Regulatory Framework of Takeovers in India

10/03/2023 1 By indiafreenotes

Takeover is a type of corporate action in which one company acquires another company by purchasing a controlling interest in its shares or assets. Takeovers can occur through a friendly negotiation between the two companies, or through an unsolicited offer made by the acquiring company.

The main objectives of takeovers are often to gain access to new markets, customers, products or technologies, to achieve economies of scale, or to eliminate competition. Takeovers can be beneficial for both the acquiring company and the target company, as well as for their shareholders, employees, and other stakeholders. However, takeovers can also have negative effects, such as job losses, cultural clashes, or disruptions to business operations.

Takeovers can take several forms:

  • Friendly Takeover:

Friendly takeover occurs when the target company agrees to be acquired by the acquiring company. This type of takeover can be beneficial for both parties, as it allows for a smooth transition and the opportunity to negotiate favorable terms.

  • Hostile Takeover:

Hostile takeover occurs when the target company does not agree to be acquired by the acquiring company, but the acquiring company continues to pursue the acquisition through an unsolicited offer or other means. Hostile takeovers can be contentious and may require legal or regulatory intervention to resolve.

  • Leveraged buyout:

Leveraged buyout occurs when a group of investors, often including the management of the target company, uses borrowed money to acquire the target company. This type of takeover can be risky, as the debt used to finance the acquisition can be substantial.

  • Reverse Takeover:

Reverse takeover occurs when a private company acquires a public company, often to gain access to the public company’s listing on a stock exchange. This type of takeover can be beneficial for the private company, as it can provide a quicker and less expensive way to go public.

Regulatory framework for takeovers in India is governed by the Securities and Exchange Board of India (SEBI) Takeover Regulations, which were first introduced in 1997 and have been updated several times since then. The regulations aim to provide a framework for fair and transparent takeovers of listed companies in India, and to protect the interests of shareholders and other stakeholders.

Provisions of the SEBI Takeover Regulations:

  • Mandatory offer:

If an acquirer acquires 25% or more of the voting rights of a listed company, they are required to make a mandatory offer to acquire an additional 26% of the voting rights from public shareholders.

  • Open offer:

If an acquirer acquires between 25% and 75% of the voting rights of a listed company, they may make an open offer to acquire additional shares from public shareholders. The open offer must be made at a price that is fair and reasonable, as determined by an independent valuer.

  • Disclosure Requirements:

Both the acquirer and the target company are required to make various disclosures to the stock exchanges and SEBI during the takeover process, including information about their shareholdings, intentions, and financial position.

  • Prohibition on insider Trading:

SEBI Takeover Regulations prohibit insider trading and other unfair trading practices during the takeover process.

  • Exemptions:

Certain exemptions from the mandatory offer and open offer requirements may be available in certain circumstances, such as when the acquisition is made through a preferential allotment or when the acquirer is a financial institution or a government entity.

  • Monitoring and enforcement:

SEBI monitors compliance with the Takeover Regulations and has the power to investigate and penalize violations.