Sebi tightens takeover norms, clears deck for USL-Diageo

Market regulator Securities and Exchange Board of India (SEBI) has come out with clarifications on the takeover code, which basically clears the road for USL-Diageo deal to go through as of now.

Remember, the entire USL-Diageo deal was in two parts. There was a stake buy from the USL promoters followed by a preferential allotment to Diageo which was around 10 percent. As a result of which the total stake before the open offer would have gone to 27.3 percent.
The clarification that was required was: When will the open offer actually trigger? As per the existing guidelines, there was ambiguity that the open offer will trigger only if the stake goes beyond 25 percent. That was creating an issue in terms of the pricing of the open offer.
Sebi Chairman U K Sinha said that some decisions have been taken related to preferential as well as shareholder arrangements related to takeover regulations at its board meeting today here. He clarified saying that the open offer will trigger from the date of announcement or shareholder agreement that happened. That means that the day the board approves the entire deal the open offer will trigger from that particular day and that would be considered as a relevant day for calculation of the open offer price.
It gives a green signal for USL-Diageo deal to go through once Competition Commission of India (CCI) completes the process and then it goes to SEBI.
To safeguard the interest of small shareholders vis-à-vis promoters and other large investors during company takeovers, market regulator Sebi today brought the entities holding more than five per cent stake under its insider trading regulations.
Tightening its takeover regulations, Sebi also said the price offered to the public shareholders and the price for preferential allotment would need to be decided on basis of the prevailing market price on the earliest date when the company's board approves the transaction.
To bring parity in disclosure requirements among various market norms, Sebi also decided to align takeover related disclosures with that of insider trading norms. Also Read: Sebi retains 100% upfront margin for OFS
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"... the disclosure requirement with regard to buy or sell two per cent by persons holding more than five per cent as specified in Takeover Regulations, 2011 shall be modified in line with Sebi (Prohibition of Insider Trading) Regulations, 1992," Sebi said.
The market regulator also said that where open offer obligations are triggered -- pursuant to an agreement or otherwise in combination of any modes of acquisition – the relevant date for making the public announcement and determination of offer price would be the "earliest date on which obligations are triggered".
"This will, however, not be applicable if the subsequent trigger is on account of willful and deliberate act on the part of the acquirer," it added.
Sinha emphasised that this would avoid any uncertainty or controversy about the exact date on which share price or valuation would take place.
The Sebi chief noted that at present, there is a certain amount of uncertainty over preferential allotment of shares that if a decision has been taken about it, then whether the date of the board decision or date of the shareholder decision should be the effective date.
"And going by the first decision, that whenever the earliest announcement takes place, here also we are now clarifying that the date of the board decision will be the relevant date. So that acquirer does not have any uncertainty about what price he may asked to pay three or four weeks later," Sinha said.
Sebi said that if voting rights of a shareholder, not part of buyback arrangement, goes beyond the threshold level, the open offer requirement would not be triggered.
In such cases, Sebi noted that open offer requirement would not be triggered if voting rights are brought below the threshold limit within 90 days from the date on which the voting rights so increase.
"It has now been clarified that the period of ninety days will be reckoned from the date of closure of the buyback offer," it said.
Sebi today also decided that market purchases made during the open offer period can be completed during the open offer period subject to such shares being kept in an escrow account.
"Further, these shares can be transferred from the escrow account to the name of the acquirer after the expiry of 21 working days from the date of the detailed public statement, provided the acquirer deposits 100 per cent of consideration payable in cash in the escrow account," Sebi said.
At present, takeover regulations do not allow completion of acquisition of shares or voting rights which triggers the open offer obligations until the expiry of the offer period.
Currently, such acquisition can be completed after the expiry of 21 working days from the date of the detailed public statement, provided the acquirer deposits 100 per cent of consideration payable in cash in the escrow account.
The regulations also allowed purchase of shares from stock exchange which required to be completed within two days as per settlement process, thus creating an anomalous situation, Sebi noted.
In September 2011, Sebi came out with takeover norms and had said the norms would be reviewed after one year.
"One year period was over and we have been receiving some suggestions and the good thing is most of the suggestions were procedural in nature and we have gone into those suggestions.
"... the good thing is that there is no substantial suggestions from the industry, most of the suggestions were in the area of clarifications," Sebi chief said.
Regarding safety net for investors, Sinha said the regulator was keen on having such a system and asserted that more discussions are required on the issue.
"We need some more understanding on the subject. So the consultation process is still on. Sebi is keen to introduce some sort of safety margin. This was not an item in the discussion today," he said.
Meanwhile, Sebi has decided to simplify the regulations related to Know Your Client (KYC), among others.     
The intermediaries would retain the original KYC documents of their clients and would furnish scanned images of the KYC documents with proper authentication to the KRAs.
"This proposal will help to reduce the cost of and delay in movement of documents, saving in warehousing charges and avoiding physical print out of documents of millions of existing investors," Sebi said.