Presentation Onmdi Takeover

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Nov. 6, 2001 L&L/MDI 1

LEGAL ISSUES AND

TAKEOVER CODE

Presentation by

Mohit Saraf Partner

Luthra & Luthra

Law Offices



Nov. 6, 2001 L&L/MDI 2

Agenda

Overview of Takeover Regulations

Salient Definitions

Types of Takeovers

Required Disclosures

Takeover code Trigger

Exempted Categories

Takeover at a Global Level

Takeover and Disinvestment

Advantages



Nov. 6, 2001 L&L/MDI 3


³Takeover´ is a transaction whereby a person (individual, group of individuals or company) acquires control over the assets of the

company either:- directly by becoming the owner of those assets; or

- indirectly by obtaining control of the management of the company .

Takeover can be of a listed or an Unlisted company

In case of Takeover of an Unlisted and closely held company ±

Companies Act, 1956 to apply. In case of Takeover of a listed company, the following legal framework

to apply:



Nov. 6, 2001 L&L/MDI 4


(Cont¶d.)

- SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997issued by the Securities and Exchange Board of India (SEBI);

- Companies Act, 1956; and

- Listing Agreement

³Take Over´ ± taking over the control of management

³Substantial acquisition of shares or voting Rights´- acquiringsubstantial quantity of shares or voting rights

SEBI Regulations for the first time introduced in 1994, but foundinadequate to control hostile takeovers or regulate competitive offersand revision of offers.



Nov. 6, 2001 L&L/MDI 5


(Cont¶d.)

The Takeover Code came in for a fair amount of criticism due to thevarious loopholes which surfaced.

Example:

Torrent group and Bombay Dyeing

- Under the 1994 Takeover Code - an acquisition resulting in the acquirer'sshare holding exceeding 10% - a public announcement to acquire at least

20% of their existing share holding to be made.

- The Torrent group made an open offer to acquire 20% in AhmedabadElectricity Company ("AEC") at Rs. 65 per share.





Nov. 6, 2001 L&L/MDI 7


(Cont¶d.)

The takeover of Damania Airways is an example of a companyfailing to deliver due to insufficient funds.

The Khemkas of the NEPC group, after acquiring managementcontrol in Damania Airways made an open offer to acquire 20% inthe company at Rs. 19.60 per share.

The ruling price was then Rs. 15.50.

SEBI pressure forced Khemkas to revise price of open offer to Rs.35.25

NEPC group unable to make payments to all the shareholders.



Nov. 6, 2001 L&L/MDI 8


(Cont¶d.) SEBI issued show cause notice to NEPC for its failure to meet

commitments to shareholders who responded to the open offer.

Current status: Khemkas have been barred from accessing thecapital market for 5 years for violating the takeover regulations.

Bhagwati Committee appointed under the chairmanship of Justice P N Bhagwati for plugging loopholes. On the basis of

recommendations suggested SEBI notified 1997 regulations.



Nov. 6, 2001 L&L/MDI 9

Salient Definitions

Acquirer´ has been defined as any person who directly or indirectly acquires

or agrees to acquire:

± shares or the voting rights in the target company; or

± control over the target company

either by himself or with any person acting in concert with the acquirer

³Target Company´ means a listed company whose shares or voting rights or control is directly or indirectly acquired.



Nov. 6, 2001 L&L/MDI 10

Salient Definitions (Cont¶d.) Control has been given an inclusive definition and includes:

a) the right to appoint the majority of the directors.

b) To control the management or policy decisions.

Persons acting in concert (³PAC´) has been defined as:

any person established to have, with the acquirer, the commonobjective of buying:

a substantial amount of shares; or voting rights in a company; or

gaining control of a company

following an agreement or understanding (formal or informal) or bycooperating with the acquirer, directly or indirectly.



Nov. 6, 2001 L&L/MDI 11

Salient Definitions (Cont¶d.)

The concept of PAC assumes significance in the context of take overs: ± acquisition made by the acquirer remains below the threshold limit

± taken together with the voting rights of persons acting in concert, thethreshold may exceed.

Example:

Bajoria ± Bombay Dying Tussle.

PAC in case of Bajoria:

Mega Resources, Mega Stock, Hooghly Mills, Ms Pooja Bajoria,Ms Mohini Devi Bajoria, Ms Lata Devi Bajoria and MsMeenakshi Jatia



Nov. 6, 2001 L&L/MDI 12

Salient Definitions (Cont¶d.)

Bajoria together with PAC acquired more than 15%.

Parking ± Collusion were several different parties act in concertto buy equity.

Example:

Reliance



Nov. 6, 2001 L&L/MDI 13

Types of Takeover (Cont¶d.)

Takeover bids may be classified as under:

1) Hostile takeover

2) Friendly takeover

3) Bailout takeover

Hostile takeover

The method of trying to take the control of the company withoutthe knowledge of the existing management is known as ³hostiletakeover´.

Example:

- Bombay Dyeing and Manufacturing Co Ltd -Bajoria struggle



Nov. 6, 2001 L&L/MDI 14


Bajoria together with people acting in concert acquired more than 5%of shares in Bombay Dyeing without making appropriate disclosures,required at the 5% level under the Takeover Regulations.

Complaint filed by Bombay Dyeing before SEBI and CLB.

Petition before CLB ± praying for rectification of register of membersin respect of all shares above 5%. Bajorias having validly transferredshares above 5% during pendency of petition - no rectification

SEBI ±barred Bajoria, along with persons acting in concert, fromaccessing the capital market for one year with immediate effect.

CII, FICCI and Assocham ±Introduction for Promoter friendlyamendments

Creeping acquisition limit raised from 5% to 10% with effect fromOctober 25, 2001



Nov. 6, 2001 L&L/MDI 15

Types of Takeover (Cont¶d.) Tendency of Financial Institutions (FI) to help out Promoters in hostile

takeovers

However, in Raasi Cements Limited (RCL) and India Cements Limited(ICL), FIs felt cheated.

ICL in its hostile bid for RCL made an open offer for RCL shares at Rs.300 per share when the share price was at Rs. 100.

Promoters of RCL sold out its 32% stake to ICL in a negotiated dealduring the term of the open offer at price ranging between Rs.200 to

Rs. 286 per share

ICL had full control of RCL without having to purchase single sharefrom from the institutional investors.



Nov. 6, 2001 L&L/MDI 16


- Friendly takeover

Management of a company may face serious financialproblems or threats of hostile takeover

Unable to ward off the takeover attempt.

A friendly corporate body or group of companies may come to

the rescue by buying shares of the company in the open marketand/or by pumping resources to help the management.

Example:

Sterlite Industries Limited (³SIL´) ± Indian Aluminum CompanyLimited (³Indal´).



Nov. 6, 2001 L&L/MDI 17

Types of Takeover (Cont¶d.) SIL made an open offer to purchase 10% of the shares of Indal

from the Public. (Takeover trigger at 10% then)

SEBI came up with ruling of public offer of not less than 20%.

SIL required to increase its public offer to 20%.

Indal, feeling vulnerable to a takeover threat from SIL, requested its

foreign collaborator Alcan to come to its rescue.

SIL made a cash offer at Rs. 115 per share and Alcan made a bidfor Rs.175.



Nov. 6, 2001 L&L/MDI 18

Types of Takeover (Cont¶d.) SIL thereafter announced its intention to acquire 52% and

revised it price to Rs.221 per share.

In this case FIs were a key element holding 36% of theequity.

On the day of closure of the offer period, FIs struck a dealwith Alcan for Rs. 200 per share.

Indal with the help of Alcan was succesful in wardinf of thehostile threat.



Nov. 6, 2001 L&L/MDI 19

Types of Takeover (Cont¶d.)- Bailout takeover

Taking over of the management of such weak companies

for nurturing them back in normal activities by a companyhaving expertise and resources is known as ³Bailouttakeover´

- Example:



Nov. 6, 2001 L&L/MDI 20

Disclosure under Takeover Code

5% or more shares or voting rights:

± An Acquirer, who along with the PAC, acquires shares or votingrights of a company which shareholding together with his existingshareholding exceeds 5% of shares or voting rights in a company

± disclose his aggregate shareholding or voting rights within four working days of receipt of intimation of allotment or acquisition of shares or voting rights, as the case may be.

± Such company shall disclose to all Stock Exchanges on which itsshares are listed, the aggregate number of shares held by each of such person within 7 days of receipt of information.



Nov. 6, 2001 L&L/MDI 21


(Cont¶d.) More than 15% shares or voting rights

± Any acquirer along with PAC holding more than 15% but less than

75% of shares or voting rights in a company shall disclose to thecompany upon acquiring a further:

5%; or

10%

of shares or voting rights during any period of 12 months.



Nov. 6, 2001 L&L/MDI 22


(Cont¶d.)

± A promoter or every person having control of a company shallwithin 21 days from the financial year ending March 31, or /and aswell as the record date for the purpose of declaration of dividends,

disclose the number as well as percentage of shares or votingrights held by him along with PAC in that company to the TargetCompany.

± Every listed company shall within 30 days from the end of financialyear on March 31, as well the record date for declaration of

dividends make disclosure to the stock exchange(s) with changes,if any, on which its shares are listed in respect of holding of personsmentioned above.



Nov. 6, 2001 L&L/MDI 23

Takeover Code Trigger

The Takeover Code is triggered under the following circumstances:

15% shares or voting rights:

± Acquirer intending to acquire shares which along with his existingshareholding would entitle him to more than 15% voting rights

± such additional shares can be acquired only through an open offer.

± open offer for acquiring a minimum of 20% of the shares of a targetcompany.

Exception:

If the Acquirer is already holding less than 75% or more of votingrights/shareholding; and

Has deposited in the escrow account 50% of the consideration in cash.



Nov. 6, 2001 L&L/MDI 24

Takeover Code Trigger (Cont¶d)

Creeping Limit of 10%

- Acquirer holding 15% or more but less than 75% of the shares or

voting rights of the company

- Can consolidate his holding upto10% in any period of 12 months.

- Acquisition of shareholding beyond 10% through an open offer

- Open offer for acquiring a minimum of 20% of the shares of theTarget Company



Nov. 6, 2001 L&L/MDI 25


Consolidation of holding

± An Acquirer who is having 75% shares or voting rights of a target company

± Can acquire additional shares through an open offer

Public Announcement (PA)/Open Offer

± An open offer is made by a Public Announcement

± Announcement given in the newspapers by Acquirer disclosing his intention

to acquire a minimum of 20% shareholding from existing shareholdersthrough an open offer

± PA is made to ensure that the shareholders of the Target Company areaware of the exit opportunities available to them in case of a take over.



Nov. 6, 2001 L&L/MDI 26


Competitive Offer

± Any third person other than the acquirer who has made the first

public announcement can make a competitive bid or a counter offer;

± within 21 days of the public announcement of the first offer.

± Upon the public announcement of this competitive bid, the originalacquirer shall have the option to either revise the original offer or withdraw it.



Nov. 6, 2001 L&L/MDI 27

Exempted Categories

The public offer provisions of the Takeover Code will not be apply inthe following cases:

± Allotment in pursuance of an application made to a public issue;

± Allotment pursuant to an application made by the shareholder for rightsissue, subject to such rights issue not resulting in change in control andmanagement of the company;

± Sick company;

± Preferential allotment of shares, subject to the condition that at least 75%of the shareholders of the company shall have approved the preferentialallotment and that sufficient disclosures relating to the post-allotmentshareholding pattern, offer price etc., have been made to theshareholders;



Nov. 6, 2001 L&L/MDI 28

Exempted Categories (Cont¶d.)

- Allotment to the underwriters pursuant to any underwritingagreement;

- Issue of American Depository Receipts and Global DepositoryReceipts or Foreign Currency Convertible Bonds, till such time asthey are not converted into equity shares;

- Shares held by banks and financial institutions by way of security

against loans;



Nov. 6, 2001 L&L/MDI 29

Takeover Code at a Global Level

Global level arrangements - whether it attracts Takeover Code

Under 1994 takeover code

Example:

± Sesa Goa-Mitsui

± In 1996, Mitsui of Japan acquired the parent company of Sesa-Goa IndiaLimited.

± As a result of this acquisition Mitsui indirectly became the single largest

shareholder of Sesa-Goa.

± Mitsui applied to SEBI stating that the Take over code should not betriggered as the change in control of Sesa-Goa was a result of acquisition of its parent



Nov. 6, 2001 L&L/MDI 30

Takeover Code at a Global Level (Cont¶d.)

± Mitsui applied to SEBI stating that the Takeover Code should not betriggered since the change in control of Sesa-Goa was a result of itsacquisition of Sesa-Goa's parent.

± Case evaluated under the 1994 takeover code

± Ministry of Finance ruled that under the 1994 takeover code, SEBI had no jurisdiction over the developments abroad and therefore could not passsentence on something that happened outside its jurisdiction and thereby

no open offer was required.

Last three years:

± With respect to transactions taking place outside India (GlobalLevel arrangements), quite a few cases have been decided withregard to global-level developments.



Nov. 6, 2001 L&L/MDI 31


Examples:

Schenectady International Inc.

± Schenectady International Inc. of USA (the "acquirer"), the acquirer filedan application with SEBI seeking exemption from the application of publicoffer provisions of the Takeover Code for its acquisition of 51% of the equitycapital of Dr. Beck & Co. (India) Limited (the "target").

± The Takeover Panel rejected the above application and accordingly SEBIordered the acquirer to make open offer for 20% to the public.

Bausch & Lomb acquisition by Luxottica



Nov. 6, 2001 L&L/MDI 32


± In global acquisition in April 1999, the Luxottica group had acquired the

sunglasses business of Bausch & Lomb (B&L), USA, for $640million.

± The takeover of the Indian Operations of (B&L) also followed.

± B&L, USA had a 44% stake in B&L India

± When global deal took place, the control of B&L, India went toLuxottica.

± The deal resulted in change of management of B&L, India

± No open offer was made.

± SEBI is probing into a possible violation of the provisions of thetakeover code by Luxottica Spa while acquiring B&L of India lastyear



Nov. 6, 2001 L&L/MDI 33


B.P. Amoco plc (Acquirer) and Burmah Castrol plc. (B.C)

± B.P. Amoco Plc. (Acquirer) and Burmah Castrol plc.(B.C),companies incorporated in U.K entered into an Agreement.

± Castrol India Limited (CIL) and Foseco (India) Limited (FIL)(³Target Companies´) are indirect subsidiaries of B>C

± B.C indirectly has a 51% holding of shares in CIL and a 58%holding of shares in FIL.

± Acquirer made an application to SEBI to seek an exemption frommaking a public offer of 20% in respect of shares of TargetCompanies.



Nov. 6, 2001 L&L/MDI 34


± The matter forwarded to the Takeover Panel and the panelrecommended exemption subject to the condition that shareholdersof Indian Target companies passing special resolutions at their respective meetings permitting voting through postal ballot thereatratifying the change in control.

Take over of a foreign parent would trigger the Takeover code

Special exemptions under the Regulations for mereger whether carried

in India or Abroad

To be examined on a case to case basis whether merger or takeover



Nov. 6, 2001 L&L/MDI 35

Takeover Code and Disinvestment

The Takeover Code amended twice

Restrictions specified under Takeover Code not to apply of takeover of a PSU:

± prohibition, during the offer period, on the acquirer or PAC to beappointed on the board of directors of the target company;

± Agreement for sale of shares, which entitles the acquirer 15% or more of the share capital or voting rights of a PSU along with hisexisting shareholding, shall contain a clause to the effect that incase of non-compliance of any provisions of the Takeover Code,the agreement for such sale shall not be acted upon by the seller and the acquirer.



Nov. 6, 2001 L&L/MDI 36


Cont. appointment of any representative of the acquirer or any person

having an interest in the acquirer as additional director or asdirector to fill in any casual vacancy on its board after the PAhas been made.

The shares acquired by the acquirer both under the agreementand/or from the open market can be transferred in the name of the acquirer and changes in the board of director as would givethe acquirer representation on the board or control over the

company may be done, only after the merchant banker certifiesthat all the obligations of the acquirer under the Takeover Codehave been fulfilled.



Nov. 6, 2001 L&L/MDI 37


Cont.

An acquirer required to make a PA not later than 4 working days of thedate of execution of Share Purchase Agreement or Shareholders Agreement with the Central Government.

No further PA is required at the subsequent stage of further acquisitionof shares if following conditions are satisfied:

a)both the acquirer and the seller are the same in all the stages of acquisition; and

b) has made the disclosure regarding all the stages of acquisition inthe letter of offer sent to the Securities Exchange Board of Indiaand the shareholders of such public sector undertaking.



Nov. 6, 2001 L&L/MDI 38


(Cont¶d).

No public announcement for a competitive bid can be made:

± after the public announcement has been made by the acquirer pursuant to entering of the Share Purchase or Shareholders Agreement with the Central Government for acquisition of shares or voting rights or control of the public sector undertaking.



Nov. 6, 2001 L&L/MDI 39

Advantages

The management becomes more accountable.

± Promoters of Indian companies have never been answerable to smallshareholders for their business practices. Even if they had minority holdingsand indulged in mismanagement, Indian promoters didn't contend withthreats of losing control.

A powerful corrective mechanism

± In a mismanaged business, the minority shareholder suffers more than themanagement. The management lives off expense accounts while profitserode, dividends dwindle, and share price falls.

The management performs because of fear of being replaced.

± The management may also be forced to make an open offer to increase itsown stake. It may have to share powers by allowing minority shareholdersonto the board and thus create greater transparency.



Nov. 6, 2001 L&L/MDI 40

Advantages (Cont¶d) The share price automatically climbs. This climb in share prices has

already occurred in Bombay Dyeing, GE Shipping, and East IndiaHotels, for instance.

The rising share price gives minority shareholders an exit option athigher prices as well, as an option of siding with potentially better management in the event of an actual takeover bid.

Documents

Presentation Onmdi Takeover