1. DEMYSTIFYING TAKEOVER CODE
Pavan Kumar Vijay
:

2. KEYWORDS IN TAKEOVER CODE
When an
"acquirer"
takes over the “shares” or “control” of the
"target company",
it is termed as Takeover.
When an acquirer acquires
"substantial quantity of shares or voting rights"
of the
Target Company,
it results into substantial acquisition of shares.

3. LIFTING THE VEIL
SHARES
CONTROL
BOTH SHARES & CONTROL
AKEOVER

4. UNDERSTANDING SHARES
Reg 2 (k)
Shares carrying voting rights & any
REG 2(k) security which would entitle to receive
shares with voting rights in future But
shall not include PREFERNCE SHARES
What is the status of partly paid shares
under SAST Regulations, 1997?
ISSUE
The partly paid up shares are also shares
under Takeover Code as voting rights is
embedded in partly paid up shares.

5. UNDERSTANDING CONTROL
Control is the right to
“  Appoint majority of the directors
 To control the management
REG 2(c)  Control the policy decisions
By virtue of Shareholding or Management
rights or Shareholders Agreements or
Voting Agreements or in any other
manner.

6. THRESHOLDS DEFINED
FOR COMPLIANCE
Acquisition of more than
5%, 10%, 14%, 54% & 74%
[Regulation 7]
Persons, who are holding between
15% - 55%, acquisition/ sale
aggregating more than 2% or more
voting rights [Regulation 7(1A)]

7. THRESHOLDS DEFINED
FOR OPEN OFFER
Acquisition more than 15% or
more voting rights [Regulation 10]
Persons, who are holding between
15% - 55%, acquisition more than
5% or more voting rights in a
financial year.[Regulation 11(1)]
Persons, who are holding more than
55%, acquisition of single share or
voting right [Regulation 11(2)]

8. Reg 3(1)(e)
INTER – SE TRANSFER
An Insight

9. Legal Insight: Inter-se Transfer
• REGULATION 3(1)(e) OF SEBI (SAST) REGULATIONS,
1997 GOVERNS THE ACQUISITIONS THROUGH INTER
SE TRANSFERS.
• EXEMPTION FROM APPLICABILITY OF REGULATION
10,11 & 12 i.e. REQUIREMENT FROM MAKING
PUBLIC OFFER.

10. Categories for Inter-se transfer
Qualifying
Group under
Promoters
MRTP
Act, 1969
Categories
Relatives
under Acquirer &
Companies Persons
Act, 1956 acting in
concert

11. DETAILED
ANALYSIS

12. Category I – Inter-se Transfer amongst Group
Main Features
 Group here is signifying the group as
defined under MRTP Act, 1959.
 Another important feature is where persons
constituting such group have been shown as
group in the last published Annual Report of the
Target Company.

13. Category I – Group… contd
Definition of Group
SECTION 2(ef) OF MRTP ACT, 1969 DEFINES GROUP INTO TWO PARTS:
Associated
Two or more
Persons Individuals, AOI, firms, trus
 Group of persons having control ts, body corporates who
without exercising controlling interest.
are in the position to
 Associated persons such as relatives
of director of a company, partner of a exercise control , whether
firm & any trustee in relation to a trust. directly & indirectly over
 Any associated person in relation to any body corporate, firm or
associated person.
trust.
-

14. Category II – Inter-se transfer amongst relatives
 Relatives under this regulation means the
Main Features Relatives defined under Section 6 &
Schedule 1A under Companies Act, 1956.
 The definition of relative u/s 6 includes
 Spouse
 Members of HUF
 Relative mentioned in Schedule 1A.
 Schedule 1A gives a list of 22 persons.

15. Category III – Promoters… contd
Category III – Inter-se transfer for Qualifying Promoters
Qualifying
Indian
Promoter & Qualifying
Foreign Promoters
Collaborators
, who are
shareholders.

16. Category III – Promoters… contd
Qualifying Promoters - Defined
Who is named as
Promoter
Any person who in any
DIRECTLY OR INDIRECTLY Offer Document OR
is in control Shareholding
of the company Disclosure,
Whichever is later
& includes….

17. Category III – Promoters… contd
When person is When person is body
individual corporate
His relatives as Defined Holding & Subsidiary
u/s 6 of Co. Act 1956.
Any company controlled Any company controlled
by P/R by P/R
Firm or HUF in which
Firm or HUF in which P/R
P/R is partner or
is partner or coparcener
coparcener ; stake
;stake not < 50%
not < 50%

18. Category III – Promoters… contd
Category IV – Acquirer and Persons acting in concert.
PAC
ACQUIRER
Reg2(e)
Reg 2(b)
Exemption available only after 3 years from the
date of closure of open offer made under these
Regulations.

19. Pre- Conditions for availing Inter- se transfer.
Conditions Category I Category II Category III Category IV
(Group) (Relative) (Qualifying (Acquirer &
Promoter) PAC)
i. Transfer is at a N N Y Y
price > 25% of the
price determined
in terms of Reg
20(4) & 20(5) of
SEBI (SAST) Regs,
1997.
ii. 3 yrs holding of N N Y N
shares by
transferee &
transferor.
iii. Compliance of Y Y Y Y
Regulation 6, 7 &
8.

21. Checks & Balances under Regulation 3
C
O
M
P
L
Advance Report Fees to be
Intimation I
(21 days of accompanied
(4 days in
acquisition) with Report A
Advance)
(Rs 10000 N
25000)
C
Reg 3(3) Reg 3(4) Reg 3(5) E

22. Checks & Balances under Regulation 7
Acquirer : Compliance of regulation 7(1) or 7(1A)
Seller: Compliance of regulation 7(1A)
Target Company:Compliance of Regulation 7(3)

23. Taxation Issues
STT
vs.
LTCG/STCG

24. Taxation Issues..contd.
A Comparative Study
Securities Transaction Tax LTCG/STCG
 STT is levied when the transfer is  LTCG/STCG is levied when the
made through stock exchange. transfer is made in off market
mode.
 STT is @ 0.125% of the sale value.  LTCG –
 20% with indexation benefit on
the amount of capital gain .
 10% without indexation benefit on
amount of capital gain .
 STCG –
 10% on the amount of capital gain.

25. INTER- SE TRANSFER : A STRATEGICAL MOVE
Good means
for
consolidation
of holdings in
a Company.

26. INTER- SE TRANSFER: Clause 40A
Regulation 3(1A)
“Nothing contained in sub-regulation (1) shall affect the
applicability of the listing requirements.”
Effect of Regulation 3(1A)
The above-mentioned regulation is giving the effect that the
exemption under regulation cannot exceed the provisions of
listing agreement,i.e.the minimum public holding of 25%
cannot be exceeded by the exemption of Inter- se Transfer

28. MATTER OF DEBATE:
Whether Reporting under Regulation 3(4) is one time
reporting?
HELD:
Regulation 3(4) is applicable to all cases wherever
the acquisition exceeds the limit prescribed in the
regulations irrespective of the existing holding of the
acquirer.
NAAGRAJ GANESHMAL JAIN V P.SRI SAI RAM, THE SAT

29. MATTER OF DEBATE:
Whether the belated filing of report should not be
considered as commission of offence when there is no
substantial loss to the investors?
HELD:
It was held that when the belated filing of the report
under 3(4) does not resulted in any gain to the
appellant & also no loss to the invested, the
imposition of the penalty is not justified.
SAMRAT HOLDINGS V SEBI

30. Concluding Remarks
Inter-se transfer is a good tool for
consolidation of holdings…………..
However,the exemption is available
subject to strict compliance of Regulation
3(3),3(4) & 3(5).

32. An issue by a company
Of
Equity shares / Securities convertible into
equity/
FCDs/Warrants/PCDs/
Convertible Preference Shares
pursuant to a resolution u/s. 81(1A) of Act,
to any select group of persons
by way of private placement.

33. BENEFITS
Simple way to raise capital of the Company
No need to appoint Merchant Banker.
Economical way to raise capital.
Minimum Formalities.

34. GOVERNING LAW
The Companies Act, 1956
SEBI (Disclosure and Investor Protection) Guidelines, 2000
(Chapter – XIII & XIIIA)
Listing Agreement
SEBI (SAST) Regulations, 1997
Unlisted Public Companies (Preferential Allotment)
Rules, 2003

35. Proposed Allottees
Chapter – XIIIA of Chapter – XIII of
SEBI (DIP) Guidelines SEBI (DIP) Guidelines
Allotment to QIBs (not in
Promoter Group)
by companies OTHERS
listed on
NSE / BSE

36. Time Line- Preferential Allotment
15 days (12 months in case
of QIBs)
30 days
25 days Shareholders’ Resolution
must be implemented within
15 days (12 months in case
of QIBs) except in case of
pending regulatory approvals

37. Pricing Schedule
6 months
30 days
2 weeks

38. Lock-in Requirement
QIBs Others
Existing Preferential Existing Preferential
Holding Allotment Holding Allotment
PROMOTERS –
No Lock in For One Year, For Six 20% of Total
Capital - for 3
except in case Months Years
of Remaining – for
one Year
Trading through
Stock Exchange OTHERS –
For One Year

39. Currency of Security Convertible into
Equity Shares
QIBs OTHERS
FCDs/ PCDs/ any other
FCDs/ PCDs/ any other
convertible Security –60
convertible Security –No
Months from the
time prescribed for conversion
date of allotment
Warrants convertible into
Warrants convertible into
Equity Shares - 18 months
Equity Shares –
from the date of allotment
can’t be issued to QIBs

40. Preferential Allotment:- In- Principle & Listing
 Process of identification of allottees.
 Bank Statements
 DIP Compliances – Pricing, Lock in ,
Identity
 Clause 40A of Listing Agreement
Change in Management/Control

41. Preferential Allotment
viz-a-viz
Takeover Code

42. Limit for Preferential Allotment
Limits are calculated taking
into account the
EXPANDED CAPITAL of
the Company
& not the EXISTING
CAPITAL of the Company.

43. Illustration I
Acquirer
(holding 20%)
Through
Preferential
Allotment
Acquirer’s holding
cannot exceed 24.99% of
Expanded Capital.

44. Illustration II
Acquirer
(holding 5 %)
Through
Preferential
Allotment
Acquirer’s holding
cannot exceed 14.99%
of Expanded Capital.

45. Illustration III
Acquirer
(holding 0%)
Through
Preferential
Allotment
Acquirer’s holding
cannot exceed 14.99% of
Expanded Capital.

46. Example:
Category Existing Maximum Shares &
shares Allotment in % of
&% Preferential Expanded
allotment. Capital
Non- 0 14.99% 1764700
Promoter (14.99% of
the Expanded
Capital)
Present Capital= Expanded Capital=11764700
1 cr

47. Queries
Query 1
What is the exact formula for calculating the % of shareholding, in
case of issue of warrants? At what point of time, the number of
warrants would be taken into account – on the day of issuing
warrants or on the date of conversion of warrants into shares?
Query 2
Suppose the present holding of a promoter is 54% and after
preferential allotment the holdings of the promoter remains same as
that of 54% of the expanded capital. The question is whether any
disclosure or compliance required in the present situation

48. Queries
Query 3
What is the maximum limit of preferential allotment? Can
a Company through preferential allotment expand its
capital without any limit?

49. Queries
Query 4
Suppose the present holding of a promoter is 54% and after
preferential allotment the holdings of the promoter remains same as
that of 54% of the expanded capital. The question is whether any
disclosure or compliance required in the present situation?
What, if, the same question arises in case the promoter is holding
60%? The issue is as there is acquisition of shares but such acquisition
has not change the voting rights. The question is what is relevant in
terms of takeover code, acquisition or voting rights?

50. Conclusion
To sum up… preferential allotment is
becoming a buzz word these days…
However, it is subject to various checks
& balances.