MC EXCLUSIVE SEBI may make it obligatory for target companies to share key details for open offer

MC Exclusive: SEBI may make it obligatory for target companies to share key details for open offer.

Market regulator Securities and Exchange Board of India (SEBI) is likely to include an obligation on the companies which are being acquired, to share key details to acquirer in case of being a target for the acquisition. As per the sources, aware of the development, issue is likely to be included under the review of Takeover Code Regulations.

Under Takeover Regulations, the acquirer company is required to ensure that the contents of the public announcement, the detailed public the Letter of Offer and the statement, post-offer advertisement are true, fair and adequate in all material aspects and not misleading in any material particular, and are based on reliable sources, and state the source wherever necessary.

The existing Takeover Regulations does not prescribe any obligations on the company to be acquired to co-operation or providing information to the acquirer company relating to an open offer. In normal course is not difficult in cases where the open offer is triggered by way of share purchase agreement and seller is an existing promoter or where the target company is in consonance with the acquirer.

Problem arises in cases where the bid by an acquirer for seeking control of the target company does not have backing or co-operation of the target company or its management or where there is no arrangement with persons currently in control. In such cases, accessing to certain information relating to the target company becomes a difficult task.

But there have been episodes where the company to be acquired did not co-operate with the acquirer. The review is triggered by one corporate episode which lead to a long legal battle, as the target company, a NBFC did not even pursue to seek the statutory approval with the concerned regulator, which is a requirement necessary to fulfil the open offer condition. Despite repeated request from the acquirer, company failed to apply to Reserve Bank of India.  Finally, SEBI had to issue a directive to the company with a timeline.

Also read: SEBI simplifies issuance of duplicate shares, raises threshold to Rs 10 lakh for easier issuance

Globally, in some jurisdictions, the takeover regulation has such provision which make it an obligation on the company to be acquired to share information and co-operate with the acquiring company. UK Takeover Code has such provisions.

A legal source aware of the development stated, “The committee was of the view that a provision regarding imposing certain obligations on the target company should be introduced in the Takeover Regulations, which would liable the target company to co-operate for the purpose of open offer”.

The Takeover Code is likely to put the responsibility on the board of the company to be acquired for sharing information and co-operation required with respect to the Target Company for the purpose of open offer. Also, the target company will be mandated to discharge all the necessary obligations for the successful implementation of open offer including applying with the statutory regulators. As per another legal source, “The Regulation 9 of the Takeover Code may be tweaked for this purpose and two provisos are likely to be added”.

Another aspect where Takeover Code may be tweaked is restricting wilful defaulter from making competing offer. SEBI may remove the part of the Takeover Code that allows wilful defaulters from making a competing offer. The rationale is, that a wilful defaulter may not be able to fulfil the financial obligations under the Takeover Regulations. Also, allowing such persons for taking control or managing the affairs of a company may not be in the interest of the company or shareholders.

Currently wilful defaulters are not allowed to make an open offer but allowed to make a competing offer. The regulation says, “no person who is a wilful defaulter shall make a public announcement of an open offer” for acquiring shares or enter into any transaction that would attract the obligation to make a public announcement of an open offer for acquiring shares under these regulations. But it also adds, “regulation shall not prohibit the wilful defaulter from making a competing offer” in accordance with regulation 20 of regulation upon any other person making an open offer for acquiring shares of the target company.

SEBI is expected to come up with consultation paper on the issue, after receiving the final report from the Committee to Review the Takeover Code. Moneycontrol had previously reported some parts of the recommendations of the committee based on draft report. Including the tweaks in the definition of 'Control' and clarify that it does not include ‘negative control’ or ‘protective rights’, unless these are conferred with the intent to exercise control - directly or indirectly - over the target company. Also, the recommendations to reduction of open offer timelines from 62 days to 42 days.

An email seeking comments from SEBI on the issue did not elicit any response.