SEBI

SEBI’s Master Circular on Takeover Regulations

On 16^th February 2023, the SEBI issued the (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Regulations”), which is prepared for the purpose of enabling the stakeholders to have access to the provisions of the applicable circulars in one place. Upon the issuance of this Master Circular, the directions/instructions prescribed in the List of Rescinded Circulars, to the extent they relate to SEBI (SAST,  2011 i.e. “Takeover Regulations ), shall be rescinded.

The circular is broadly divided into 10 chapters for a better understanding of the circular, and the same shall be discussed in the present article.

Chapter 1 Format of Documents for activities regarding Open Offers

The first chapter deals with the following –

 1. Takeover Regulations require the acquirer to make an open offer to the public shareholders in the event of any substantial acquisition of shares or voting rights, directly or indirectly, or in the event of any change in control of a target company.

2. In such a scenario, it is essential that fair and accurate disclosures of all material information are made by persons who are responsible to shareholders of a target company for enabling them to make informed decisions.

3. Accordingly, Takeover Regulations mandate the following documents to be filed by an acquirer through the manager to an open offer for the necessary information to the shareholders

• Public Announcement, as stated under  Regulation 12 (2)^[1]
• Detailed Public Statement  as per Regulation 14 (3)
• Letter of Offer  in accordance with Regulation 16(1)  
• Pre-offer announcement as provided in Regulation 18(7)
• Post-offer announcement as provided under Regulation 18 (12)
• Recommendation pertaining to  the offer by the committee of independent directors of the Target Company as  per Regulation 26 (7)
• Post-offer report as provided in Regulation 27 (7)

The updated formats for such activities have been specified in the master circular as well.

Chapter 2: Format pertaining to disclosure documents/reports

The second chapter of the Takeover Regulations deals with the Format pertaining to disclosure documents/reports and provides the following-

Disclosures are a fairly critical and important component of the legal regime governing the substantial acquisition of shares and takeovers.

The intent behind the disclosures is to make sure that investing public isn’t informed about the essential information. The full disclosure of information material to investors’ decisions is the most important way to ensure investor protection. Investors are,  therefore, better able for assessing the potential risks and rewards of their investments and, thus, to protect their own interests.

3. Accordingly, Takeover Regulations have  provided the following reports/disclosures to be filed under various provisions contained therein

• Format under  10(5) regarding the intimation to Stock Exchanges of acquisition under Regulation 10;
• Format under  10 (6), which deals with reports to be submitted to Stock Exchanges for any acquisition made  relying upon the exemption provided for under Regulation 10;
• Format under Regulation 10 (7)  pertaining to submission of the report to SEBI in respect of any acquisition made in reliance upon the exemption provided for under Regulation 10;
• Format under Regulation 18(6) with respect to disclosure to Stock Exchanges about acquisitions made by the acquirer/PAC during the Offer Period;
• Format under Regulation 29 (1) and (2) regarding the disclosures for acquisition and disposal of shares;
• Format under Regulation 31 (1) & (2) dealing with disclosure of encumbered shares and details of any invocation/release of such encumbrances to the Stock Exchanges and the Target Company.

Chapter 3: Automation of disclosure requirements pursuant to the introduction of System Driven Disclosures

The aspects covered in this chapter of the Takeover Regulations are discussed below –

1. With the intention of encouraging ease of doing business, SEBI, after consulting with the market infrastructure institutions, had made the decision to automate the filling process of disclosures as prescribed under Regulations 29 and 31 of the Takeover Regulations at the stock exchange(s) level for the companies being listed on nationwide stock exchanges.
   Under SDD, relevant disclosures must be disseminated by the Stock Exchanges on the basis of the aggregation of data received from the Depositories without human intervention.
   Thus, disclosures for the transactions undertaken in the depository system  as per Regulations 29 and  31 of the Takeover Regulations won’t be requiring manual filing except for the following transactions: –
   • Triggering of disclosure requirement  consequential to acquisition or disposal of the shares,  depending upon the case, by the acquirer together with persons acting in concert (PACs)
   • Triggering of disclosure requirements in the event of shares being held in physical form by the acquirer and/or PACs.
   • Listed companies who haven’t provided the PAN of the promoter(s), including member(s) of the promoter group, to the designated depository or companies which haven’t appointed any depository as their designated depository.
     Further, for streamlining the capturing and dissemination of the information regarding “encumbrances”, the board has decided that.
   • All kinds of encumbrances, as defined under Regulation 28(3) of the Takeover Regulations, shall necessarily be recorded in the depository system.
   • The depositories would capture details of the ultimate lender along with the name of the trustee acting on behalf of such ultimate lender, such as banks, NBFCs, etc. In the case of issuance of debentures, the name of the debenture issuer would be recorded in the depository system.
   • The depositories shall record the reasons for encumbrances in the depository system
2. For the  objective of dissemination of this information
   • The depositories must provide information to the stock exchanges for the transactions recorded in the depository system.
   •  Such information received from both the depositories must be consolidated by the stock exchanges and disseminated the same on their websites as per the formats specified by SEBI.
   • The stock exchanges must also devise an appropriate mechanism for the dissemination of disclosures under SDD in a simple, readable pdf format.
   •  The listed companies, stock exchanges and depositories must reconcile the data at least once in a quarter or immediately whenever any discrepancy has come under notice. 
   • These aforesaid requirement has come into effect 01.07.22

Chapter 4: Procedure for tendering of shares and settlement via SE

The fourth chapter of the Takeover Regulations deals with the following –

The Takeover Regulations facilitate tendering of shares by the shareholders and settlement of the same through the mechanism of the stock exchange.

However, if an acquirer or any person acting in concert with the acquirer proposing to acquire shares under the offer isn’t eligible for acquisition of shares through the stock exchange due to the operation of any other law, such offers would follow the existing “tender offer method”.

In case of competing offers under Regulation 20,  for having a playing field, in the event one of the acquirers is ineligible for the acquisition of shares through the stock exchange mechanism, then all acquirers shall follow the existing “tender offer method”.

Acquisition Window

1. The facility for the acquisition of shares through the Stock Exchange mechanism as per the offer is available on the SE, having nationwide trading terminals as a separate window (the “Acquisition Window”).
2. The Acquirer or company have a choice of using the Acquisition Window provided by more than one Stock Exchange having a nationwide trading terminal; however, in that case, one of the exchanges must be chosen as the “Designated Stock Exchange”(DSE).
3. The Recognized Stock Exchanges that have nationwide trading terminals shall also be facilitating the acquirers towards providing the platform in case of companies exclusively listed on Recognized Regional Stock Exchanges.
4. If there are competing offers under Regulation 20 of the Takeover Regulations, each acquirer will apply for and use separate Acquisition Windows during the tendering period. If one acquirer chooses to use the acquisition window of one Stock Exchange having a nationwide trading terminal, it won’t be compulsory for the other acquirer for choosing the same Stock Exchange.
5. The acquirer/company must appoint a stock broker registered with the Board for the offer. Such brokers may also undertake transactions on behalf of sellers.

Placing of orders and basis of acceptance

1. At the onset of the tendering period, the acquirer/company shall place the order for buying the required number of shares shall be placed by the acquirer/company through his stockbroker.
2. During the tendering period, eligible sellers shall place the order for selling the shares through their respective stock brokers during normal trading hours of the secondary market.
3. Depositories shall provide information to the clearing corporation regarding the shareholder on whose behalf the member has placed a sell order. This information shall include beneficiary account details and bank details, investor PAN, including IFSC code.
4. The cumulative quantity tendered would be available online to the market throughout the trading session at specific intervals by the Stock Exchange, providing an acquisition window at the time of tendering period on the basis of shares transferred to the clearing corporation using an early pay-in mechanism.

Changes regarding Intra Depository – Tender Offer Instructions (within Depository)

•  The depositories must mark the lien in the depository system the in the Beneficial Owner’s Demat Account for the shares offered in tender offers.
•  Details of shares marked as lien in clients’ demats accounts shall be provided by respective Depositories to Clearing Corporations (CC).
•  Details of shareholder’s entitlement for the tender offer process shall be provided to Clearing Corporations by Issuer / Registrar to an Issue and Share Transfer Agent (RTA) handling the respective tender offer.
• Clearing Corporation would cancel excess blocked securities, and securities shall become free balances in the shareholder’s account.
• All blocked shares mentioned in the accepted bid shall be transferred to Clearing Corporations on the settlement date.

Changes  regarding Inter Depository Tender Offer (IDT) instructions

1. In case a Client BO account is held with one Depository and CM pool and CC account are held with another Depository, shares shall be blocked in the shareholder’s BO account at the source Depository during the tendering period.
2.  IDT instruction shall be initiated by the shareholder at the source Depository to the CM pool/ CC account at the target Depository. Source Depository would block the shareholder’s securities (i.e. transfers from free balance to blocked balance) and sends an IDT message to the target Depository for confirming the creation of a lien.
3. Details of shares blocked in the shareholder’s demat account shall be provided by the target Depository to CCs.
4.  Clearing Corporation would cancel excess blocked securities in the target Depository. Source Depository would not be able to release lien without a release of IDT message from target Depository. Further, the release of IDT message shall be sent by the target Depository either based on  the receipt of a cancellation request from CCs or automatically generated  subsequent to matching with Bid accepted detail as received from CCs / Issuer / RTAs
5. Post receiving the IDT message from the target Depository, the source Depository shall release the excess quantity from the shareholder’s block balance to the free balance. The CC, if any, would be processed by the source Depository, and any increase in quantity or substitute ISIN shall be communicated to the target depository in an IDT message.
6.  Subsequent to the completion of tendering period and receipt of the requisite details, viz., Demat account details and accepted bid quantity regarding the receipt entitlement details of securities of tender offer from clearing corporation, the source depository would debit the securities in accordance with the communication/message received from target Depository till the extent it is accepted bid quantity from shareholder’s blocked balance and credit it to clearing corporation settlement account in target Depository on settlement date.
7. All extra quantity of shares which aren’t part of accepted bid data provided by Clearing Corporations shall be reversed by the source depository based on the communication/message received from the target Depository from the shareholders’ blocked balance and shall be credited in the free balance of respective demat accounts.
8. Depositories, in coordination with SE and Clearing Corporations, shall make necessary changes in their system and ensure timely updation of the processes as and when required.

Finalisation of Basis of Acceptance

In case of the offer under the Takeover Regulations, the Merchant Banker to the offer shall finalize the basis of acceptance of the shares depending upon the level of acceptance received in the offer.

Execution of trades and settlement

1. Acquirer will transfer the funds concerning the offer to the clearing corporation’s bank account. Clearing Corporations will then be settling the trades by making direct funds payout to shareholders. If shareholders bank account details aren’t available, or if the fund’s transfer instruction is rejected by RBI/bank because of any issue, such funds will be transferred to the seller broker’s settlement account for onward transfer to the shareholder.

2. The seller broker would then issue a contract note for the shares accepted in the offer.

Tendering of Locked in-shares

For shares which are locked in, the selling shareholder can tender the shares off-market.

Disclosures

• Additional disclosures needed in Detailed Public Statement, Letter of Offer for Takeover Regulations: Name of the Recognised SE with nationwide trading terminals where the Acquisition Window shall be available, including the name of the Designated Stock Exchange.
  • Methodology for placement of orders, acceptances and
  •  Name &  address of the stock broker appointed by the Acquirer/Company;
  • settlement of shares held in physical form and dematerialised form
  •   Particulars of the special account opened with Clearing Corporation.

Filing System, Payment of Fees and Tendering by shareholders holding securities in physical form

The fifth, sixth and seventh chapter deals with the Online Filing System for submission of documents under the Takeover Regulations and Payment of Fees Tendering by shareholders holding securities in physical form, respectively, wherein it was stated the filings must be made in the prescribed manner.

 Payment of fees for filings made with SEBI is mandated to be made through the Payment Gateway made available by SEBI.

However,  regarding the fees for informal guidance, applications regarding exemption application under regulation 11, non-applicability of the Takeover Regulations under regulation 10(7) and Merchant Bankers, Companies and other market intermediaries, as applicable, are advised to make payment of fees as per bank details mentioned in the circular.

With regard to the seventh chapter, the Shareholders holding securities in physical form shall also be allowed to tender shares in open offers. However, such tendering shall be in accordance with the provisions of the Takeover Regulation.

Chapter 5 deals with the Online Filing System for submission of documents under the Takeover Regulations, Chapter 6 with the Payment of Fees and 7 with  Tendering by shareholders holding securities in physical form

Chapter 8: Exemption Application  which involves  Trust as Acquirer

1. The conditions that must be fulfilled for the grant of exemptions are –
   1. Only individual promoters or their  lineal descendants or immediate relatives   can be  Trustees and beneficiaries;
   2. The beneficiary’s beneficial interest of the trust  hasn’t been and, in the future, won’t be transferred, assigned or encumbered in any manner, including by way of pledge/mortgage;
   3.  If there is a dissolution of the Trust,  the distribution of assets shall be done only to the beneficiaries of the trust or to their legal heirs;
   4. The Trustees won’t be entitled to transfer or delegate any of their powers to any person other than one or more of themselves.

2. Additionally,  the following undertakings were part of the trust deed:

1. Any change in the trustees/beneficiaries and in ownership or control of shares or voting rights held by the Trust must  be disclosed within 2 days to the concerned stock exchanges  along with a copy endorsed to SEBI for its record;
2. As far as the provisions of the SEBI Act, 1992, the regulations framed thereunder are related. The ownership or control of shares or voting rights will be considered as vesting not only with the Trustees but also indirectly with the beneficiaries;
3. The liabilities and obligations of individual transferors as per the SEBI Act and the regulations framed thereunder will not change or get diluted due to transfers to the Trust.
4. The Trust shall confirm that it is in compliance with the exemption order passed by SEBI on an annual basis,  which must  be furnished to the company, which it shall disclose prominently as a note to the shareholding pattern filed for the quarter ending March 31 every year   as per  regulation 31 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015;
5. The Trust must get its compliance status certified by an independent auditor on an annual basis and furnish the certificate to the SE  for public disclosure with a copy to SEBI for its records.

3. Further, exemptions were granted when the below-mentioned were complied with:

1. The proposed acquisition is as per  the provisions of the Companies Act, 2013 and other laws that are  applicable
2. The transferors are  showcased  as promoters in the shareholding pattern filed with the SE  for a  span of at least 3 years  before  transfer (except in case of holding  account of inheritance);
3. There isn’t any layering in terms of trustees/beneficiaries in the case of Trusts;
4. The Trust deed agreement doesn’t contain any limitation of liability of the trustees/beneficiaries in relation to the provisions of the SEBI Act, and all regulations framed thereunder.

Chapter 9: Standard Format of Application  as per  Regulation 11(1) of the  Regulations

The ninth chapter of the Takeover Regulations states that –

• For ensuring the uniformity of disclosures in exemption applications under Regulation 11(1), a standard format for filing applications as specified under Regulation 11(3) has been provided.

 Chapter 10: Publication of the Investor Charter and Disclosure of Complaints by Merchant Bankers on their Websites

This chapter of the Takeover Regulations deals with the following

Publication of Investors Charter

•  The board advised all the Regd. Merchant Bankers are to disclose the Investor Charter for SAST as provided in the format of the Pre-Offer Advertisement. Disclosure of Investor Complaints
• Additionally, for bringing transparency to the Investor Grievance Redressal Mechanism, the board has made the decision that all the registered Merchant Bankers must disclose the data on complaints received against them or against issues dealt with by them and redressal thereof on each of the aforesaid categories on their respective websites,  separately as well as collectively, latest by 7th of succeeding month.

Conclusion

Despite the rescission of the earlier Takeover Regulations,  anything committed or any action taken or purported to have been done or taken,  inclusive initiation of any enquiry or investigation or issue of show cause notice regarding the circulars specified in the post-offer advertisement, would be considered to be done or taken under the aspects of this circular.

Also Read: Disclosures required under SEBI (Substantial Acquisition of Shares and Takeovers) Regulation, 2011

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