Other Merchant Banking Activities - Mergers, Acquisitions & Takeovers

Other Merchant Banking Activities - Mergers, Acquisitions & Takeovers (Part 1)

Definition: Merchant bankers are involved in various activities, including providing advisory services for mergers, acquisitions, divestments, and takeovers, which may result in a change of ownership of a company or business.
Details: The role of merchant bankers in Mergers, Acquisitions & Takeovers includes:
- Acting as a catalyst for the entire deal
- Preparation and circulation of information memoranda
- Deal structuring and negotiations
- Valuation and due diligence
- Providing fairness opinion on valuation of assets/shares
- Certificate on disclosure of unlisted company involved in the scheme in the abridged prospectus

Key Concepts

Mergers: A combination of two or more companies to form a single entity, where one or both companies lose their identity, and a new company is formed.
Acquisitions: The purchase of one business or company by another company or business entity, often resulting in a change of control.
Takeovers: The acquisition of substantial shares or voting rights to seek management control of a company, which can be done through a merger, acquisition, or open offer.
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011: Regulates mergers, acquisitions, and takeovers in India, ensuring transparency, fairness, and equitable treatment to all investors.

Key Terms

Acquirer: A person who directly or indirectly acquires or agrees to acquire shares or voting rights in a target company.
Control: The right to appoint a majority of the directors or control the management or policy decisions of a target company.
Frequently Traded Shares: Shares of a target company with a traded turnover of at least 10% of the total number of shares of that class on any stock exchange during the preceding 12 months.
Offer Period: The period between the date of entering into an agreement to acquire shares or control over a target company and the date on which the payment of consideration to shareholders is made or the open offer is withdrawn.
Persons Acting in Concert: Individuals or entities that cooperate to acquire shares or voting rights in a target company, including companies, directors, promoters, and immediate relatives.

Other Merchant Banking Activities - Mergers, Acquisitions & Takeovers (Part 2)

Related Parties: The following are considered related parties in the context of mergers, acquisitions, and takeovers:
- A venture capital fund and its sponsor, trustees, trustee company, and asset management company.
- An alternative investment fund and its sponsor, trustees, trustee company, and manager.
- A merchant banker and its client, who is an acquirer.
- A portfolio manager and its client, who is an acquirer.
- Banks, financial advisors, and stock brokers of the acquirer, or of any company which is a holding company or subsidiary of the acquirer.
- An investment company or fund and any person who has an interest in such investment company or fund as a shareholder or unitholder having not less than 10% of the paid-up capital of the investment company or unit capital of the fund.
Promoter: A promoter has the same meaning as in the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, and includes a member of the promoter group.
Substantial Acquisition of Shares or Voting Rights: As per the SEBI SAST Regulation, an acquirer shall not acquire shares or voting rights in a target company which entitle them (acquirer and persons acting in concert) to exercise 25% or more of the voting rights in the target company unless they have made a public announcement of an open offer for acquiring shares of such target company.
Voluntary Offer: An acquirer who together with persons acting in concert with him, holds shares or voting rights in a target company entitling them to exercise 25% or more but less than the maximum permissible non-public shareholding, shall be entitled to voluntarily make a public announcement of an open offer for acquiring shares in accordance with SEBI SAST.
Offer Size: The open offer for acquiring shares to be made by the acquirer and persons acting in concert with him shall be for at least 26% of total shares of the target company.
Open Offer Obligations: Any open offer made under these regulations shall be made to all shareholders of the target company, other than the acquirer, persons acting in concert with him, and the parties to any underlying agreement, including persons deemed to be acting in concert with such parties.
Exemptions and Prohibitions: Certain persons, such as wilful defaulters and fugitive economic offenders, are prohibited from making a public announcement of an open offer or entering into any transaction that would attract the obligation to make a public announcement of an open offer.

Other Merchant Banking Activities - Mergers, Acquisitions & Takeovers (Part 3)

Open Offer: An offer made by an acquirer to purchase shares from existing shareholders of a target company, subject to certain regulations.
Regulation 5A: The acquirer whose shareholding exceeds the maximum permissible non-public shareholding, pursuant to an open offer, shall not be eligible to make a voluntary delisting offer under the Delisting Regulations, unless a period of twelve months has elapsed from the date of the completion of the offer period.

Key Concepts

Offer Price: The price at which the acquirer offers to purchase shares from existing shareholders, determined by the highest of several parameters, including:
- Highest Negotiated Price: The highest price per share paid or agreed to be paid for any acquisition under the agreement.
- Volume-Weighted Average Price: The average price paid or payable for acquisitions during a specified period.
- Highest Price Paid: The highest price paid or payable for any acquisition during a specified period.
- Volume-Weighted Average Market Price: The average market price of the shares for a specified period.
- Fair Price: The price determined by the acquirer and the manager to the open offer, taking into account valuation parameters.
Parameters for Determining Offer Price: The offer price shall be determined based on the following parameters:
- Direct acquisition of shares or voting rights
- Indirect acquisition of shares or voting rights
- Volume-weighted average price paid or payable for acquisitions
- Highest price paid or payable for any acquisition
- Volume-weighted average market price of the shares
Adjustments to Offer Price: The offer price may be adjusted for corporate actions such as:
- Rights Issue: An issue of new shares to existing shareholders.
- Bonus Issue: An issue of new shares to existing shareholders without receiving any payment.
- Stock Consolidations: A reduction in the number of shares outstanding.
- Stock Splits: An increase in the number of shares outstanding.
- Payment of Dividend: A payment made to shareholders.
- De-mergers: A separation of a company into two or more separate companies.
- Reduction of Capital: A reduction in the amount of capital invested in a company.
Provisions for Acquisitions during the Tendering Period: The acquirer shall not acquire any shares during the tendering period at a price higher than the offer price.
Provisions for Acquisitions after the Tendering Period: If the acquirer acquires shares at a price higher than the offer price during the period of 26 weeks after the tendering period, the acquirer shall pay the difference to all shareholders whose shares were accepted in the open offer.
Minimum Level of Acceptances: The acquirer may indicate a lower price subject to other provisions of the SEBI SAST for acquiring all the acceptances, provided the lower price is not less than the price determined under the SAST.
Indirect Acquisitions: The offer price shall stand enhanced by an amount equal to a sum determined at the rate of 10% per annum for the period between the earlier of the date on which the primary acquisition or the date on which the intention or the decision to make the primary acquisition is announced in the public domain and the date of the detailed public statement.
Partly Paid-Up Shares: The offer price for partly paid-up shares shall be computed as the difference between the offer price and the amount due towards call-in-arrears including calls remaining unpaid with interest, if any.

Other Merchant Banking Activities - Mergers, Acquisitions & Takeovers (Part 4)

Determination of Offer Price: The offer price for equity shares carrying differential voting rights shall be determined by the acquirer and the manager to the open offer, with full disclosure of justification for the price in a detailed public statement and the letter of offer.
Conversion of Price Parameters: In cases where price parameters are not available or denominated in Indian Rupees, the conversion shall be effected at the exchange rate prevailing on the date preceding the public announcement.
Exclusion of Material Price Movement: The effect on the price of equity shares due to material price movement and confirmation of reported event or information may be excluded as per the framework specified under sub-regulation (11) of regulation 30 of the listing regulations.

Payment Mode

Modes of Payment: The offer price may be paid in cash, by issue, exchange or transfer of listed shares, listed secured debt instruments, or convertible debt securities.
Combination of Payment Modes: A combination of payment modes is allowed, and where shares have been acquired or agreed to be acquired by the acquirer and persons acting in concert with him, during the 52 weeks preceding the date of public announcement, the open offer shall entail an option to shareholders to require payment of the offer price in cash.
Requirements for Non-Cash Consideration: The shares sought to be issued or exchanged or transferred towards payment of the offer price shall conform to certain requirements, including being listed on a stock exchange, frequently traded, and having a good track record of complaint redressal and compliance with listing regulations.

Exemptions

General Exemptions: Certain acquisitions are exempt from the obligation to make an open offer, including inter se transfer of shares amongst qualifying persons, acquisition in the ordinary course of business by SEBI registered underwriters, stock brokers, merchant bankers, and market makers.
Specific Exemptions: Exemptions are also available for acquisitions at subsequent stages by an acquirer who has made a public announcement of an open offer, and for acquisitions pursuant to a scheme made under section 18 of the Sick Industrial Companies (Special Provision) Act, 1985, or pursuant to an order of a court or tribunal.
Conditions for Exemptions: The exemptions are subject to certain conditions, including disclosure of all subsequent stages of acquisition, and compliance with the listing regulations and other applicable laws.

Other Merchant Banking Activities - Mergers, Acquisitions & Takeovers (Part 5)

Exemptions from Open Offer: The following acquisitions are exempt from the obligation to make an open offer:
- Acquisition pursuant to a scheme of arrangement approved by a competent authority under any law or regulation, subject to certain conditions.
- Acquisition pursuant to a resolution plan approved under Section 31 of the Insolvency and Bankruptcy Code, 2016.
- Acquisition pursuant to the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
- Acquisition pursuant to the provisions of the SEBI (Delisting of Equity Shares) Regulations, 2021.
- Acquisition by way of transmission, succession, or inheritance.
- Acquisition of voting rights or preference shares carrying voting rights arising out of the operation of sub-section (2) of section 47 of the Companies Act, 2013.
- Acquisition of shares by lenders pursuant to conversion of their debt as part of a debt restructuring scheme implemented in accordance with the guidelines specified by the Reserve Bank of India.
SEBI Exemptions: SEBI may grant exemption from the obligation to make an open offer for acquiring shares under the SEBI SAST regulations, subject to conditions imposed by SEBI and after recording it in writing.
Process of Open Offer: The process of open offer involves the appointment of a SEBI-registered merchant banker who shall not be an associate of the acquirer.
Role of Merchant Banker: The merchant banker plays a crucial role in the open offer process, including:
- Making a public announcement of the open offer.
- Determining the value of securities offered in lieu of cash payment.
- Providing escrow services.
- Certifying the release of escrow amount to the acquirer.
General Obligations of Merchant Banker: The merchant banker has general obligations, including:
- Ensuring compliance with SEBI regulations.
- Maintaining confidentiality.
- Providing independent and unbiased advice to the acquirer.

Other Merchant Banking Activities - Mergers, Acquisitions & Takeovers (Part 6)

SEBI SAST Regulations: The SEBI SAST regulations lay down the general obligations of the Merchant Banker, which include ensuring the acquirer's ability to implement the open offer, verifying firm arrangements for funds, and ensuring the contents of the public announcement and letter of offer are true and fair.
Manager to the Open Offer: The manager to the open offer is responsible for:
- Ensuring the acquirer's ability to implement the open offer
- Verifying firm arrangements for funds
- Ensuring the contents of the public announcement, detailed public statement, and letter of offer are true, fair, and adequate
- Furnishing a due diligence certificate to SEBI
- Ensuring market intermediaries are registered with SEBI
- Exercising diligence and care to ensure compliance with regulations
- Not dealing in the target company's shares during the offer period
- Filing a report with SEBI within 15 working days from the expiry of the tendering period

Public Announcement

Timing: The public announcement shall be made on the date of agreeing to acquire shares or voting rights in, or control over the target company, with specific rules for different scenarios such as market purchases, conversion of securities, and disinvestment.
Contents: The public announcement shall contain information such as:
- Name and identity of the acquirer and persons acting in concert
- Nature of the proposed acquisition
- Consideration for the proposed acquisition
- Offer price and mode of payment
- Offer size and conditions
- Intention of the acquirer to delist or retain the listing of the target company

Detailed Public Statement

Publication: The detailed public statement shall be published in newspapers and sent to SEBI, stock exchanges, and the target company within 5 working days of the public announcement.
Contents: The detailed public statement shall contain information to enable shareholders to make an informed decision, including disclosures about the acquirer, target company, and the open offer.

Filing of Letter of Offer with SEBI

Letter of Offer: A letter of offer is a document containing disclosures about the acquirer, target company, and the open offer, including justification of the offer price, number of shares to be acquired, and future plans of the acquirer.
Filing: The letter of offer shall be filed with SEBI within 5 working days from the date of the detailed public statement, along with a non-refundable fee.
Fee: The non-refundable fee is prescribed in the SAST Regulations, based on the consideration payable under the open offer, with different slabs for different sizes of the open offer.

Other Merchant Banking Activities - Mergers, Acquisitions & Takeovers (Part 7)

Definition: The process of acquiring a company or a part of it, through a public offer, is known as an open offer. The Acquirer is primarily responsible for the correctness, adequacy, and disclosure of all relevant information in the Letter of Offer.
Details: The Merchant Banker is expected to exercise due diligence to ensure that the Acquirer discharges its responsibility adequately. The SEBI shall give its comments on the draft letter of offer as expeditiously as possible but not later than fifteen working days of the receipt of the draft letter of offer.

Key Concepts

Provision of Escrow: The Acquirer should create an escrow account towards security for performance of his obligations under the SAST regulations, at least two working days prior to the date of the detailed public statement of the open offer for acquiring shares.
Escrow Amount: The escrow amount shall be computed as per the following scale:
- 25% of the consideration for the first Rs. 500 crore
- 10% of the balance consideration
Form of Escrow Account: The escrow account may be in the form of:
- Cash deposited with any scheduled commercial bank
- Bank guarantee issued in favour of the manager to the open offer by any scheduled commercial bank
- Deposit of frequently traded and freely transferable equity shares or other freely transferable securities with appropriate margin

Other Procedures Requirements for Open Offer Process

Dispatch of Letter of Offer: The letter of offer shall be dispatched to the shareholders whose names appear on the register of members of the target company as of the identified date, not later than seven working days from the receipt of comments from SEBI.
Revision of Open Offer: The Acquirer may make upward revisions to the offer price, and subject to the other provisions of these regulations, to the number of shares sought to be acquired under the open offer, at any time prior to the commencement of the last one working day before the commencement of the tendering period.
Disclosure of Acquisitions: The Acquirer shall disclose during the offer period every acquisition made by the Acquirer or persons acting in concert with him of any shares of the target company, to each of the stock exchanges on which the shares of the target company are listed and to the target company at its registered office within 24 hours of such acquisition.

Other Merchant Banking Activities - Mergers, Acquisitions & Takeovers (Part 8)

Open Offer Process: The acquirer shall facilitate tendering of shares by the shareholders and settlement of the same, through the stock exchange mechanism as specified by SEBI.
Disclosure Requirements: The acquirer shall issue an advertisement 1 working day before the commencement of the tendering period, announcing the schedule of activities for the open offer, the status of statutory and other approvals, if any.
Tendering Period: The tendering period shall start within 12 working days from the date of receipt of comments from SEBI and shall remain open for 10 working days.
Payment of Consideration: The acquirer shall complete payment of consideration to the shareholders who have tendered shares in acceptance of the open offer within 10 working days from the last date of the tendering period.
Conditional Offer: An acquirer can make an open offer conditional as to the minimum level of acceptance, provided that the open offer is made after the agreement.
Competing Offer: When a public announcement of an open offer for acquiring shares of a target company is made, any person, other than the acquirer who has made such public announcement, is entitled to make a public announcement of an open offer within 15 working days.
Payment of Consideration: The acquirer shall open a special escrow account with a SEBI registered banker to an issue and deposit the amount of consideration (in cash).
Completion of Acquisition: The acquirer shall not complete the acquisition of shares or voting rights in, or control over, the target company, until the expiry of the offer period.
Withdrawal of Open Offer: The regulations also provide for the withdrawal of an open offer, subject to certain conditions and penalties for non-compliance.

Other Merchant Banking Activities - Mergers, Acquisitions & Takeovers (Part 9)

Open Offer Withdrawal: An open offer for acquiring shares can be withdrawn under certain circumstances, including:
- Statutory approvals being finally refused, subject to specific disclosure in the detailed public statement and letter of offer.
- The acquirer, being a natural person, has died.
- Conditions stipulated in the agreement for acquisition not being met due to reasons outside the acquirer's control, and the agreement being rescinded, subject to specific disclosure.
- Circumstances that, in the opinion of the SEBI, merit withdrawal, with a reasoned order being passed by the SEBI and hosted on its official website.
Withdrawal Procedure: In the event of withdrawal, the acquirer must:
- Make an announcement in the same newspapers as the public announcement, providing grounds and reasons for withdrawal, within two working days.
- Inform the Board, all stock exchanges where the target company's shares are listed, and the target company at its registered office, in writing, simultaneously with the announcement.
Key Concepts:
- Mergers: The combination of two or more companies to form a new entity.
- Acquisitions: The purchase of a company or its assets by another company.
- Takeovers: The acquisition of substantial shares or voting rights for the purpose of seeking management control of a company.
Regulations: The SEBI (Substantial Acquisition of shares and takeovers) Regulations, 2011 ensure greater transparency, fairness, and equitable treatment to all investors.
Merchant Banking Activities: Merchant bankers are involved in activities such as mergers, acquisitions, and takeovers.