acquisition through preferential allotment pursuant to a special resolution passed u/s 81(1A) of the Companies Act, 1956. Thus, the group felt that such an acquisition may be exempted from the obligation of the open offer subject to acquirer making upfront disclosure in the notice of the shareholders to the effect that in the event of the acquirer acquiring more than 5% but less than 15%, the acquirer would not be obligated to make an open offer.

Further, an acquirer should not be permitted to cross the 5% limit through an acquisition made through off market. In other words, where an acquirer who holds, say 1% in a target company, could acquire additional shares upto a maximum of 4% through off market transactions. If an acquirer already holds 5% or more, he could acquire further shares only through stock market mechanism (except through preferential allotment as referred to above), failing which the Takeover Code would be triggered.

The group observed that at present open offer formalities ideally take 120 days to complete from the date of public announcement. It was felt that the same should be reduced as it would be in line with the time period prevailing in other countries. In this regard, considering the major structural changes and developments in the secondary market such as the introduction of dematerialisation of shares, speedy information dissemination etc, and following representations from the market players, the group recommends that the current time cycle of the offer may be reduced from 120 days to 90 days. It was felt that the proposed reduction of time cycle would facilitate quick realization of consideration by the shareholders regarding the shares tendered and accepted in the open offer and the acquirer would also be in a position to acquire the shares/control in the target company, as per the objective of the offer.

In this regard, the proposed activity schedule for the open offers viz a viz the present schedule is as under:

The existing regulations are not explicit regarding the sale of shares of Target Company by an acquirer during the offer period. It was observed by the group that there is a possibility that an acquirer may sell its shares of the target company in the open market during the offer period and upon receipt of the consideration from the sale of the said shares, pay the consideration to the shareholders whose shares have been accepted in the offer. In this regard it is observed by the group that, the "Codes on Takeovers and Mergers and Share Repurchases" as prevalent in Hong Kong provide for restriction on dealings by the offeror (acquirer) and person acting in concert during the offer period except with prior consent of the executive and following 24 Hour public notice that such sales might be made.

In this regard, it was observed by the Group that the open offers are generally made with an objective of substantial acquisition of shares or consolidation of holdings. Therefore, the group felt that if an acquirer is allowed to sell its shareholding during the offer period, it would be contradictory to the aforesaid objective.

In view of the above, the group recommends that the Regulations may be amended by incorporating a specific provision under "General obligations of the Acquirer" to put a restriction on the sale of shares by the acquirer during the offer period.

As per the existing Takeover Regulations, the Board of Directors of the target company may, if they so desire send their unbiased comments/recommendations on the open offer made by any acquirer to the shareholders of the target company. The said comments/recommendations are optional.

In this regard, the group was of the opinion that the independent advice on offer should not be made mandatory. However, it was felt that in order to facilitate an informed decision by the shareholders regarding the open offer, the board of the target company may be required to comment on the affairs of the target company especially its future plans, likely benefits arising from such plans, capacity utilization, any likely impact on company due to changes in government policies regarding the industry etc by way of a notice/comments letter to the shareholders of the target company and the same should form part of the Listing Agreement. Further, the comments may also be made available at the target company’s website and at the website of all the stock exchanges where the shares of the company are listed.

It was brought to the notice of the group that presently, the acquirers are getting only limited information from the target company, as detailed in the Takeover Regulations and this may restrict the shareholders from taking an informed decision regarding the open offer. Therefore, it was felt that in addition to the above disclosures, the Regulations may obligate the board of directors of the target company to provide such information as may be sought by the acquirer for the purpose of making adequate disclosures in the letter of offer.

The Regulations do not provide for any time limit for completion of acquisition of shares under the MOU which triggers an open offer. The issue whether the time frame for completion of such acquisition of shares through MOU should be specified in the Regulations was debated by the group. It was observed by the group that in cases of applications made to the panel seeking exemption from making open offers pursuant to the proposed acquisitions/MOU, a certain period for completion of said acquisition/MOU that triggered the open offer requirements is specified in the SEBI Orders.

However, as regards the time limit for completion of MOUs, it was decided that since it is a contractual obligation of acquirer and seller, SEBI may not intervene in the issue. It is for the concerned parties to decide when they wish to exercise their right regarding acquisition of shares.

The group observed that the regulations are not explicit on the said issue and recommends that the regulations may be suitably amended under the heading obligations of Merchant Banker thereby providing for the following:

• Merchant Banker should not be allowed to deal in the scrip of Target Company during the period commencing from date of appointment of MB as manager to the issue till the 15 days from the closure of the offer.
• Shareholding of Merchant Banker in the target Company, if any, shall be disclosed in the public announcement as well as in the letter of offer.