Public mergers and acquisitions in India: overview

A Q&A guide to public mergers and acquisitions law in India.

The country-specific Q&A looks at current market activity; the regulation of recommended and hostile bids; pre-bid formalities, including due diligence, stakebuilding and agreements; procedures for announcing and making an offer (including documentation and mandatory offers); consideration; post-bid considerations (including squeeze-out and de-listing procedures); defending hostile bids; tax issues; other regulatory requirements and restrictions; as well as any proposals for reform.

To compare answers across multiple jurisdictions visit the Country Q&A tool. This Q&A is part of the Practical Law Public Mergers and Acquisitions Global Guide. For a full list of jurisdictional Q&As visit www.practicallaw.com/acquisitions-guide.

Contents

M&A activity

1. What is the current status of the M&A market in your jurisdiction?

Despite the challenging global environment and the domestic unrest caused by demonetisation, India witnessed some major cross-border M&A deals in 2016. These transactions took place in the some of the following sectors:

With the insertion of section 234 in the Companies Act 2013 (yet to be notified), which now enables not only in-bound but also out-bound mergers by way of scheme of arrangements, M&A activity is likely to gradually improve in India in 2017. It is possible that the upcoming budget of 2017, macro-economic changes and reforms in many sectors may increase the M&A activity. Despite the significant constraints, sectors like information technology, retail, infrastructure, pharmaceuticals, and banking and financial services are still likely to continue attracting major investments.

 
2. What are the main means of obtaining control of a public company?

There are two types of public companies in India:

  • Listed public companies whose shares are listed on the stock exchange for public trading.

  • Unlisted public companies whose shares are closely held and not listed on the stock exchange.

Both types are governed by the Companies Act 2013 and certain provisions of Companies Act 1956.

Listed public companies are also governed by the:

  • Securities and Exchange Board of India (SEBI) (Listing Obligations and Disclosure Requirements) Regulations, 2015 (SEBI Listing Regulations) and the specific listing agreement that has been executed between the public company and the stock exchange.

  • Other regulations issued by the Securities Exchange and Board of India (SEBI) (that is, the regulatory body for the securities market in India).

There are several ways to take control of a company. This can include acquiring all or a majority of the shares in a company through one of the following methods:

  • Making an open offer under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 (SEBI Takeover Regulations).

  • Through a scheme of compromise, arrangements and reconstructions (sections 230 to 240, Companies Act 2013).

  • Acquisition as a going concern by agreement or de-merger by way of slump sale, where the shareholders of the de-merged entity receive shares in the resulting company as consideration.

  • Subscribing to a fresh issue of shares through preferential allotment by way of:

    • private placement (for unlisted companies); or

    • preferential issue (for listed companies).

An "open offer" is an offer made by a bidder to acquire shares or control of a target, inviting shareholders to tender their shares in the target at a particular price. An open offer can be mandatory, voluntary or competitive depending on the nature and mode of acquisition of the shares at different trigger points.

The process for an open offer begins with the bidder making a public announcement to the stock exchange, followed by publishing a detailed statement in the newspapers. For details on the open offer process, see Question 12. The timing of the public announcement to the stock exchange depends on the type of acquisition (for example, market purchase, share purchase agreement, converting securities, disinvestment, indirect acquisition, and so on).

Certain share acquisitions are exempt from the obligation to make an open offer, including:

  • Internal transfer of shares among certain categories of shareholders.

  • In the ordinary course of business by an underwriter, a stock broker, a merchant banker (in certain capacities), or scheduled commercial bank acting as an escrow agent.

  • Using a scheme under the Sick Industrial Companies (Special Provisions) Act 1985 or scheme of arrangement or reconstruction (including merger or de-merger) ordered by a court. However, with effect from 01 December 2016, the Act is repealed and the powers under the act are transferred to the National Company Law Tribunal (NCLT) in accordance with the provisions of the Insolvency and Bankruptcy Code, 2016. Accordingly, consequential changes to the SEBI Takeover Code are yet to be made.

  • Under a scheme of corporate debt restructuring under the Corporate Debt Restructuring Scheme of the Reserve Bank of India.

  • Conversion of debt into equity shares under a strategic debt restructuring scheme in accordance with the Reserve Bank of India guidelines.

  • Under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 and De-listing Regulations.

 

Hostile bids

3. Are hostile bids allowed? If so, are they common?

The SEBI Takeover Regulations do not define the term hostile bid or provide any method for preventing or averting one. A hostile bid is generally understood to be an offer made by a person directly to a listed company's shareholders without first informing the management (so the board of directors is caught unaware).

Hostile bids are not common India for the following reasons:

  • Indian promoters generally hold large numbers of shares.

  • A hostile bidder will not have access to information on the business plans of the target.

  • A hostile bidder faces practical difficulties trying to conduct due diligence on the target without support from company management and can run commercial risks investing in shares without proper diligence.

However, under the SEBI Takeover Regulations a potential bidder can make a successful hostile bid by making a:

  • Voluntary offer under Regulation 6, where a shareholder with more than 25% of the shares or voting rights in a target can make an offer to acquire the entire share capital of the company up to the maximum permissible non-public shareholding limit of 75%. However, Regulation 6A, inserted recently by way of an amendment to the SEBI Takeover Code, restricts a wilful defaulter from making a public announcement of an open offer or from entering into any transaction that would attract the obligation to make a public announcement of an open.]

  • Competitive offer under Regulation 20, where a third person is allowed to make an open offer to acquire shares while the original bidder's open offer is subsisting. A wilful defaulter can, however, make a competing offer in accordance with regulation 20 of the SEBI Takeover Regulations upon any other person making an open offer.

 

Regulation and regulatory bodies

4. How are public takeovers and mergers regulated, and by whom?

The regulatory framework for controlling takeover activities and mergers of public companies includes the:

  • Companies Act 2013 and rules made under them.

  • Securities Contracts (Regulations) Rules 1957.

  • SEBI Takeover Regulations.

  • SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015.

  • SEBI (Prohibition of Insider Trading) Regulations 2015.

  • SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009.

  • SEBI Circular CIR/CFD/CMD/16/2015 dated 30 November 2015

  • Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations 2004 (read with the Master Circular on Foreign Direct Investment dated 1 July 2015 and the Consolidated Foreign Direct Investment Policy effective 7 June 2016 (Foreign Exchange Regulations)). Foreign Exchange Regulations are relevant if the bidder is resident outside India.

  • Competition Act 2002.

  • Stamp Act laws.

  • Income Tax Act 1961.

 

Pre-bid

Due diligence

5. What due diligence enquiries does a bidder generally make before making a recommended bid and a hostile bid? What information is in the public domain?

Recommended bid

The concept of recommended bid is not recognised under the SEBI Takeover Regulations. However, the target's board of directors must constitute a committee of independent directors to provide reasoned recommendations if faced with an open offer from any bidder (Regulation 26(6), SEBI Takeover Regulations). These recommendations must be given by the committee to the target's shareholders and published in newspapers. Copies must also be sent to:

  • SEBI.

  • Stock exchanges where the target's shares are listed. The stock exchange will then disseminate the information to the public.

  • The manager to the open offer and any competing offers.

A bidder will conduct legal, business and financial due diligence on the target to gather sufficient information to make a reasoned decision on whether to make the proposed open offer. This process helps the bidder assess the risk of the acquisition and determine the terms and price of the deal.

Under the SEBI (Prohibition of Insider Trading) Regulations 2015, a specific carve-out for communication or procurement of unpublished price sensitive information (UPSI) is permitted for the purpose of conducting due diligence in M&A transactions. It is subject to the board requiring the parties to execute a confidentiality and non-disclosure agreement and not trading in securities of the target when in possession of the UPSI.

Hostile bid

Hostile bids are undertaken without the knowledge of the board of directors and promoters of the target company. Therefore, a hostile bidder can only rely on publicly available information and has no support from the management of the target when conducting due diligence.

Public domain

Much of a listed company's corporate information is available in the public domain, specifically on the stock exchange where its shares are listed. The SEBI Listing Regulations ensure timely and accurate disclosure by listed companies on matters including their financial situation, performance, ownership and governance. However, the level of publically available information does not remove the need to carry out specific diligence on a particular company to ensure that it is legally compliant.

Information on the target can be accessed through the:

  • Ministry of Corporate Affairs (www.mca.gov.in). All secretarial information relating to corporate records of a company including its annual accounts, special resolutions, disclosure of directors' interests and information on charges created on the property of the company can accessed on this portal by paying a nominal fee.

  • Stock exchanges where the company's shares are listed, for example, the National Stock Exchange of India (www.nseindia.com) and BSE Limited (www.bseindia.com).

  • SEBI (www.sebi.gov.in/sebiweb/) contains information about open offers and filings made with the relevant stock exchanges by listed companies.

  • Office of the Controller General of Patents, Designs & Trade Mark, Department of Industrial Policy and Promotion (http://ipindia.nic.in) where public searches can be done on a company's patents, trade marks and designs.

  • Copyright Office of the Government of India, Ministry of Human Resource Development (www.copyright.gov.in) where the status of any copyright application can be tracked.

  • Official websites of relevant courts provide information relating to pending litigation. However, not all district courts and city civil courts maintain details of cases electronically.

Secrecy

6. Are there any rules on maintaining secrecy until the bid is made?

There are no specific rules for maintaining secrecy until the bid is made. Under the SEBI Takeover Regulations, no formal announcement can be made about the bid unless it is made publicly on the date of the agreement to acquire the shares or voting rights that will change the control and management of the target. Therefore, an implied rule of secrecy exists and the parties generally agree to observe confidentiality so that the target's share price is not impacted by untimely disclosure of the transaction.

Agreements with shareholders

7. Is it common to obtain a memorandum of understanding or undertaking from key shareholders to sell their shares? If so, are there any disclosure requirements or other restrictions on the nature or terms of the agreement?

It is common practice for a bidder to execute a memorandum of understanding (MoU) or a share purchase agreement (SPA) with the target's shareholders who are involved in the management of the company.

There are no disclosure requirements or other restrictions on the terms of the MoU or SPA, but broad terms are mentioned in the draft offer letter filed with SEBI, including the:

  • Number of equity shares.

  • Price per share.

  • Total consideration amount.

Copies of the MoU or SPA are made available for inspection at the registered office of the target during the offer period.

Stakebuilding

8. If the bidder decides to build a stake in the target (either through a direct shareholding or by using derivatives) before announcing the bid, what disclosure requirements, restrictions or timetables apply?

There are no public disclosure requirements on a bidder before the announcement of a bid. However, there are restrictions on obtaining certain levels of shareholding in a listed company without making a public offer (see Question 16).

If a bidder holds less than 25% of the equity shares in a target, it must make disclosures to every stock exchange where the target's shares are listed and the target's registered office within two working days of either:

  • Receiving an allotment of shares (if subscribing).

  • Acquiring shares from an existing shareholder.

The above disclosures only apply if the bidder:

  • Acquires 5% or more of the shares or voting rights in the target.

  • Holds 5% or more of the shares or voting rights in the target.

Any change to the bidder's shareholding or voting rights since the last date of disclosure must be declared, even if the change results in its shareholding falling below 5%, provided it still holds more than 2% of the total shareholding or voting rights in the target.

Continued disclosure

The SEBI Takeover Regulations require a bidder and promoter of a target to continue disclosing to every stock exchange where the target's shares are listed and the target company, within seven working days from the end of each financial year. Where the bidder holds 25% or more of the shares or voting rights, it must disclose its aggregate shareholding and voting rights in the target from 31 March. A promoter must also disclose its aggregate shareholding and voting rights in the target from 31 March.

Agreements in recommended bids

9. If the board of the target company recommends a bid, is it common to have a formal agreement between the bidder and target? If so, what are the main issues that are likely to be covered in the agreement? To what extent can a target board agree not to solicit or recommend other offers?

The concept of recommended bid is not provided for under the SEBI Takeover Regulations (see Question 5).

Break fees

10. Is it common on a recommended bid for the target, or the bidder, to agree to pay a break fee if the bid is not successful?

The concept of recommended bid is not provided for under the SEBI Takeover Regulations (see Question 5).

However, in certain inbound and outbound M&A transactions, the parties have contractually agreed to break fees (a common practice recognised under the laws of some foreign jurisdictions). The legal viability and enforceability of these contractually agreed deal protection mechanisms is yet to be tested in India.

Committed funding

11. Is committed funding required before announcing an offer?

Under Regulation 17 of the SEBI Takeover Regulations, a bidder proposing to make an open offer for shares in a listed company must create an escrow account two working days before the public statement of the open offer, and deposit an aggregate amount in the account.

The escrow account can be in the form of:

  • Cash deposited with any scheduled commercial bank.

  • Bank guarantee issued in favour of the manager of the open offer by any scheduled commercial bank. However, a bidder must ensure that at least 1% of the total consideration payable is deposited in cash with a scheduled bank as part of the escrow account.

  • Deposit of frequently traded and freely transferable equity shares or other freely transferable securities with appropriate margins.

The amount to be deposited in the escrow account includes:

  • 25% of the consideration payable under the open offer on the first INR5 billion.

  • An additional amount equal to 10% of the balance consideration.

If the offer is conditional on a minimum level of acceptance, then the higher of the following two must be deposited in the escrow account:

  • 100% of the consideration payable in respect of the minimum level of acceptance.

  • 50% of the consideration payable under the open offer.

If there is any upward revision of the offer price or offer size, the bidder must deposit the corresponding increased amount in the escrow account before effecting the revision.

 

Announcing and making the offer

Making the bid public

12. How (and when) is a bid made public? Is the timetable altered if there is a competing bid?

The SEBI Takeover Regulations provide for two types of offer:

  • Mandatory open offer.

  • Voluntary open offer.

Mandatory offer

A bidder proposing to acquire equity shares or voting rights (taken together with the existing equity shares or voting rights (if any) held by it or by persons acting in concert with it) of 25% or more of the target must publicly announce the open offer.

After acquiring 25% or more (but less than the maximum permissible non-public shareholding of 75%), a bidder can only acquire more shares or voting rights over 5% in any financial year, after making a public announcement of the open offer (see Question 16).

In the case of a mandatory offer, the bidder must acquire at least 26% of the total shares of the target.

Voluntary offer

A bidder who holds equity shares or voting rights (taken together with the existing equity shares or voting rights (if any) held by it or by persons acting in concert with it) of 25% or more but less than the maximum permissible non-public shareholding of 75%, is entitled to voluntarily make a public announcement when acquiring the shares.

In the case of a voluntary offer, the bidder must acquire enough shares to entitle it to exercise an additional 10% of the total shares of the target.

Process for open offer

The process for making an open offer (mandatory or voluntary) is as follows:

  • The bidder appoints a manager to run the open offer.

  • Public announcement. In a mandatory offer, the bidder makes a public announcement to the stock exchange where the target's shares are listed through the manager on the date when the bidder agrees to acquire the shares (depending on how the shares are being acquired). A copy of public announcement is to be sent to SEBI and to the registered office of the target company. In a voluntary offer, the bidder makes its public announcement on the date it decides to voluntarily make its open offer. The public announcement must include the:

    • identity of the bidder and seller;

    • nature of the proposed acquisition;

    • offer price;

    • consideration and mode of payment of consideration; and

    • offer size.

  • Within five working days of the public announcement, the manager publishes a detailed public statement of the open offer:

    • in one English and one Hindi national daily newspaper and a regional language daily newspaper with wide circulation near the registered office of the target; and

    • one regional language daily newspaper near the stock exchange where the maximum volume of trading in the shares of the target was recorded 60 trading days before the date of the public announcement.

  • The bidder opens an escrow account not later than two working days before the date of detailed public statement of the open offer and deposits money in it (see Question 11).

  • Five working days from the date of the detailed public announcement, the manager files the draft offer letter with SEBI.

  • Copies of the public announcement, the detailed public statement and the draft offer letter are sent to SEBI for its comments. The manager carries out changes to the offer letter if sought by SEBI before it is sent to the shareholders.

  • The bidder publishes an advertisement (in all the newspapers in which detailed public statements were made) announcing:

    • the schedule of activities for the open offer;

    • the status of statutory approvals and unfilled conditions (if any);

    • the procedure for tendering acceptances; and

    • any other necessary material details.

  • The tendering period starts no later than 12 working days from receiving comments from SEBI and the offer must remain open for ten working days.

  • Within ten working days from closure of the open offer, the bidder must complete all procedures including paying consideration to the shareholders whose shares have been acquired in the open offer.

  • On payment of consideration, the shares are transferred by the depository to the bidder.

  • Within five working days of the offer period, the bidder issues a post-offer advertisement detailing the aggregate number of shares tendered and accepted, and the date of payment of consideration.

Competitive offers

Any person (other than the bidder making the first public announcement) can make a competitive offer within 15 working days of publication of the detailed public statement. Where there is a competitive offer, the bidder who made the first public announcement can revise the terms of its open offer (including the offer price) up to three working days before the start of the tendering period, provided the revised terms are favourable to the target's shareholders. The timeline for competing offers will be identical to the timeline of the open offer outlined above.

Offer conditions

13. What conditions are usually attached to a takeover offer? Can an offer be made subject to the satisfaction of pre-conditions (and, if so, are there any restrictions on the content of these pre-conditions)?

The SEBI Takeover Regulations provide that the proposed bidder can make an open offer conditional on a minimum level of acceptance. If the open offer is made under a memorandum of understanding or share purchase agreement, the agreement must contain a condition to the effect that in the event the desired level of acceptance of the open offer is not reached, the bidder will not acquire any shares under the open offer and the agreement attracting the obligation to make the open offer will be rescinded.

Where an open offer is made conditional on a minimum level of acceptance:

  • The public announcement must contain information on the offer size and minimum level of acceptance conditions.

  • The bidder can indicate a lower price (not less than the price determined under the SEBI Takeover Regulations for acquiring all the acceptances despite the acceptance falling short of the indicated minimum level of acceptance) in the event the open offer does not receive the minimum level of acceptance.

  • 100% of the consideration payable in respect of the minimum level of acceptance or 50% of the consideration payable under the open offer, whichever is higher, must be deposited in cash in the escrow account.

  • The bidder cannot appoint any director to the board of directors of the target during the offer period.

  • The bidder cannot acquire any shares in the target during the offer period.

In addition, the bidder and promoters of the target can contractually agree that certain conditions precedent need to be fulfilled. There are no restrictions on the contents of these pre-conditions, but they generally include:

  • Seeking regulatory approvals, for example, from the Competition Commission of India, Reserve Bank of India or Foreign Investment Promotion Board.

  • Satisfaction of any legal and financial issues relating to the target company that were discovered during the due diligence exercise, such as completion of corporate compliance, obtaining licences and so on.

Bid documents

14. What documents do the target's shareholders receive on a recommended and hostile bid?

In an open offer the target's shareholders are given access to the following documents:

  • Memorandum and articles of association of the target along with its certificate of incorporation.

  • Audited annual accounts of the target for the last three financial years.

  • Certificate from a chartered accountant certifying the net worth of the bidder.

  • Certificate from a chartered accountant certifying that sufficient resources are available with the bidder to fulfil the obligations under the open offer.

  • Certificate from a SEBI registered category-I merchant banker or a chartered accountant certifying the fair value of equity shares of the target.

  • Copy of the letter received from a scheduled commercial bank confirming that the required amount is kept in the escrow account and marked lien in favour of the manager of the open offer.

  • Copy of any memorandum of understanding or share purchase agreement between the seller and the bidder triggered in the open offer.

  • Copy of the memorandum of understanding between the bidder and the manager of the open offer.

  • Copy of the recommendations made by the committee of independent directors of the target.

  • Copy of the public announcement.

  • Published copy of the detailed public statement and issue of opening public announcement.

  • Copy of the SEBI observation letter.

Employee consultation

15. Are there any requirements for a target's board to inform or consult its employees about the offer?

There is no legal requirement for the board of a target to inform or consult its employees about the open offer.

Mandatory offers

16. Is there a requirement to make a mandatory offer?

A bidder must make a mandatory open offer to the target's shareholders to provide them with an opportunity to exit the target before its acquisition is complete, if the bidder (with any persons acting in concert):

  • Intends to acquire shares or voting rights which will entitle it to exercise 25% or more of the target's shares or voting rights.

  • Already holds 25% or more but less than 75% (or 90% in the case of public sector undertakings) of the target's shares or voting rights, and proposes to acquire additional shares or voting rights that will entitle it to exercise more than 5% of the target's voting rights in any financial year ending on 31 March (see Question 12).

  • Acquires control over the target.

Further, the SEBI Takeover Regulations state that in an indirect acquisition (where the proportionate net asset value or sales turnover or market capitalisation of the indirectly acquired target (represented as a percentage of the consolidated net asset value or sales turnover or enterprise value of the directly acquired entity) is in excess of 80% on the basis of the most recently audited annual financial statements) will be regarded as a direct acquisition and will trigger the mandatory open offer obligation.

 

Consideration

17. What form of consideration is commonly offered on a public takeover?

The bidder can pay consideration in the form of cash, by issue, exchange or transfer of securities or by way of bank guarantee to the shareholders who have tendered their shares in acceptance of the open offer (see Question 11).

Payment of consideration must be made within ten working days of expiry of the tendering period by transferring the consideration held in a special escrow account.

 
18. Are there any regulations that provide for a minimum level of consideration?

The SEBI Takeover Regulations do not provide for a minimum level of consideration. The offer price for the open offer for substantial or indirect acquisition of shares or voting rights or control or by voluntary offer must be made at a price not lower than that determined under Regulation 8.

 
19. Are there additional restrictions or requirements on the consideration that a foreign bidder can offer to shareholders?

Foreign Exchange Regulations will apply if the bidder or the shareholder of the target who is tendering his shares in the open offer (seller), is a person resident outside India. The Regulations apply as follows:

  • The bidder can acquire the target's shares subject to the specified sectoral limit as set out in the Foreign Exchange Regulations.

  • The bidder or seller must comply with the pricing guidelines provided by the Reserve Bank of India (RBI) from time to time.

  • The bidder or seller who is resident in India must comply with the reporting requirement to transfer the shares using Form FC-TRS to the RBI through the authorised dealer category-1 bank (AD Bank) within 60 days from the date of receipt of consideration, along with the relevant documents.

  • The consideration paid by a bidder must be remitted into India through normal banking channels and will be subject to a "know your customer" check by the receiving AD Bank.

 

Post-bid

Compulsory purchase of minority shareholdings

20. Can a bidder compulsorily purchase the shares of remaining minority shareholders?

The bidder cannot compulsorily purchase the shares of the remaining minority shareholders. The Securities Contracts (Regulations) Rules 1957 state that the public shareholding in a listed company must be maintained at 25% of the share capital of the company.

Restrictions on new offers

21. If a bidder fails to obtain control of the target, are there any restrictions on it launching a new offer or buying shares in the target?

The obligation on a bidder is to provide an exit opportunity to the target's public shareholders, but if the shareholders elect not to tender their shares in the open offer then there is no restriction on the bidder to complete the bid. It is free to launch a new offer or buy the target's shares in compliance with the SEBI Takeover Regulations.

De-listing

22. What action is required to de-list a company?

The de-listing procedure is governed by the SEBI (Delisting of Equity Shares) Regulations, 2009 (De-listing Regulations). The term "de-listing" means removing the securities of a listed company from the stock exchange. The shares of a listed company can be de-listed by compulsory or voluntary de-listing.

Compulsory de-listing

De-listing of company from a recognised stock exchange as a penalising measure can occur if:

  • The company has incurred losses for the preceding three consecutive years and has a negative net worth.

  • Trading in the securities of the company has not occurred for six months or is infrequent.

  • The company, its promoters and directors have failed to furnish the correct information or have been convicted for not complying with various regulations and have been awarded a penalty.

  • The company has failed to maintain the minimum public shareholding.

The key provisions for compulsory de-listing are as follows:

  • The decision to de-list is taken by a panel of representatives constituted by the stock exchange consisting of:

    • two directors of the stock exchange (one of whom will be a public representative);

    • one representative each from the investors and Ministry of Corporate Affairs or the registrar of companies; and

    • the executive director or secretary of the stock exchange.

  • The stock exchange publishes a notice of de-listing in one English national daily newspaper and one regional language newspaper where the stock exchange is located. The notice will give at least 15 days to persons aggrieved by the proposed de-listing to represent their grievances to the stock exchange and informs all other exchanges where shares are listed about the de-listing.

  • The stock exchange appoints an independent valuer who will determine the fair value of the de-listed equity shares.

  • The promoters of the company must acquire the de-listed shares from the public shareholders at a price determined by the independent valuer.

  • A company that is compulsorily de-listed cannot (nor can its promoters, full time directors and the companies any of them promote) directly or indirectly access the securities market or seek listing for any equity shares for a period of ten years from the date of the de-listing.

Voluntary de-listing

Voluntary de-listing occurs where a company voluntarily decides to remove its securities from a stock exchange.

If a company proposes to be de-listed from all stock exchanges (or from the only stock exchange where it is listed), all of its public shareholders must be given an exit opportunity under the provisions set out in the De-listing Regulations (see below, Exit opportunity). Where a company de-lists its shares only from one stock exchange but continues its listing in other stock exchanges, then no exit opportunity need be given to the public shareholders.

The key provisions of a voluntary de-listing where no exit opportunity is required are:

  • Approval is given by the company's board of directors.

  • The company gives public notice of the proposed de-listing in one English national daily newspaper and one Hindi national daily newspaper and one regional language newspaper where the relevant stock exchange is located.

  • The company applies to the stock exchange for de-listing and discloses the fact of the de-listing in the first annual report prepared after the de-listing.

  • The stock exchange will complete the application within 30 working days from receipt.

The key provisions of voluntary de-listing where an exit opportunity is required are:

  • Approval is given by the company's board of directors after complying with certain actions like informing the stock exchange and appointing a merchant banker.

  • Approval of 75% of shareholders is passed by resolution through postal ballot.

  • The company applies to the stock exchange for in-principle approval of the proposed de-listing within a year of passing the special resolution, along with the audit report.

  • The recognised stock exchange completes the application within five days from receipt.

Exit opportunity

When providing an exit opportunity to all public shareholders whose shares are proposed to be de-listed, the bidder or promoter of the target must:

  • Appoint a merchant banker.

  • Determine the offer price using the book-building method provided under the De-listing Regulations.

  • Make a public announcement within one working day from the date of receipt of in-principle approval for de-listing from the stock exchange.

  • Open an escrow account and deposit either cash or a bank guarantee in favour of the merchant banker or a combination of both (the total estimated amount of consideration is calculated on the basis of the floor price and number of equity shares outstanding with public shareholders).

  • Send an offer letter to the public shareholders no later than two days after the public announcement.

  • Keep the offer period open for five working days (which must not be later than seven working days) from the public announcement.

De-listing offer

The SEBI Takeover Regulations also provide for a de-listing offer, which requires that when the bidder makes a public announcement of an open offer for acquisition, he can de-list the company in accordance with the provisions of the De-listing Regulations, provided that he declares upfront his intention to de-list at the time of making the detailed public statement.

 

Target's response

23. What actions can a target's board take to defend a hostile bid (pre- and post-bid)?

Neither the SEBI Takeover Regulations nor the Companies Act provide for any mechanism to thwart or prevent hostile takeovers. There have only been a couple of instances of hostile takeovers and the target companies tried to avert them by adopting the following strategies:

  • Consolidating the promoters' shareholding in the target.

  • Adopting contractual provisions restricting change in control or use of trade marks.

  • Selling the prized unit or business.

  • Refusing to register the transfer of shares by the board of directors pursuant to the hostile takeover.

  • Launching a competitive bid by the target and its promoters or associated companies as permitted under the SEBI Takeover Regulations.

 

Tax

24. Are any transfer duties payable on the sale of shares in a company that is incorporated and/or listed in the jurisdiction? Can payment of transfer duties be avoided?

The sale of shares in a listed company will attract securities transaction tax (STT) and stamp duty.

STT is levied on the sale or purchase of securities listed on stock exchanges in India at 0.1% on the value of the transaction.

Stamp duty differs by state and is payable under the state stamp laws. Stamp duty is payable on the agreement effecting the transfer and the amount payable depends on the state in which the agreement is executed. If the shares to be transferred are in physical form then stamp duty is payable on the share transfer forms and on the share certificates. In all states the stamp duty payable on share transfer forms is 0.25% of the consideration and on share certificates it is 0.1% of the total value of the shares. If the shares are in de-materialised form, stamp duty is not paid on transfer.

 

Other regulatory restrictions

25. Are any other regulatory approvals required, such as merger control and banking? If so, what is the effect of obtaining these approvals on the public offer timetable?

In the case of public acquisitions, the following regulatory approvals may be required:

  • If the acquisition meets certain financial thresholds, then the deal must be reported to the Competition Commission of India (CCI). CCI approval is required if the acquisition exceeds certain prescribed thresholds of assets and turnover.

  • Where the bidder is a person resident outside India and the target's shares are in a sector where foreign direct investment is under government control or capped, approval from the Foreign Investment Promotion Board will be needed.

  • If the seller is a non-resident Indian and the bidder is a non-resident, the transfer will need prior approval from the Reserve Bank of India.

If any of the above approvals are required, the open offer will be subject to receiving the approvals on time. Where the regulatory approvals are not received on time, the whole timeline of the open offer is delayed. Under Regulation 18(11) of the SEBI Takeover Regulations, the bidder is responsible for pursuing all the necessary statutory approvals needed to complete the open offer without any default, neglect or delay. If SEBI is satisfied that the delay was not due to intentional default or negligence or failure to diligently pursue the approvals on the part of the bidder, it can grant an extension for completion of the open offer subject to the bidder paying interest to the shareholders for the delay (as specified by SEBI).

 
26. Are there restrictions on the foreign ownership of shares (generally and/or in specific sectors)? If so, what approvals are required for foreign ownership and from whom are they obtained?

Foreign direct investment (FDI) of up to 100% is permitted in most sectors without prior approval from the Reserve Bank of India (RBI) or the Central Government through the Foreign Investment Promotion Board (FIPB) (known as the "automatic route").

For certain sectors, FDI is capped under the automatic route or prior approval will be required from the RBI or FIPB (known as the "government route"). Approval under the government route can also be granted subject to certain conditions.

Restrictions on foreign ownership apply, for example, to the following sectors:

  • Mining. Up to 100% can be acquired under the government route.

  • Private Security Agencies. The following caps on ownership apply:

    • Up to 49% can be acquired under the automatic route; and

    • Beyond 49% and up to 74% can be acquired under the government route

  • Banking. The following caps on ownership apply:

    • up to 49% can be acquired under the automatic route;

    • 49% to 74% can be acquired under the government route; and

    • foreign institutional investors, foreign portfolio investors and qualified foreign investors can invest up to the sectoral limit of 74% of the total paid up capital of a private bank.

  • Print media. Depending on the activity, up to 26% can be acquired under the government route.

  • Insurance. Up to 49% can be acquired under the automatic route.

  • Defence. The following caps on ownership apply:

    • up to 49% can be acquired under the automatic route; and

    • more than 49% can be acquired under the government route on a case-by-case basis if such acquisition is likely to result in access to modern and "state of the art" technology.

  • Broadcasting content services. Terrestrial broadcasting FM (FM radio) and up-linking of news and current affairs TV channels is capped at 49% under the government route.

FDI is completely prohibited in the following sectors:

  • Atomic energy.

  • Railway operations (other than railway infrastructure).

  • Lottery business (including government or private lottery, and online lotteries).

  • Real estate business or construction of farmhouses.

  • Gambling and betting including casinos.

  • Chit funds (that is, a type of saving scheme).

  • Manufacturing of cigars, cigarettes or tobacco substitutes.

  • Trading in transferable development rights.

  • Nidhi companies (that is, companies incorporated under the Companies Act 2013 with the object of cultivating the habit of thrift and savings among its members, receiving deposit from, and lending to its members for their mutual benefit and functions as per the rules prescribed by the Central Government).

 
27. Are there any restrictions on repatriation of profits or exchange control rules for foreign companies?

All foreign investments (net of applicable taxes) can be freely repatriated, subject to sectoral policies and except where investment was specifically made under schemes where repatriation was not possible.

Dividends (net of applicable taxes) declared on foreign investments can be remitted freely through an authorised dealer bank.

 
28. Following the announcement of the offer, are there any restrictions or disclosure requirements imposed on persons (whether or not parties to the bid or their associates) who deal in securities of the parties to the bid?

There are no restrictions on dealing with securities of the parties to the bid following the open offer.

 

Reform

29. Are there any proposals for the reform of takeover regulation in your jurisdiction?

The SEBI Takeover Regulations were introduced in 2011 and undergo a regular review by the regulator and amendments from time to time. At present, there are no proposals for the reform of the SEBI Takeover Regulations in India.

 

The regulatory authorities

Securities and Exchange Board of India (SEBI)

W www.sebi.gov.in/sebiweb/

Main area of responsibility. SEBI regulates the securities market in India.

Registrar of Companies

W www.mca.gov.in/MinistryV2/contact.html

Main area of responsibility. The Registrar of Companies functions as the registry of records relating to limited liability partnerships and companies, which are available for inspection by the public on payment of prescribed fees. Each state typically has one registrar office or shares an office with neighbouring states. The Central Government exercises administrative control over these offices through the respective regional directors.

Reserve Bank of India (RBI)

W www.rbi.org.in/home.aspx

Main area of responsibility. The central bank of India that monitors, formulates and implements India's monetary policy.

Department of Industrial Policy and Promotion (DIPP)

W www.dipp.nic.in/English/default.aspx

Main area of responsibility. The DIPP formulates and promotes the FDI Policy.



Online resources

Securities and Exchange Board of India (SEBI)

W www.sebi.gov.in/sebiweb/

Description. Official website of the Securities and Exchange Board of India.

Ministry of Corporate Affairs of India (MCA)

W www.mca.gov.in

Description. Official website of the Ministry of Corporate Affairs of India.

Department of Industrial Policy and Promotion (DIPP)

W www.dipp.nic.in/English/default.aspx

Description. Official website of the Department of Industrial Policy and Promotion.

BSE Limited (BSE)

W www.bseindia.com

Description. Maintained by the BSE. All trading data, eligibility criteria and membership information of companies whose shares are listed on BSE are available.

National Stock Exchange of India Limited (NSE)

W www.nse-india.com

Description. Maintained by the NSE. All trading data, eligibility criteria and membership information of companies whose shares are listed on the NSE are available.



Contributor profile

Nitin Potdar, M&A Partner

J. Sagar Associates

T +91 22 4341 8505
F +91 22 4341 8617
E nitin@jsalaw.com
W www.jsalaw.com

Professional qualifications. Solicitor, India

Areas of practice. Mergers and acquisitions; private equity; foreign direct investment (joint ventures & collaborations); corporate advisory.

Non-professional qualifications. LLB, University of Mumbai. India

Languages. English, Hindi, Gujarati, Marathi

Professional associations/memberships. Bar Council of Maharashtra and Goa; Bombay Incorporated Law Society.


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