Discussion on Takeover Code
The Takeover Code is a set of regulations under the SEBI (Securities Exchange Board of India) Act, which determines whether or not the acquisition of shares in a company amounts to an attempt to takeover. The need for a code was felt to ensure that the entire process of a takeover is transparent and done in a fair manner. This was to ensure that the acquirer gives an opportunity to investors to exit if they feel that the change in control is not in the company's best interests. The rules were also aimed at creating a level-playing field between the potential acquirer and the existing promoter. The Code, and the need to take a second look at it, has come into limelight in recent times, thanks to the number of takeover attempts.
The Code was first established in 1994 and later amended in 1997. For the past few years, it is going through yet another review. The Code does not differentiate an ordinary investor from an existing promoter. It defines an acquirer as any person who directly or indirectly acquires shares or voting rights in the target company or acquires or agrees to acquire control over the target company, either by himself, or with any person acting in concert with the acquirer. The persons acting in concert can essentially be anybody who is established to have with the acquirer the common objective of buying a substantial amount of shares or voting rights in a company or gaining control of a company. Such persons would come under the definition of "acting in concert" if they acquire shares following an agreement or understanding (formal or informal) . or by directly or indirectly co-operating with the acquirer or agreeing to acquire shares in the target company or control over the target company.
The Code has also outlined some relationships. These include a company, its holding company, or subsidiary of such a company, or a company under the same management, either individually or together with each other, or a company with any of its directors, or any person entrusted with the management of the funds of the company. It could also be a relationship of a Mutual Fund (MF) with sponsor or trustee or asset management company, Financial Institutions (FIs), with sub-account holders, merchant banker with their clients as acquirer, Venture Capital Funds (VCFs) with their sponsors etc.
The Takeover Code is triggered when there is a change in control. At this point, the acquirer has to make an open offer for at least 20 percent of the equity of the company. Control of the company includes the right to appoint a majority of directors, to control the management or the policy decisions that can be exercised by a person or persons acting individually or in concert. This can be either directly or indirectly by virtue of their shareholding agreements or voting agreements in any manner.
Any acquirer who buys five percent of the equity or that many voting rights in any manner has to report this to the company within four working days. The company, in turn, will have to disclose this information to the Stock Exchanges (SEs) within seven days. When an acquirer crosses a level of 15 percent equity stake, he has to make an open bid for a minimum of 20 percent.
Creeping promoter is meant to allow promoters or any other investors with more than 15 percent, but less than 75 percent equity, to consolidate their holding. The Code allows a creeping acquisition of five percent every year. If this limit is exceeded, the acquirer has to make an open offer for at least 20 percent of the equity. On the other hand, if the acquirer wants to take over a company without the tacit approval of the existing management or promoters, it is considered an unsolicited or hostile bid. The Takeover Code does not differentiate between a friendly and hostile bid. It only recognises an acquirer.
The most important concern over the Takeover Code is whether an acquirer should disclose details of his purchases more frequently and to more agencies. It has now been decided that apart from making the disclosures at the five percent equity level, the acquirer should also disclose the details of 10 percent and 14 percent. This will soon become law. It has also been decided to disclose the details of shareholdings to the SEs, besides the company. The second issue under dispute is whether to make it more difficult for a non-serious investor to acquire a company. Corporate are lobbying to allow only serious players to attempt a takeover, the counter view is that it would hit takeover activity and have a negative effect on investors.
Takeovers are healthy for small investors because it provides an opportunity to exit the company at a good price, if they so desire. The performance of a company is often reflected in its share price and a falling share price spells trouble for the existing management.