MC EXCLUSIVE Sebi panel on Takeover Regulations reviews definition of control, no tweaks to open offer and creeping acquisition threshold

Takeover panel submits draft, suggests changes in control other definitions, avoids tweaks in open offer and creeping acquisition threshold

Capital market regulator Sebi may soon issue a consultation paper seeking to review the Takeover Regulations, Moneycontrol has learnt from people familiar with the development, who said that a panel formed to review the regulations has deliberated on all 17 points raised by the regulator, and submitted a draft report some time ago.

The panel - chaired by former Chief Justice of the Punjab and Haryana High Court, Justice (Retd) SJ Vazifdar - comprised legal experts, exchange officials, industry representatives, law firms and financial sector professionals. The Takeover Regulations prescribe key aspects of the takeover regime such as the obligation and triggers to make a mandatory tender offer, the minimum price for such a tender offer and its timelines and mechanics, alogn with various related matters.

Definition of Negative Control

One of the major issues considered by the panel was the insertion of clarity regarding the meaning of ‘control’ under the Takeover Regulations, with the panel suggesting to introduce the definitions of ‘negative control’ and ‘protective rights’.

As per the draft seen by Moneycontrol, the meaning of ‘control’ will 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.

This clarification follows the Supreme Court’s observations in the ArcelorMittal case and the Securities Appellate Tribunal (SAT)’s ruling in Shubhkam Ventures, where both held that ‘control’ denotes positive control, and the mere power to block a special resolution does not amount to control.

Control through Convertible Securities

The panel suggested that mere issuance of convertible securities should not trigger an open offer, unless they are issued with the intent to gain control of a company - in which case an open offer must be made at the time of issuance.

It also recommended adding provisions to the Takeover Code for cases where control of a listed company changes indirectly through transfer of its unlisted holding company. Currently, such transactions are not disclosed, leaving investors unaware.

Also Read: Mutual funds are pushing for non-disclosure of block deals as Sebi reviews framework

Clarity on Joint Control

The Sebi panel has also suggested clarity on ‘joint control;, recommending that the conversion of control from joint to sole should not amount to acquisition. Specifically, if one of the persons acting in concert ceases to exercise control and the remaining person(s) continue as the sole controller(s), such a situation should not trigger an acquisition.

Triggers for Open Offer in case of Slump Sale

The panel has proposed that an open offer should be triggered in case of sale of an undertaking amounting to 50 percent or more of the market capitalization.

It also suggested including a proviso requiring that consideration from a slump sale of assets exceeding 30 percent of company’s networth in a fiscal, or 50 percent in last 24 months, be deposited into a designated account. This amount must be utilized only for the company’s business, and if not utilized within 24 months, the funds may instead be used by the company to acquire shares from all shareholders.

Embargo on Negotiated Deals Post-Offer Period

To address situations where selling promoters or persons acting in concert enter in a deal with the acquirer at a higher price after the tendering period, the panel has recommended changes to the regulations.

The draft note said, “An amendment should be introduced to Regulation 8(10), barring negotiated transactions in shares at a price higher than the original offer price during a period of 26 weeks. This would act as a deterrent and ensure all parties are treated equally.”

This proposal was prompted by a case involving a large media company, where the exiting promoter received a control premium in a negotiated deal after the end of the tendering period.

No Change in Open Offer Threshold

The panel is not inclined to review the current 25 percent threshold for triggering an open offer, even as Sebi had suggested raising it in line with global practices. The Sebi panel felt the 25 percent threshold is logical as it provides substantial power to block special resolutions and often leads to further increases in shareholding. It also ensures that existing shareholders retain a justified exit right.

Creeping Acquisition Limit to Stay Unchanged

Sebi had proposed revising the current creeping acquisition limit from 5 percent to 15 percent per financial year, arguing that the existing 5 percent limit - introduced in 2002 - is outdated, and restricts consolidation. It also said that such consolidation by an existing shareholder does not amount to a change in control.

However, the Takeover Regulations review panel was not convinced, maintaining that exemptions already exist and promoters can resort to rights issues instead of preferential allotments.

Tweaked Definition of Frequently Traded Shares

The panel has recommended splitting the 240-day period into two 120-day blocks, to better value frequently traded shares, with at least 5 percent turnover in each block. Sebi’s proposal to review was to reduce the period for definition of frequently traded shares from 12 months to 240 days for a better offer price. At the suggestion of one of the exchanges, the panel agreed to modify and include the trades of all recognised stock exchanges, not only one for the determination of frequently traded shares.

Also Read: Sebi working group proposes broader price band, higher order size for block deals

The panel has also suggested tweaks on various aspects of procedural issues which are to be followed by companies during the takeover.

Next Step

According to sources, the panel’s recommendations are currently being studied, and Sebi will issue a consultation paper to seek broader feedback. Typically, Sebi usually reviews the takeover code once every 10 years, with the last review notified in 2011.

An email sent to Sebi seeking comments on the panel’s recommendations and the implementation timeline did not elicit a response.

Sebi had constituted the committee in November 2022 with a mandate to advise on issues related to substantial acquisition of shares and takeovers, and to review provisions considering judicial pronouncements, and recommend measures to simplify and strengthen the takeover code by following global practices.