Takeover: Mode of Payment under SEBI (SAST) Regulations, 2011


When an acquirer has made an open offer under SEBI (SAST) Regulations, 2011, the acquirer is required to pay consideration for the shares tendered in the open offer. For payment of consideration to the shareholders for the shares tendered by them, the acquirer is given an option under the regulations with regard to the mode of payment of offer consideration. A brief analysis of provisions relating to the mode of payment of offer consideration to the shareholders is detailed below:

Takeover Code


Regulation 9 of the SEBI (SAST) Regulations, 2011 dealt with the mode of payment of offer consideration and provides that offer price may be payable in any of the following manner–
  1. In cash; 
  2. by issue, exchange or transfer of listed shares in the equity share capital of the acquirer or of any person acting in concert;
  3. by issue, exchange or transfer of listed secured debt instruments issued by the acquirer or any person acting in concert with a rating not inferior to investment grade as rated by a credit rating agency registered with the Board;
  4. by issue, exchange or transfer of convertible debt securities entitling the holder thereof to acquire listed shares in the equity share capital of the acquirer or of any person acting in concert; or
  5. a combination of the mode of payment of consideration stated in clause (a), clause (b), clause (c) and clause.
Thus, in terms of regulation 9, the acquirer is free to make the payment to the shareholders of Target Company in any mode as he desires. However the following points are required to be considered while selecting the mode of payment of consideration to the shareholders:

Points to be taken care of
  • Where the acquirer along with PAC have acquired or agreed to be acquired shares of the Target Company during immediately preceding 52 weeks from the date of public announcement which constitutes more than 10% of the voting rights in the Target Company and has made the payment in cash, then the Acquirer is required to give an option to the shareholders of Target Company to accept payment either in cash or by exchange of shares or other secured instruments. If a shareholder has not exercised an option in his acceptance then it shall be deemed to have opted for receiving the offer price in cash.
  • The mode of payment of offer consideration may also be altered by the acquirer in case of revision in the offer price provided that the amount of offer price to be paid in cash prior to such revision is not reduced.
  • Where the shareholders have been provided with options to accept the payment either by way of cash or securities, or a combination thereof, then the pricing for the open offer may be different for each option subject to compliance with minimum offer price requirements under regulation 8. It is to be noted that the Detailed Public Statement and the Letter of offer shall contain justification of such differential pricing.
  • Where the offer price is to be paid by issuance of securities which requires compliance with any applicable law, the acquirer shall ensure that such compliance is completed upto commencement of the tendering period.
If the requisite compliance are not completed by such date, then the acquirer shall pay the entire consideration in cash.

Requirements to be fulfilled in case of payment of offer price under mode B, D and E
The shares sought to be issued or exchanged or transferred or the shares to be issued upon conversion of other securities, towards payment of the offer price, shall confirm the following requirements:
  • Such class of shares shall be listed on a stock exchange for a period of atleast two years preceding the date of public announcement and frequently traded at the time of the public announcement;
  • Issuer of such shares has redressed at least 95% of the complaints received from investors by the end of the calendar quarter immediately preceding the calendar month in which the public announcement is made;
  • Issuer of shares has been in material compliance with the listing agreement for a period of at least two years immediately preceding the date of the public announcement otherwise the offer price shall be paid in cash only;
  • Impact of auditors’ qualifications, if any, on the audited accounts of the issuer of such shares for three immediately preceding financial years does not exceed 5% of the net profit or loss after tax of such issuer for the respective years; and 
  • SEBI has not issued any direction against the issuer of such shares not to access the capital market or to issue fresh shares.

Issuance of Listed securities as consideration
If the issuer has offered listed securities as consideration, then the value of such securities shall be highest of the following: 
  • The average of the weekly high and low of the closing prices of such securities quoted on the stock exchange during the six months preceding the relevant date.
[(WH1+WL1)/2 + (WH2+WL2)/2…. (WH26+WL26)/2]
---------------------------------------------------------------------------------------------
26 
            WH = Weekly High Closing Price
            WL = Weekly Low Closing Price
             1, 2, 3…. 26 denote the Weeks
  • The average of the weekly high and low of the closing prices of such securities quoted on the stock exchange during the two weeks preceding the relevant date. 
[(WH1+WL1)/2 + (WH2+WL2)/2 
 ------------------------------------------------------------ 
          WH = Weekly High Closing Price
          WL = Weekly Low Closing Price
          1, 2 denote the Weeks

  • The volume-weighted average market price for a period of sixty trading days preceding the date of the public announcement, as traded on the stock exchange where the maximum volume of trading in the shares of the company whose securities are being offered as consideration, are recorded during the six-month period prior to relevant date. Further the ratio of exchange of shares shall be duly certified by an independent merchant banker (other than the manager to the open offer) or an independent chartered accountant having a minimum experience of ten years.
VWAP1+VWAP2…..VWAP60 
------------------------------------------------------------ 
60 
         VWAP= Volume Weighted Average Market Price

RELEVANT DATE shall be the 30th day prior to the date on which the meeting of shareholders is held to consider the proposed issue of shares under subsection (1A) of Section 81 of the Companies Act, 1956 (1 of 1956).
Prepared by: Ms. Ruchi Hans
For any professional query, please contact:
Ms. Divya Vijay
+911140622248,
Email:-divya@indiacp.com

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