The Insolvency and Bankruptcy Code: Dr. V.K. Unni Professor IIM Calcutta E-Mail: Unniv@iimcal - Ac.in

The Insolvency and Bankruptcy Code
Dr. V.K. Unni

Professor
IIM Calcutta
E-mail: [email protected]
IBC
• The Insolvency and Bankruptcy Code (Code) is one of the most effective reforms
brought in with the potential of transparently and expeditiously resolving India’s
overwhelming nonperforming assets (NPAs) conundrum.
• With a strict 180+90 days ‘resolve-or liquidate’ rule , the Code has received
commendation, from the global fraternity, including The World Bank and IMF, and has
been instrumental in India’s 30 place jump in 2018’s ‘Ease of Doing Business’ ranking.
• The Code enforces the concept of ‘creditor in control’ instead of ‘debtor in possession’,
and maximizes value recovery potential of the corporate debtors.
• Once the resolution process starts, the Director Board of the debtor cedes control of the
company, and insolvency professionals, with the help of professional advisors, start
managing the company.
IBC
• The insolvency resolution process in India has in the past involved the simultaneous operation
of several laws
• They include the Sick Industrial Companies Act 1985, the Securitisation and Reconstruction
of Financial Assets and Enforcement of Security Interest Act 2002, the Recovery of Debt Due
to Banks and Financial Institutions Act 1993, and the Companies Act 2013
• Quite understandably a plethora of legislation dealing with insolvency and liquidation led to
immense confusion in the legal system, and there was a grave necessity to overhaul the
insolvency regime
• The Code is intended to comprehensively reform the fragmented regime of corporate
insolvency framework,
• This will enable credit to flow more freely in India and instilling faith in investors for speedy
disposal of their claims
Applicability
• The Code provides creditors with a mechanism to initiate an insolvency resolution process in
the event a debtor is unable to pay its debts.
• The Code makes a distinction between Operational Creditors and Financial Creditors
• Financial Creditor is one whose relationship with the debtor is a pure financial contract, where
an amount has been provided to the debtor against the consideration of time value of money
(“Financial Creditor”).
• An Operational Creditor is a creditor who has provided goods or services to the debtor,
including employees, central or state governments (“Operational Creditor”)
• A debtor company can also, by itself, take recourse to the Code if it wants to avail of the
mechanism of revival or liquidation.
• In the event of inability to pay creditors, a company may choose to go for voluntary insolvency
resolution process –under which the company can itself approach the NCLT for the purpose of
revival or liquidation.
Institutional Framework
• The Code proposes the creation of several new institutions, all of which have specialized roles
in the insolvency resolution process.
• The Code has created a regulatory and supervisory body, the Insolvency and Bankruptcy
Board of India (“IBBI”), which has the overall responsibility to educate, effectively
implement and operationalize the Bankruptcy Code
• The Code envisages the creation of a cadre of professional insolvency practitioners, known as
Resolution Professionals (“RP”), who will be overseeing various aspects of the resolution of
insolvency
• The Code also sets up Insolvency Professional Agencies, which are professional bodies that
will regulate the practice of insolvency professionals
• Individual practitioners are required to be enrolled with insolvency professional agencies
which are empowered to certify professionals, conduct examinations, and lay out a code of
conduct.
Information Utilities
• The Code envisages the establishment of Information Utilities, which are tasked with the collection,
collation, maintenance, provision and supply of financial data to businesses, financial institutions,
adjudicating authorities, insolvency professionals and other relevant stakeholders,
• They will serve as a comprehensive repository of information on corporate debtors that are of a
financial nature.
• It is optional for operational creditors to provide financial information to the information utility.
• This information, including records of liabilities, defaults, and overall debt, is to be sourced from
creditors by the utility service
• All security interests created on assets are to be reported to the Utilities by financial creditors.
• The records with the utilities has evidentiary value in the initiation of insolvency resolution procedure,
and can assist various stakeholders in arriving at an ideal resolution at distressed companies
• National e-Governance Services Ltd. (NeSL), a government entity, has become the first Information
Utility after receiving the required approvals from the IBBI.
Framework of the Code
• All proceedings under the Code in respect of corporate insolvency are to be adjudicated by the
NCLT, which has been designed as the special one window forum which can tackle all aspects
of insolvency resolution.
• The NCLT is referred to as the Adjudicatory Authority in relation to insolvency of corporate
persons under the Code.
• No other court or tribunal can grant a stay against an action initiated before the NCLT.
• Appeals from the orders of the NCLT lie before the National Company Law Appellate Tribunal
(“NCLAT”).
• All appeals from orders of the NCLAT lie to the Supreme Court of India.
• The jurisdiction of civil courts is explicitly ousted by the Code with regard to matters addressed
by the Code.
• Additionally, it is now established that the Limitation Act, 1963 shall be applicable to
proceedings under the Code, thus, time-barred claims are outside the purview of insolvency
IBC
• When resolution/restructuring of debts is not viable, the NCLT may direct for dissolution
of the company.
• The Code envisages a two stage process, first revival and second liquidation
1. Corporate Insolvency Resolution Process (“Insolvency Resolution Process”)
2. Fast Track Corporate Insolvency Resolution Process (“Fast Track Resolution Process”)
3. Liquidation
• Insolvency Resolution Process and Fast Track Resolution Process are measures to help
revive a company.
• The Code attempts to first examine possibilities of a revival of a corporate debtor failing
which, the entity will be liquidated.
Insolvency Resolution Process
Initiation by a Financial Creditor
• A Financial Creditor may by itself or jointly with other financial creditors or any other person
on behalf of the financial creditor, seek to initiate Insolvency Resolution Process by filing an
application before the NCLT, once a default has occurred.
• Interestingly, under the Code, the adjudication process in respect of a Financial Creditor does
not require a notice to be served on the debtor.
• However, the Supreme Court has in its judgement (Innoventive Industries v IDBI Bank, 2017)
made it mandatory for a notice to be served on the debtor, as well as to provide the debtor
with the right to be heard
• The Code provides that within fourteen days of an application having been filed, NCLT shall
ascertain the existence of the debt and default and either admit or reject the application, after
which consequences under the Code would follow
• The Code does not mention the degree of proof required for the NCLT to ‘ascertain’ default in
respect of a debt owed by a debtor
IBC
• However, decisions of the Supreme Court establish that NCLT has to only ascertain the
existence of an outstanding debt in respect of which there has been a default and not deliberate
into its extent or composition
Initiation by an Operational Creditor
• The Code envisages a two-step process for the initiation of insolvency proceedings by an
Operational Creditor
• An Operational Creditor would upon the occurrence of a default have to demand payment of
the unpaid debt (“Demand”)
• The Corporate Debtor may within 10 days of receipt of the Demand either Dispute the debt or
pay the unpaid debt
• In the event the corporate debtor does not reply or repay the debt, an application could be filed
by the Operational Creditor before the NCLT to initiate Insolvency Resolution Process
IBC
• However, the existence of a dispute can act as a barrier to such application.
• The term “dispute” includes a suit or arbitration proceedings relating to: (a) the existence of
the amount of debt; (b) the quality of goods or service; or (c) the breach of a representation or
warranty
• There are Supreme Court decisions which had held that operational creditors cannot use IBC
either prematurely or for extraneous considerations or as a substitute for debt enforcement
procedures
What is a Dispute ? (Mobilox v Kirusa, Supreme Court, 2017)
1. The term “dispute” must be interpreted in a wide an inclusive manner to mean any
proceeding which had been initiated by the debtor before any competent court of law or
authority
2. The dispute should be in respect of (a) existence of the amount of debt; or (b) quality of
goods and services; or (c) breach of representation and warranty;
IBC
3. The dispute should be raised prior to the issuance of a demand notice by the Operational
Creditor
4. The debtor would have to particularize and prove the dispute in respect of the existence of the
“debt” and the “default”
5. The dispute cannot be a mala fide, defense raised to defeat the insolvency proceedings.
• After this judgement the definition of dispute has been expanded to cover even
correspondences between parties showing a dispute and the existence of dispute need not be in
the form of pendency of suit or arbitration proceedings only
• The corporate debtor shall bring to the notice of the operational creditor, existence of a dispute
or record of the pendency of the suit or arbitration proceedings
• This provided much-needed relief and clarity to corporate debtors who may have a genuine
dispute regarding the debt under consideration, but may not have yet initiated legal
proceedings.
IBC
Initiation by a Corporate Applicant
• In case of default by the corporate debtor, the corporate applicant may file an application for
initiation of insolvency proceedings.
• The applicant must furnish information relating to the books of account and the RP to be
appointed
• Additionally, a special resolution must be passed by the shareholders of the corporate debtor
or a resolution by at least three-fourth of the total number of partners must be passed
approving the filing of the insolvency resolution application (for LLPs)
• In February 2019, Reliance Communication Ltd. on its own filed for insolvency
proceedings under the Code
IBC
Insolvency Resolution Process
• Upon admission of the application preferred by a Financial Creditor/Operational Creditor, a
moratorium is declared on the continuation and initiation of all legal proceedings against the
debtor
• Thereafter an interim resolution professional (“IRP”) is appointed by the NCLT within
fourteen days from the insolvency commencement date
• The moratorium continues to be in operation till the completion of the Insolvency Resolution
Process which is required to be completed within 180 days of the application being admitted
• This is extendable by a maximum period of 90 days in case of delay
• Once an IRP is appointed, the Director Board is suspended and management vests with the
IRP.
• IRP’s are required to conduct the insolvency resolution process, take over the assets and
management of a company, assist creditors in collecting information and manage the
Insolvency Resolution Process.
IBC
• The term of the IRP is to continue until an RP is appointed
• The first step for the IRP is to determine the actual financial position of the debtor by
collecting information on assets, finances and operations.
• Information that may be obtained at this stage include data relating to operations, payments,
list of assets and liabilities.
• The IRP would also have to receive and collate claims submitted by creditors
• In order to have a more workable valuation of stressed assets and bring in transparency in the
bidding process, IBBI amended its regulations with respect to the Corporate Insolvency
Resolution Process in 2018
• The regulations initially required determination of the liquidation value of the insolvent
company
• As per the amendment a fair value, along with the liquidation value, has to be determined.
IBC
• This was financially detrimental for the insolvent company, because widespread dissemination of
liquidation value prompted resolution applicants to submit bids which tended to linger near the
liquidation value mark which was significantly lower than the market value
• Fair value means the realisable value of assets of the insolvent company, if they were to be sold
between a willing buyer and seller as on the date on which insolvency application has been
admitted, on an arm’s length basis, after proper marketing
• The amended regulation seeks to ensure a maximization of the value of the assets so that the
insolvent company fetches an economically sustainable amount for its creditors.
• The RP shall provide an evaluation matrix to prospective applicants before they submit their
resolution plans
• The evaluation matrix refers to a set of parameters and the manner in which these parameters are
to be applied while considering a resolution plan
• The Committee of Creditors (CoC) evaluates various resolution plans submitted for an insolvent
company and, based on their evaluation, determine the appropriate resolution plan.
IBC
• The Code also allows withdrawal of applications admitted for insolvency resolution subject to
an approval of 90% of the voting share of the CoC.
Committee of Creditors (CoC)
• The RP appointed by the NCLT would constitute a Committee of Creditors (CoC) comprising
of all the Financial Creditors of the corporate debtor
• This would incentivize a creditor to favour a collective approach towards insolvency
resolution rather than proceeding individually
• A decision of the CoC would require to be approved by a minimum of 51% of voting share of
the Financial Creditors.
• For certain key decisions of the Committee of Creditors, including: (i) appointment of the
resolution professional, (ii) approval of the resolution plan, and (iii) increasing the time limit
for the insolvency resolution process, the voting threshold is fixed at 66%.
IBC
• To ensure that there are no conflicts of interest, a related party of the Corporate Debtor to
whom a financial debt is owed is not given any representation, participation or voting rights
in the CoC
• The Code at this stage of the Insolvency Resolution Process, provides preferential treatment
to Financial Creditors since Operational Creditors do not have the right to be a part of the
CoC
• In case Financial Debts as well as Operational Debts are owed to a person, such person would
constitute a Financial Creditor to the extent of the Financial Debt owed
• Similarly, if the right to recover an Operational Debt is transferred or assigned to a Financial
Creditor, such transferee or assignee would be an Operational Creditor to the extent of such
debt
IBC
• In case of consortium based lending, every Financial Creditor is eligible to be a part CoC
• The voting is such a situation would be based share of the financial debts owed to such
Financial Creditors.
• Similarly, in case a trustee has been appointed under a consortium/syndicated lending
agreement- the lenders may elect to be represented by a trustee or may represent themselves.
• The CoC may also replace the RP at any point of time
• When the resolution process is on, the RP would have to seek prior approval of the Committee
of Creditors by convening a meeting prior to taking actions such as raising any interim
finance, creation of any security interest, amendment of rights creditors etc
• A primary objective of the enactment of the Code is to aid a debtor in resolving an insolvency
situation without approaching liquidation, by finalizing an insolvency resolution plan
(“Resolution Plan”).
IBC
• In an ideal scenario, a properly structured Resolution Plan would provide a strategy for
repayment of the debts of the debtor after an evaluation of the debtor’s worth, while allowing
for the survival of the debtor as a going concern.
• Specifically, the Resolution Plan must provide for repayment of the debt of operational
creditors in a manner such that it shall not be lesser than the amounts that would be due
should the debtor be liquidated.
• Additionally, it should identify the manner of repayment of insolvency resolution costs, the
implementation and supervision of the strategy, and should be in compliance with the law
• If the terms under the Resolution Plan are approved by the CoC and subsequently by the
NCLT, the Resolution Plan would be implemented, and the debtor may emerge from the debt
crisis with a fresh chance for business and lessened liabilities.
IBC
• Initially, under the Code, the Resolution Plan could be presented before the committee of
creditors by any person, without any restrictions or stipulations on eligibility of the
Resolution Applicant
• However, an amendment to the Code in December 2017 inserted certain eligibility criteria to
be satisfied for a person to qualify as a Resolution Applicant.
• Specifically, the amendment introduced Section 29A of the Code, whereby certain categories
of persons were ineligible to submit a Resolution Plan
• Apart from categories such as undischarged insolvents, wilful defaulters, persons convicted
of offences, etc., it also extended to persons who controlled an account classified as non-
performing assets, persons who were promoters of a corporate debtor in which a preferential
or fraudulent transaction has taken place, persons who have executed an enforceable
guarantee in favour of a creditor of the debtor, etc.
IBC
• The subjectivity in the criteria led to widespread debates on who could be an eligible
Resolution Applicant, subsequently landing several debtors and bidders in litigation to
determine the bidders’ eligibility and delaying the insolvency resolution
• Considering the possible adverse impact of the eligibility criteria, the legislature introduced an
Amendment in 2018, further amending Section 29A in an attempt to bring about clarity in the
confusion.
• For instance, the erstwhile Section 29A made ineligible those persons who were ‘connected
persons’ to applicants who failed to satisfy the eligibility criteria prescribed therein,
consequently including banks and financial institutions within its ambit.
• The Amendment has tried to provide a wide and all-encompassing definition of financial
institutions who are provided crucial exemptions for compliance with these eligibility norms
IBC
• Similarly financial institutions have been exempted from being treated as a related party on
account of holding equity in the corporate debtor undergoing insolvency if the equity has been
obtained through conversion of a debt instrument
• Once a person meets all the eligibility criteria and submits a Resolution Plan, in the event the
same is not approved by the committee of creditors or by the NCLT, the NCLT may direct the
debtor to be liquidated.
• The request inviting resolution plans would require a Resolution Applicant to provide a
performance security in case its resolution plan is approved by the CoC
• If the Resolution Applicant either doesn’t implement the plan or contributes towards the
failure of the implementation of that plan the performance security will be forfeited
Fast Track Resolution
• The criterion for invoking Fast Track Resolution depends on the corporate debtor’s assets,
income and nature of creditors or quantum of debt.
• The standards/ thresholds for invoking Fast Track Resolution have been provided in the
Regulations
• The entire process is completed within 90 days. However, the NCLT may, if satisfied, extend
the period of 90 days by another 45 days.
• A creditor or a debtor may file an application, along with the proof of existence of default, to
the NCLT for initiating Fast Track Resolution
Fast Track Resolution shall be applicable to the following categories
• small company under the Companies Act 2013 or
• startup (other than the partnership firm), as defined in the 2017 notification of the Ministry of
Commerce and Industry; or
• an unlisted company with total assets, as reported in the financial statement of the
immediately preceding financial year, not exceeding Rs.1 crore
Liquidation
• Under the Code, the liquidator shall create an estate, i.e. a corpus, of all assets of the corporate
debtor which can be utilized and distributed subsequent to liquidation.
• The liquidator is then required to receive or collect all claims from the creditors within a period
of thirty days from the date of commencement of the liquidation process
• The liquidator has been empowered to adopt a new methodology for the realization of assets,
namely, “to sell the corporate debtor as a going concern
• If the creditors committee does not get a resolution plan approved, then liquidation of the
company’s assets will have to be undertaken in order to satisfying outstanding debts.
Liquidation
• The Code establishes an ordered of priority among creditors, which will determine the
sequence in which outstanding debts will be repaid
1. First, the dues towards the insolvency professional including fees and other costs incurred in
the insolvency resolution process
2. Second, secured creditors who chose to not enforce the security they hold and the dues
owed to workmen
3. Third, employee wages;
4. Fourth, unsecured creditors
5. Fifth, dues owed to the government and residual debts to creditors even after the
enforcement of security
6. Sixthly, any other outstanding debt
7. Finally, shareholders, with preference shareholders’ rights taking precedence
Liquidation
• Once the creditors committee chooses to liquidate the company’s assets, there are two paths
available to the secured creditor
• they may choose to opt out of the resolution process and enforce their security to recover
debts owed to them; or
• they may participate in the resolution process, thereby giving up all rights over the collateral
• The latter option will prioritise the secured creditor ahead of all except the dues owed to
workmen
• Another unique feature of the Code is the low priority accorded to government dues, unlike
the Companies Act, 2013 where they are paid alongside employees and unsecured financial
creditors.
• Now, they are paid after secured creditors, unsecured creditors, employees, and workmen
Liquidation
• This undoubtedly signals the business-first principle that is guiding the Code, where the
government is viewed only as a facilitator and regulator, and not an active participant in the
affairs of commercial entities
• After an order for liquidation has been passed, suits/ legal proceeding cannot be instituted by/
against the corporate debtor.
• For the purpose of liquidation, the liquidator ordinarily sells the assets of a corporate debtor
by way of an auction
• However, such sale may be by way of a private sale, in cases where
• (i) the asset is perishable;
• (ii) the asset is capable of deterioration of value if not sold immediately;
• (iii) the asset is sold at a higher price than the reserve price of a failed auction as well as;
• (iv) when prior permission of the Adjudicating Authority for a private sale has been obtained.
IBC
Name of the Corporate Debtor Percentage of the amounts realized by Realization by Financial Creditors as a
Financial Creditors vis a vis the amounts percentage of the liquidation value
claimed
Electrosteel Steels Limited 40.38 183.45
Bhushan Steel Limited 63.5 252.88
Monnet Ispat & Energy Limited 26.26 123.35
Amtek Auto Limited 34.38 106.2

IBC
• It is imperative that we have more examples of efficient resolution (which includes successful
implementation of the resolution plans) such as the resolution of Bhushan Steel by Tata Steel,
since the time value of money is an important consideration to ensure the efficacy of the IBC
framework
• Whilst steep haircuts still remain an important issue, a strong market for the growing investor
appetite in the corporate resolution space should help in lowering the haircuts that the lenders
are currently bearing
• An important example would be the case of Binani Cements (which saw a stiff competition
between Ultratech and the Dalmia Group with the winning bid providing for a 100% recovery
for the creditors)
IBC
• Until December 2019, IBC applied only against companies
and LLPs
• Even though IBC contained provisions in respect of
individual insolvency, these provisions have not been notified
and consequently they are not in force
• However in December 2019 IBC provisions applicable to
Personal Guarantors of a Corporate Debtor have been
notified
IBC
Dr. V.K. Unni
Professor
IIM Calcutta
Dr. V.K. Unni
Professor
Indian Institute of Management Calcutta
V.K. Unni IIM-C
Spin off
Split off
Restructuring
Split up
Equity carve
out
V.K. Unni IIM-C

Spin-Off
 From an existing company a division/unit is carved
out/spun off and set up as a new company
 The new company issues shares to the shareholders of the
first/existing company
 This in effect creates a separate legal entity with its own
management team and board of directors.
 Each existing shareholder of the first company will get
shares of the newly created company which is
proportional to the amount of shares already held in the
first company.
 Importantly there is no involvement of cash and the
shareholders of the first company become the
shareholders of the newly spun off company.
V.K. Unni IIM-C
 In simple words, in the case of a spin off the first company
converts its division/unit into a separate entity and divides its
shares to its shareholders on a proportional basis
 There are 2 major ways of spinning-off a company
1. Regular spin-off – In this case there is a 100% distribution to
shareholders
2. Majority spin-off – The first company will retain a minority
shareholding which is about 15-20% in the newly spun
company and distributes the majority of the shares to
shareholders.
V.K. Unni IIM-C

Regular Majority
spin-off spin-off
First company will
100%
retain a minority
distribution to
shareholding which is
shareholders
about 15-20%
Distributes the majority of

the shares to shareholders.
V.K. Unni IIM-C

Examples
 Areva T&D India Limited decided to spin off Smartgrid
Automation Distribution and switchgear Limited on April
11, 2011. As per the terms, for every 1 equity share of Areva
T&D India, 1 equity share of Smartgrid Automation will be
issued (April 2011).
 In April 2010, Unitech Ltd. approved plans to spin off some
businesses including telecom into a new company called
Unitech Infra Ltd.
 For every one share held in Unitech Ltd, shareholders will
get one share of the new firm Unitech Infra Ltd.
 In 2013 Marico spun off its beauty care business into a new
company called Marico Kaya Enterprises Ltd. where Marico
shareholders were allotted 2 shares of the new company for
every single share held in Marico
V.K. Unni IIM-C
Split-Offs:
 The parent company offers its shareholders the opportunity to
exchange their shares in the parent company for shares of a company
(Split-off Company) wherein the parent company has a significant
stake
 Thus would lead to a different shareholding pattern in Split-off
Company as compared to the shareholding pattern of Parent Company
 Depending upon the number of shares being tendered one of the
shareholders of the Parent Company will gain disproportionate
shareholding in the Split-off company and relinquishes/brings down
its shareholding in Parent Company
 The most crucial difference between a split-off and spin off lies in the
fact that the shareholders in a split-off must exchange their shares in
the Parent Company so as to receive shares of the Split-off Company
V.K. Unni IIM-C

 While in the case of a spin off , shareholders do not need to
exchange their shares so as to receive shares in the spun-off
company
 A split-off is also known by the name tender offer exchange
 Transactions in the nature of split off happens commonly in USA
 In 2008 US based insurance company MetLife split-off substantially
all of its 52% stake in Reinsurance Group of America which Metlife
acquired in 2000
 In the exchange offer, tendering stockholders had to exchange their
MetLife shares for RGA shares at a 10% discount to the per-share
value of RGA share.
 For each $1.00 of MetLife share accepted in the exchange offer, the
tendering stockholder will receive approximately $1.11 of RGA
share.
V.K. Unni IIM-C
 US Pharma company Bristol Myers Squibb (BMS) in February 2009
demerged its nutrition business Mead Johnson, through an Initial
Public Offering (IPO)
 Post IPO, BMS held around 82% shares in Mead Johnson Nutrition
Co.
 In November 2009, BMS decided to split off its holding in Mead
Johnson
 In the exchange offer, Bristol-Myers Squibb shareholders can
exchange their shares of Bristol-Myers Squibb for shares of Mead
Johnson at a discount.
 For each $1.00 of Bristol-Myers Squibb share accepted in the
exchange offer, the tendering shareholder will receive approximately
$1.11 of Mead Johnson share, subject to the upper limit on the
exchange ratio. V.K. Unni IIM-C
Opportunity to exchange their shares in the
parent company for new shares held by the
parent in the Split off company.
It will lead to a different shareholding pattern in

Split-off Company
One of the shareholders of Parent Company will

gain disproportionate shareholding in Split-off
Company and relinquishes shareholding in Parent
Company
Example: Bristol Myers Squibbs (BMS) splitting off its
shareholding in Mead Johnson Nutrition Co. by
allowing its shareholders to exchange their BMS
shares for Mead Johnson’s shares
V.K. Unni IIM-C
Split up:
 The term “split-up” is defined as the division of a company
into two or more independent companies. A
 Because of this two or more separate companies emerge
while the parent company disappears as a corporate entity.
 Shareholders of the parent company get shares of the new
companies, with the exact distribution of shares depending
on each situation.
 AT&T was forced to split up in 1982 when the US
government emerged victorious in the anti-trust case which
was filed against it (United States v. AT&T)
 From January 1, 1984, AT&T's local operations were split
into seven independent Regional Holding Companies, or
"Baby Bells
V.K. Unni IIM-C
 Recently Max India Ltd. was split up into three separate companies
 While one company will focus on life insurance; the second company
will be deal with healthcare and allied businesses; and the third entity
will focus on manufacturing
 This restructuring is clearly intended to unlock the shareholder value
in its main businesses.
 After the split up there will be three companies a) Max Financial
Services for life insurance; b) Max India Ltd for health care, health
insurance and allied businesses; and c) Max Ventures and Industries
for manufacturing activities
 The demerger scheme was approved by the Punjab and Haryana High
Court in December 2015
V.K. Unni IIM-C
Division of a company into two or
more independent companies.
Two or more separate companies emerge while the

parent company ceases to exist/ completely changes
its business and structure
Shareholders of the parent company get shares of the new

companies, according to an approved ratio
V.K. Unni IIM-C

Equity Carve Out
 The parent company sells a portion or all of its
interest in a subsidiary to the public in an IPO.
 This results into a new legal entity which has its
own board of directors and management team
different from the Parent Co.
 It is also known as an IPO carve-out or a subsidiary
IPO
 Each carved-out subsidiary has its own board,
operating CEO, and financial statements, while the
parent provides strategic direction and central
resources
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 Carve-out is essentially an IPO, but in economic terms it is
an asset sale to public shareholders as opposed to a single
buyer
 In other words, in an equity carve out a company (parent)
turns its division into a separate entity and then takes it to
the public
 Thus equity carve outs has some similarity with spin offs in
the sense that a new entity is created but the significant
difference lies in the fact that the parent entity receives cash
as part of the transaction while in the case of a spin off there
is no payment of money involved
V.K. Unni IIM-C

The parent company sells a portion or all of its interest in a subsidiary
to the public in an IPO
Formation of a new legal entity which has its own board of directors
and management team
Each carved-out subsidiary has its own board, operating CEO, and
financial statements, while the parent provides strategic direction and
central resources
V.K. Unni IIM-C

Example:
 Reliance Communications managed to carve out a
company in 2007 by hiving off its tower business
 The new company Reliance Infratel is owned by
Reliance Communication (95%) and some PE funds
(5%)
 SEBI in 2010 cleared Reliance Infratel’s proposed IPO
 Reliance Infratel will offer 10 per cent equity under the

proposed IPO
V.K. Unni IIM-C

TCS Carve out from TATA Sons
 TCS was initially a division of Tata Sons
 First Tata Sons hived off TCS into a subsidiary under

Sec ( 391 to 394) of the companies act after obtaining
approval from Bombay High Court.
 There after TCS went for an IPO and Tata Sons got
their stake diluted but still retained their control in TCS
 The proceeds from the IPO will be used to help the Tata
group continue doing what it has been doing: restructuring
its balance sheet, promoting new ventures, and deepening its
involvement in existing group companies , Ratan Tata in
2004
V.K. Unni IIM-C

 In 2003, Tata Sons the holding company of the Tata group, demerged
its software services division/TCS as a going concern into its
subsidiary Orchid Print India, which was later on renamed as Tata
Consultancy Services.
 Orchid Print was set up in 2001 when Tata Sons acquired a 96% stake
in RR Donelley India (RR Donnelley India was the investment vehicle
through which RR Donnelley held its stake in Tata Donnelley)
 The Scheme which was approved by Mumbai High Court, provides for
a purchase consideration of Rs 2,300 crore for the transfer of software
services division which will be paid to Tata Sons after the successful
completion of an IPO
 The Scheme would stand null and void if an IPO of TCS was not done
before a particular date
V.K. Unni IIM-C

Dr. V.K. Unni
Professor
V.K. Unni IIM-C

Mergers & Demergers
V.K. Unni
Professor
UNNI IIM-C 1
Merger as a Scheme of Arrangement
• Merger in general sense means the union of two or more commercial

interests or entities
• This involves fusion of two or more corporations by the transfer of
all property to a single corporation
• The term amalgamation is used synonymously with merger and
conveys the same meaning as merger
• Interestingly the Companies Act makes no differentiation between
the terms merger and amalgamation
• In fact, the Act mostly uses a much wider term arrangement which
is wide enough to cover all types of restructuring
• Arrangement covers all types of capital reorganisation either by
consolidation of shares or division of shares or both
UNNI IIM-C 2
Mergers
• Merger is the process by which shareholders of two or more
companies agree to merge with any one of the companies and to take
the shares of the surviving company in lieu of their shareholding in
the transferor company
• The result of merger is that the shareholder base of the surviving
company (transferee company) is widened to the extent of the
shareholder base of the transferor company
• Pursuant to the merger, the transferor’s company’s name is struck off
from the register of companies without following the usual procedure
of winding up
• Under the Indian Law even though a Limited Liability Partnership
(LLP) can merge into a company the reverse is not allowed
Kinds of Mergers
• Horizontal/Annexing Merger: When a merger involves companies
engaged in the same line of business, it is called as Horizontal Merger
Mergers
• Merger of TOMCO with HLL, Kelvinator’s merger with Electrolux,
Centurion Bank of Punjab’s merger with HDFC Bank, Ranbaxy’s
merger with Sun Pharma, ING Vysya Bank’s merger with Kotak
Mahindra Bank etc
• Vertical /Streaming merger: When companies engaged in different
stages of production in an industry complimentary to each other
merges, it results in a vertical merger
• The merger of Reliance Petrochemicals with Reliance Industries is
an example of a vertical merger
• Diagonal/ Conglomerate: In this case, there is a merger of
companies engaged in different unrelated businesses
• The merger of an airline with a telecom company can be an
example of a conglomerate merger
UNNI IIM-C 4
Diagonal/
Horizontal/Annexing Vertical /Streaming
Conglomerate
• Companies engaged • Companies engaged • merger of companies
in the same line of in different stages of engaged in different
business merges production in an unrelated businesses
industry
complimentary to
each other merges
UNNI IIM-C 5
Merger Dealt in Other Laws/
Rules
• Merger/ Amalgamation is also covered under the Income

Tax Act 1961 and Accounting Standard 14 (AS-14) of
Institute of Chartered Accountants of India- ICAI
• In fact AS-14 differentiates Amalgamation into two
types
1. Amalgamation in the nature of a Merger
2. Amalgamation in the nature of a Purchase
UNNI IIM-C 6
Legal Issues in Mergers
Process of Merger
The entire processes involved in merger can be divided into six
phases
1. Pre Merger Review : Here the company makes an assessment of its
own situation and decides whether or not the merger strategy should
be considered
2. Scouting the Target Company : Target companies must have the
merger criteria so as to be a good strategic fit with the scouting
company on various parameters like size, capital structure, core
competencies, technology etc;
3. Valuation: The third phase involves a review stage wherein a
detailed analysis of the target company is done, known as due
diligence
UNNI IIM-C 7
4. Merger Negotiation: This stage covers the negotiations between
the merging entities with respect to various terms of the scheme of
merger like share exchange ratio
5. Sanction of the Court: If the negotiations succeed, then both the
merging companies announce an agreement to merge the two
companies and they accordingly prepare a scheme of merger
• The deal is finalised by a merger agreement which will be reflected
in the Scheme of Merger
• The Scheme of Merger shall be presented to the concerned High
Court which may grant permission to the said scheme
• As per the Companies Act 2013 the National Company Law
Tribunal (NCLT) is vested with the powers to approve /regulate
Mergers
6. Post Merger Integration: The last phase of merger is the
integration of two companies which may be having different 8
work culture and philosophies
Pre Merger Review : Makes an assessment of its own situation
Scouting the Target Company: Good strategic fit with the scouting company on various parameters like
size, capital structure, core competencies, technology etc
Valuation: Due diligence done
Merger Negotiation: negotiations between the merging entities
Sanction of the Court: The Scheme of Merger shall be presented to the concerned High Court which may
grant permission to the said scheme
Post Merger Integration: The last phase of merger is the integration of two companies which may be
having different work culture and philosophies
UNNI IIM-C 9
Reverse Merger
• Generally mergers involve fusion of a financially not so strong
company (transferor company) with a strong and capital rich
company (transferee company)
• In the case of a reverse merger, this trend is reversed and here a
financially strong company merges with another company which is
financially not so strong
• Again when a parent company merges with its subsidiary company
it is called reverse merger
Reverse merger has 3 salient features:-
➢ The assets of the transferor company are greater than that of the
transferee company (transferee company is also known by the name
surviving company)
UNNI IIM-C 10
➢ The transferee company issues new equity capital to the shareholders
of the transferor company which results in increase in the original
issued capital of the transferee company
➢ Change of control takes place in the transferee company
• Some of the recent examples of reverse merger are ICICI the parent
company merging with its subsidiary ICICI Bank, IDBI merging with
its subsidiary IDBI bank
• On many occasions a profit making company merges into a loss
making company to take advantage of the accumulated losses of the
surviving company which shall be set off against the profits of the
combined entities
UNNI IIM-C 11
Mergers involving Sick Companies
• According to the Law, a Sick Industrial Company has to get itself
registered with Board of Industrial and Financial Reconstruction
(BIFR) for revival and rehabilitation
• BIFR undertakes the responsibility to rehabilitate such sick companies
which includes merger with a financially strong companies
• BIFR then directs the operating agency which may be any public
financial institution /scheduled bank(s) to prepare the rehabilitation
proposal
• When the operating agency proposes merger as a part of
rehabilitation, the procedure prescribed in the Companies Act for
carrying out mergers need not be followed
• However, the approval of the other company’s shareholders by way
of special resolution shall be needed to get the scheme sanctioned by
UNNI IIM-C 12
BIFR
De-Mergers
• De-merger is just the opposite of merger as in this case an existing
company is split into two or more companies
• According to the law, the division of a company is also covered under
the umbrella of arrangement
• De-merger is a process wherein a division/undertaking /unit/ part of
the company is cut/spun off and transferred to another company
• The transferee company can issue shares to the transferor company
/ its shareholders as consideration of the division so transferred
• In the context of a de-merger the transferee company is also known as
resulting company or new company
• When consideration is paid in the form of shares, de-merger may take
place under the relevant provisions of the Companies Act, e.g. L&T
de-merged its cement division into a new company called Ultratech
UNNI IIM-C 13
Mergers
Recent Examples of Demerger (2009)
• The cement business of Grasim was demerged into a company called
Samruddhi, its fully owned subsidiary.
• Grasim transferred its cement businesses, including related businesses
or investments excluding its investment in UltraTech, to Samruddhi
• In consideration, Samruddhi issued shares to Grasim shareholders on
a 1:1 pattern
• Once the scheme became effective, Grasim held 65 per cent in
Samruddhi and the balance 35 per cent was held by the Shareholders
of Grasim
• The demerger was undertaken through a Court approved Scheme of
Arrangement under Sections 391 to 394 of the Companies Act, 1956.
DE-MERGER
• The New Chemical Entity division of Piramal
Healthcare Ltd (then called Nicholas Piramal) was
demerged into a new company called Piramal Life
Sciences Ltd. (PLSL)
• In consideration, PLSL has issued and allotted equity
shares to the shareholders of Piramal Healthcare
according to a particular ratio
• The entire de-merger was approved by the Court as a
scheme of arrangement
DE-MERGER
• Wipro demerged its non-IT businesses such as consumer care and
lighting into a new company to focus exclusively on IT.
• The Director Board approved the demerger of Wipro Consumer Care
& Lighting (including Furniture business), Wipro Infrastructure
Engineering (Hydraulics & Water businesses), and Medical
Diagnostic Product & Services business into a separate company
• In 2012 December, its shareholders had approved the scheme of
arrangement between Wipro (transferor company/Demerged
company), Azim Premji Custodial Services Pvt. Ltd (resulting
company/new company) and Wipro Trademarks Holding (trademark
company).
• The scheme was approved by the Karnataka High Court in March
2013. UNNI IIM-C 16
DE-MERGER
• Salient features of the Scheme are
Resident shareholders of Wipro can choose one of the following options:
1. One share with a face value of Rs10 of the Resulting Company for
every five shares of Rs. 2 each of Wipro held by such shareholder,
2. One 7% redeemable preference share (RPS) with a face value of Rs.
50 of the Resulting Company, for every five shares of Rs2 each of
Wipro
3. One share of face value of Rs. 2 each of Wipro from transferring
promoters (M/s Prazim Traders and M/s Zash Traders) in exchange
for every one and sixty five hundredths (1.65) shares of the Resulting
Company
UNNI IIM-C 17
DE-MERGER
• The resulting company will be unlisted and will be carrying on
various activities like, consumer care and lighting, medical
equipments etc
• The first option gives the shareholders the right to become
shareholder in an unlisted company
• The second option gives the shareholders the right to hold
redeemable preference shares of an unlisted resulting company, these
will be converted to its equity shares on a future date
• However the company will be unlisted and the valuation will be
decided only in future
• In the third option the shareholders get shares of the listed entity
(WIPRO Ltd.) as they exchange the resulting company’s shares with
transferring promoters as per a ratio which is agreed upon
18
UNNI IIM-C
DEMERGER CONSIDERATION COURT
APPROVAL
• Nicholas • PLSL has issued and • approved by

allotted equity shares
Piramal to the shareholders the Court as a
demerged into of Piramal Healthcare scheme of
Piramal Life according to a arrangement
particular ratio
Sciences Ltd.
(PLSL)
DEMERGER CONSIDERATION COURT APPROVAL
• Wipro Consumer • its shareholders had • approved by the

Care & Lighting approved the Karnataka High
(including Furniture scheme of Court in March 2013
business), Wipro arrangement
Infrastructure between Wipro
Engineering (transferor
(Hydraulics & Water company/Demerged
businesses), and company), Azim
Medical Diagnostic Premji Custodial
Product & Services Services Pvt. Ltd
business into a (resulting
separate company company/new
company) and Wipro
Trademarks Holding
(trademark
company).
UNNI IIM-C 19
De-Merger
Thus in simple terms, a demerger of a
Company happens when
1. A part of its undertaking is transferred to
a newly formed company or an existing
company and the remainder of the first
company’s division/undertaking
continues to be vested in it; and
2. Shares are allotted to the first company’s
shareholders and
3. The entity that emerge must have its
own board of directors and, if listed on a
stock exchange have separate listings.
De-mergers
• In other words, de-merger is a vertical split and involves the
transfer of a division/business activity by the transferor company
to the transferee company , under a corporate legal process
• Here the consideration for the transfer is discharged by the
resulting company through an issue of shares to shareholders of
the transferor company.
• Mergers/de-mergers in India are effected through a court process
in accordance with sections 391-394 of the Companies Act, 1956
(CA1956)
• Sections 230-239 of Companies Act 2013 (CA 2013) deal with the
mergers/de-mergers
• The transferee company issues shares to the shareholders of the
transferor company on a proportionate basis
• Demerger is sometimes referred to as spin off although the
company law has never defined the word spin off
A part of its undertaking is transferred to a newly formed company or an existing company and the
remainder of the first company’s division/undertaking continues to be vested in it; and
Shares are allotted to the first company’s shareholders and
The entity that emerge must have its own board of directors and, if listed on a stock exchange
have separate listings.
In other words, de-merger is a vertical split and involves the transfer of a division/business activity
by the transferor company to the transferee company , under a corporate legal process
Here the consideration for the transfer is discharged by the resulting company through an issue of
shares to shareholders of the transferor company.
Mergers/de-mergers in India are effected through a court process in accordance with sections 391-
394 of the Companies Act, 1956.
The transferee company issues shares to the shareholders of the transferor company on a
proportionate basis
Demerger is sometimes referred to as spin off although the company law has never defined the
word spin off
UNNI IIM-C 22
De-mergers
De-merger of L&T’s Cement Business
• In 2003 L&T de-merged its cement division into a new company
called Ultratech Cements where the L&T’s shareholders would
have 80% and L&T would take 20% shares
• As a next step, Grasim and its associates belonging to the Aditya
Birla Group Company which had significant stake in L&T (about
15.73%) increased its stake in Ultratech to 51% through a
combination of purchase of shares from L&T at a specified price
of Rs.171.30 and from other shareholders at the same price through
an open offer
• Simultaneously, Grasim and its associates sold their entire stake i.e.
around 15.73 % in post de-merger L&T at Rs.120 per share to the
L&T Trust being formed by L&T employees
UNNI IIM-C 23
Crossborder Mergers
• Alternatively, where the consideration is received otherwise than in
the form of shares of the transferee company, sell off may be effected
under the provisions of the Sec 293 of CA 1956 as a sale or transfer of
undertakings (slump sale)
Cross Border Mergers
• Cross border mergers take place when two companies formed in
different countries merge together
• The Indian Law provides that any foreign body corporate including a
foreign company could merge with an Indian company
• Earlier the Indian Law provided that only a company incorporated
under the Act could be a transferee company which simply means that
a foreign company cannot be a transferee company
• But CA 2013 has allowed transferee companies to be foreign
companies in certain select countries based upon rules made by
Central government UNNI IIM-C 24
Slump Sale
Slump Sale
• Mergers through the process of courts involve considerable time
and compliances
• In such instances, the process of slump sale can be used for effecting a
restructuring
• The term slump sale denoted the sale of an entire business undertaking
as a going concern, comprising various assets and liabilities for a
lump sum consideration
• In slump sale, the individual assets and liabilities are not separately
valued but a net value is arrived at for making the payment
• Approval of shareholders of the company is needed to effect a slump
sale if the seller is a public company or a private company which is a
subsidiary of a public company (Sec. 293 of CA 1956)
• In May 2010, Abbott bought over the drug divisions of Piramal
Healthcare for Rs. 17000 crores
UNNI IIM-C 25
Take Over/ Acquisitions vis-à-vis Merger
Take Over/ Acquisitions

• Take over means the act of person/group of persons purchasing shares
or voting rights of a target company with the intention to gain control
over the target company’s management
• A take over is considered as hostile when the management of the
target company resists the attempted take over
• The word acquisition is also not defined in any of the laws dealing
with the subject
• It only means purchase of shares and when such purchase is coupled
with an intention to take control of the target company it may lead to a
take over
UNNI IIM-C 26
Company Law Issues in Mergers
• The CA 1956 and CA 2013 contain the detailed legal provisions
dealing with mergers and since June 2011 mergers crossing a specific
monetary threshold also will be scrutinized by Competition
Commission of India
• A s per CA 1956 the transferee company, i.e. the surviving company
shall always be a company incorporated under the Act while the
transferor company could be any Indian or foreign body corporate, or
even unregistered companies
companies in certain select countries as per rules to be framed by
central government
• This means that as per the CA 2013 an Indian company can go and
merge into a foreign company in certain select jurisdictions
27
UNNI IIM-C
Jurisdiction and Powers of Court/ NCLT
• Under CA 1956 Act, the high courts of respective states where
transferor and transferee companies have their respective offices have
jurisdiction to entertain and sanction the scheme of merger
• Furthermore, the jurisdiction of the Courts is wide enough to regulate
the merger of companies registered outside India
• This means, a foreign company can merge with an Indian company
but in that case, the law of the foreign country should permit such
mergers
• Furthermore the new Law has allowed transferee companies to be
foreign companies in case of certain select countries
• As per CA 2013 the NCLT is vested with the powers to approve
/regulate Mergers
UNNI IIM-C 28
• In the case of cross border mergers where the transferor company
happens to be a company incorporated outside India the jurisdiction of
Indian Courts to entertain and sanction a scheme of merger depends
upon the fact whether the foreign company has any place of business
in India by way of branch office
• If a foreign company has a place of business in India, the High Court
of the state in which the principal place of business is situated has
jurisdiction over the said company
• Thus, if the foreign company has a branch in India at Kolkata,
the Calcutta High Court shall have the jurisdiction over the
foreign company
UNNI IIM-C 29
Scheme of Merger : Court/ NCLT’s Role

• While dealing with an application for sanction of a
scheme of merger of companies, it is the duty of the
court to see that the scheme is fair and reasonable
• The court would not sanction a scheme if the
purpose of it is not bonafide and is intended to
shield the misdeeds of the ex-directors
UNNI IIM-C 30
Courts, while sanctioning the scheme generally tries to ascertain
whether
• The statutory requirements have been complied with
• The scheme as a whole has been arrived at by majority and in the
interest of the whole body of shareholders in whose interest the
majority is purported to act
• The scheme is such, that a fair and reasonable shareholder would
consider it to be in his interest and in the interest of the company
Amendment of the Scheme
• Courts / NCLT have the right to amend the terms of the merger
scheme if it is of the opinion, that any terms of the scheme is not
equitable or harsh on any of the interested parties
UNNI IIM-C 31
Scheme of Merger
Scheme of Merger
• The most important document in the process of merger is the Scheme
of Merger which is the blueprint of the entire merger
• It covers each and every aspect of the merger, governs and prescribes
the entire transaction of merger, the method of valuation of the
transferor companies, the share exchange ratio, legal rights and
obligations of the transferor and transferee companies, those of
members, creditors etc;
• The scheme of merger is a complete code by itself and it empowers
the court to sanction a scheme even though the scheme involves acts
which apart from such sanction would be ultravires the company
UNNI IIM-C 32
Scheme of Merger
• Where the reduction of capital is a part of a scheme of merger, the
requirements of the Act as regards to reduction of capital are not
applicable because the court/NCLT can sanction reduction as part of
the scheme
Appointed/ Transfer Date
• The appointed date is the cut off date from which all the properties of
the transferor company proposed to be transferred to the transferee
company shall be identified
• It is generally the first day of the financial year for the sake of
accounting treatment but the director board may agree for some other
date as appointed date
• While sanctioning the scheme, it is open for the court/NCLT to
modify the appointed date and prescribe such transfer date as it thinks
fit
UNNI IIM-C 33
Effective Date
• The scheme may generally provide that the effective date shall be the
date on which the last of all the necessary approvals are obtained and
certified copies of the court/NCLT orders are filed with the RoC
• Thus, it is the date on which the entire legal proceedings concerning
merger is completed
• Every scheme of merger has to provide a date from which the merger
shall take effect and it is open for the court considering the matter to
fix any other date
• When a scheme stipulates a date for completion of merger but
provides for extension of such date, it does not become nullity on the
expiry of the said date if the extension of the date has been made by
the director boards of the companies
UNNI IIM-C 34
Sanction Date
• Another important date in the scheme of merger is the sanction date
which means the date upon which the court/NCLT sanctions the
scheme
Share Exchange Ratio
• Share exchange ratio is the number of shares which the transferee
company will issue for each share of the transferor company to the
transferor company’s shareholders
• The transferee company in consideration of the merger shall allot to
transferor company’s shareholders its equity shares (i.e transferee
company’s shares)
• The merger scheme shall provide for the share exchange ratio at
which the transferor’s shareholders are to be allotted transferee's
shareholders UNNI IIM-C 35
• The share exchange ratio depends upon the valuation of the
transferor's and transferee's shares
• The determination of the share exchange ratio is done by the chartered
accountants by considering various factors like the respective
company's net worth, PE ratio, future growth prospects etc;
• Duty of the court/NCLT while sanctioning the scheme of merger is to
make sure that the scheme is fair and not detrimental to the interests of
the shareholders
Rights of Employees
• The scheme has to make provisions to protect the rights of employees
of the transferor and transferee companies
UNNI IIM-C 36
• Whenever any scheme affects the rights of the employees,
prejudicially they have a right to oppose it
• Generally, a scheme provides that all the employees of the transferor
company in service as on the effective date shall become employees
of the transferee company from the effective date
• The scheme of merger when sanctioned by the court has statutory
force and shall be binding not only on the company but also on the
dissenting creditors or shareholders
• Scheme can only transfer such rights that are capable of being
lawfully transferred by the parties to the scheme
UNNI IIM-C 37
• Tenancy rights, licences etc. granted to the transferor company cannot
be transferred to the transferee company under a scheme of merger
without the consent of the landlord or authority which issued the
licence
• A company is a legal person entirely distinct from its shareholders and
just because the shareholders of the transferor and transferee
companies are the same even after the merger, it cannot be contended
that there is no transfer of ownership
• Even though provisions in the company law constitute a complete
code for effecting mergers of companies it cannot be used to bypass
other statutes
UNNI IIM-C 38
Effects of Negative Covenants
• Sometimes companies who are parties to merger might have entered
into loan agreements which carry a negative covenant prohibiting the
company from undertaking any merger/arrangement/compromise
without the consent of its creditors
• In such cases, consent of creditors would be needed to proceed with
the merger
• However, judicial precedents have held that where a majority of class
of creditors have approved the scheme any one creditor would not be
allowed to stall the scheme if the court is satisfied about the fairness
of the scheme
UNNI IIM-C 39
Special Effects of Merger
• In a scheme of merger, there could be provisions as to the increase
of the authorised capital of the transferee company, change of name
and buy back of its own shares
1. Increase of Capital
• Normally when a company increases its authorised capital it shall
undertake and comply with the procedure given in the Act for the
same
• The company is required to pass a special resolution authorising
such increase and also notify the same to RoC
• However in the cases of merger various High Courts have held that
no separate notification be made to ROC and there is no need to
follow this procedure if it is already covered in the Scheme
UNNI IIM-C 40
• Scheme of Merger is a complete code and is intended to be in the
nature of a single window clearance system to ensure that the
parties are not put to cumbersome procedures
2. Change of Name
• The court while sanctioning a scheme of merger can also sanction
the change of name of the transferee company and a separate
procedure is not needed
Buy-back of Shares
• The scheme of merger may also provide for buy-back of shares of
the transferee company
• Buy back as per the CA 2013 Act needs to be complied with, if the
M&A results in purchase of shares by the company
UNNI IIM-C 41
Mergers
• In the erstwhile CA 1956, single window clearance was present,
wherein the scheme which was presented to the High court acted as
a scheme which could comply with almost all provisions including
buy-back of shares
• CA 2013 has done away with this exemption in the case of share
buy-back
• This means that as part of the scheme of merger if the shares of the
company are being bought back then the relevant section dealing
with share buy-back (i.e Sec. 68 of CA 2013) needs to be fulfilled
UNNI IIM-C 42
PROCESS OF MERGER
Approval of the draft scheme by the

board of directors of both the
companies
Application to the High Court /

NCLT seeking directions for
convening meetings of shareholders,
debenture holders and creditors of the
companies (class meetings)
Convening the meetings as directed

by the High Court and obtaining the
approvals of shareholders and/or
creditors
Filing a petition before the High

Court/NCLT for sanction of the
scheme as approved by the
shareholders and/or creditors
UNNI IIM-C 43
Process of Merger
Process of Merger
• Generally the MoA of a company empowers it to merge with
another company by way of its objects clause
• Even if MoA is silent, companies can still go for a merger, as the
right to merge is a statutory power conferred on a company by the
Act
• The legal process for effecting a merger has 4 distinct stages
1. Approval of the draft scheme by the board of directors of both the
companies
2. Application to the High Court/NCLT seeking directions for
convening meetings of shareholders, debenture holders and
creditors of the companies (class meetings)
UNNI IIM-C 44
Process of Merger
3. Convening the meetings as directed by the High Court/ NCLT and
obtaining the approvals of shareholders and/or creditors
4. Filing a petition before the High Court/ NCLT for sanction of the
scheme as approved by the shareholders and/or creditors
1. Approval of the Draft Scheme
❖ Companies involved in the merger are required to consider and
approve the draft scheme of merger in their respective board
meetings
❖ The boards will also a) approve the draft scheme of merger,
b) authorise the filing of application before the High Court/ NCLT
for convening the meetings of shareholders/and or creditors,
c) authorise the filing of petition for sanction of the scheme of
merger in the High Court/NCLT
UNNI IIM-C 45
Process of Merger
2. Directions from High Courts/NCLT
• Both the transferor and transferee companies shall move before
the respective high courts/NCLT in which the registered offices
are situated to obtain directions so that they can call meetings of
shareholders/creditors for considering and approving the scheme
of merger
• The proposed scheme of merger has to be attached along with
such application before the NCLT/court
• It should also be accompanied by the MoA, AoA and latest
audited accounts of the respective companies
• The high court/NCLT shall pass the necessary orders for
convening the shareholders/creditors meetings (class meetings)
46
UNNI IIM-C
Process of Merger
• Such directions from the court shall also contain the followings:-
a) Time and place where the meetings of the shareholders and
creditors shall be held
b) Appointing chairman and alternate chairman of the meeting
c) Fix the quorum of the said meetings
d) Prescribe the manner in which the meetings are to be conducted and
procedure to be followed during voting
e) Notice of the meetings and its advertisement
f) Time-limit for the chairman to submit the report to the court /
NCLT regarding the meeting’s outcome
UNNI IIM-C 47
Process of Merger
• When an application under the Act for the purpose of securing an
order for convening the meetings of shareholders/creditors is made,
the NCLT/court is only required to give appropriate directions as to
the convening of meetings
• The companies shall forward a copy of the application made before
the high court, to the Regional Directors under the Ministry of
Company Affairs
3. Convening and Holding Meetings
• The Act requires the calling of meetings of shareholders /creditors
as directed by the court/NCLT for the approval of the scheme of
merger
• Commonality of interests and rights constitute a class
48
UNNI IIM-C
Process of Merger
• For example, equity shareholders and creditors belong to separate
class
Creditors Meeting
• Creditor means every person having a pecuniary claim against the
company
• The scheme of merger applies to all the creditors and once the major
creditors have agreed to the proposed merger the consent of all the
creditors is not required
• Such meetings of creditors also need to be called to decide about the
merger
• As per CA 2013 , the NCLT can dispense with calling of a meeting
of creditors only if such creditors having at least ninety per cent
value agree and confirm, by way of affidavit, to the scheme of
compromise or arrangementUNNI IIM-C 49
Process of Merger
• Under the CA 1956 Court had the discretion of not calling the
creditor’s meeting when the creditor’s interests are not likely to be
adversely affected
Notice of Meetings
• The chairman appointed by the court is required to issue 21 days clear
notice of the meeting to the creditors and/or shareholders individually
• The notice of the meeting also has to be advertised in newspapers in
the manner as directed by the courts at least 21 days before the date of
the meeting, such notice and other documents shall also be placed on
the website of the company
• Non receipt of notice by any member/creditor would not invalidate the
proceedings of the meeting
UNNI IIM-C 50
Process of Merger
• As per CA 2013 notice of meeting for approval of the scheme of
arrangement along with other documents shall be sent to various other
regulatory authorities in addition to Central Government such as:
❖ Income Tax authorities
❖ Reserve Bank Of India
❖ SEBI if applicable
❖ Registrar of Companies
❖ the Stock Exchanges if applicable
❖ Competition Commission of India, if necessary
❖ Other sector regulators or authorities which are likely to be affected
by the compromise or arrangement
UNNI IIM-C 51
Process of Merger
• The notice of the meeting has to be accompanied by a copy of the
scheme, valuation certificate and an explanatory statement stating the
terms of the merger and explaining its effect
• The notice shall also consist of the resolution authorising the issue of
shares to persons other than existing shareholders
Intimation to Stock Exchanges
• If the shares of any of the companies are listed in any of the stock
exchanges, the companies shall intimate them so as to comply with
the listing agreements
• The companies shall send copies of notice of the meeting to the stock
exchange where its shares are listed
UNNI IIM-C 52
Process of Merger
Filing of Affidavit
• An affidavit shall be filed before the court by the chairman of the
meeting not less than seven days before the meeting stating that the
directions regarding the issue of notices and advertisements have
been duly complied with
Voting at Meeting
• The general meetings of the members (shareholders) and those of
creditors shall be convened to pass the requisite resolutions for getting
approval for the scheme
• The resolution for the approval of the scheme shall be passed by
majority in number representing 3/4th of value of those present and
voting either in person or proxy or postal ballot
UNNI IIM-C 53
Process of Merger
• It should be noted that the majority is dual, i.e. in number and in value
• Simple majority of those who are voting is adequate while 3/4th
requirement relates to the voting value
Illustration: In company ABC there are 1000 members holding 10000
shares of Rs 10 each. Out of this Mr. X, a member of ABC holds 3000
shares and all the other 999 members together hold 7000 shares. If X
decides against the scheme of merger it cannot be passed even if all
the 999 members vote for the scheme because their aggregate share
value of 70% falls short of the requisite 3/4th of the value present and
voting
UNNI IIM-C 54
Process of Merger
• Furthermore, the members also have to pass a special resolution
authorising the allotment of shares to persons other than existing
shareholders as per the Act, Preferential allotment
• Resolution should be passed to increase the authorised capital if the
proposed issue of shares exceeds the present authorised capital
• The requisite 3/4th majority has to be based on the members who were
present and voted at the meeting and not the total members/creditors
of the company
• In modern corporate world the number of shareholders/ members may
run into millions who may be scattered through out the country and
thus it is almost impossible for any company to pass a resolution with
3/4th of total members supporting it
UNNI IIM-C 55
Process of Merger
Adjournment of Meeting
• It is not mandatory that the scheme shall be adopted in a single
meeting
• The meeting can be adjourned if the members agree to the same
Reporting of the Result
• The chairman of the meeting shall report the result of the meeting to
the court within the time fixed by the court or within seven days
• A copy of the proceedings shall be also sent to the concerned stock
exchanges
4. Petition for Sanction of the Scheme
• After majority of members and creditors representing 3/4th value
have approved the scheme, the companies must make a petition to
court/NCLT for its sanction within seven days of filing the report
by the meeting’s chairman UNNI IIM-C
56
Process of Merger
• The petition for sanction of scheme shall be made by both the

companies
• Both the companies are required to move to their respective high
court(s) to get the sanction
• If both the companies are situated in the same state, the transferee
company can join the petition filed by the transferor company
Advertisement of the Petition
• The companies have to publish notices in newspapers one in an
English newspaper and the other in a local language of the area where
the company’s registered office is located so as to invite objections to
the proposed scheme of merger
UNNI IIM-C 57
Process of Merger
Filing of Petition with Central Government
• Both the companies also have to serve a copy of the petition along
with notice to the official liquidator and Regional Director under the
Ministry of Corporate Affairs
• No merger shall be sanctioned by the court unless it receives a report
from the ROC that the affairs of the company have not been
conducted in a manner prejudicial to the interests of its members or
the general public
Report of Official Liquidator
• The court shall not make an order of dissolution of the transferor
company unless the official liquidator after due scrutiny of the
company’s books has made a report that the affairs of the transferor
company have not been conducted in a manner prejudicial to the
interests of its members or the general public
UNNI IIM-C 58
Sanction of the Scheme
• The court shall sanction the scheme if it is satisfied that
a. The company making the petition has disclosed to the court all
material facts relating to the company
b. The whole scheme is annexed to the notice for convening the
meeting
c. The scheme has been approved by the company by means of 3/4th
majority of members present and voting
d. The scheme is genuine and not against the interests of the members,
the company, creditors or general public
UNNI IIM-C 59
• After satisfying itself the court would pass the requisite orders
• It is the duty of the courts to go through the scheme carefully so as
to find out whether all provisions of law and direction of the court
with respect to the holding of meetings have been complied with
• The court generally sanctions a scheme on being satisfied as to the
benefits of the scheme to the companies involved in merger
• The factors which may influence the decision of the court are:-
a. Whether the meeting was duly held ?
b. Was the majority acting in good faith and for common advantage
of the whole class ?
c. Whether all the provisions of the statute has been complied with?
UNNI IIM-C 60
Mergers of Listed Companies
• SEBI had made several efforts to monitor scheme of arrangements
undertaken by listed entities and they include
• (a) the introduction of clauses in the listing agreement which requires
a listed entity to file the scheme of arrangement with the stock
exchange at least one month before it is filed before the court/ NCLT
for sanction;
• (b) the introduction of clauses in the listing agreement which states
that any scheme of arrangement presented before the court/NCLT
should not violate any securities law or stock exchange requirements;
• (c ) Clauses that require listed entities to file, along with the scheme
of arrangement an auditors certificate stating that the entity has
complied with the accounting standard prescribed by the central
government UNNI IIM-C 61
Merger/Demerger of Listed Companies
• In 2013, SEBI introduced some additional conditions for listed
companies going for a scheme of merger/ demerger to protect the
interest of minority shareholders
• This included a valuation report to be obtained from an independent
chartered accountant if there is any change in the shareholding pattern
of the listed or the newly created company (resulting company)
• It also required the listed companies to get an additional approval
from public shareholders by way of postal ballot and e-voting with
2/3rd of public shareholders supporting the same if the scheme of
merger/demerger involved any alteration of promoter shareholding
• (Public shareholders mean non promoter shareholders)
UNNI IIM-C 62
New Features of CA 2013 for Mergers
1. The 2013 Act has introduced a new requirement, that no scheme of
arrangement of any company shall be sanctioned by NCLT unless
the company’s auditor has given a certificate that the accounting
treatment of the proposed scheme is in conformity with the
prescribed accounting standards.
2. Under CA 1956 any shareholder, creditor or other “interested
person” can object to the scheme of compromise or arrangement
before a court if such person’s interests are adversely affected.
❖ However CA 2013 states that the objection to merger can be made
only by persons:
• Holding not less than 10% of shareholding or;
• Having debt amounting not less than 5 % of the total debt
UNNI IIM-C 63
• The new threshold limit for raising objections will protect the scheme
from small shareholders’ and creditors’ frivolous litigation and
objection
3. As per CA 2013 in case of merger between a listed transferor
company and an unlisted transferee company, transferee company
would continue to be unlisted until it becomes listed by following the
SEBI Regulations
• As per CA 1956, in case of merger between a listed transferor
company and an unlisted transferee company, transferee company
would get listed automatically without making an IPO under SEBI
Regulations
• This kind of back-door listing under CA 1956 has been abolished by
CA 2013 UNNI IIM-C 64
4) CA 2013 has abolished the practice of companies holding its own
shares either in its own name or through trusts (popularly known as
treasury shares)
• Earlier under CA 1956 after mergers certain companies used to hold
its own shares mostly through trust e.g. After the merger between
Reliance Petroleum and Reliance Industries in 2002 treasury shares
were held by a trust called Petroleum Trust whose beneficiary was
Reliance Industries
5) Fast Track Approval: Under CA 1956, all mergers required court
approval
• CA 2013 requires that mergers between two or more small
companies or between holding companies and its wholly-owned
subsidiary do not require approval of NCLT/Court
65
• However, notice has to be issued to ROC and official liquidator and
objections need to be placed before the shareholders
• The scheme needs to be approved by members holding at least 90
percent of the total number of shares or by creditors in majority
representing nine-tenths in value of the creditors
• This will reduce the time consumed in court/ NCLT proceedings and
will result in faster disposal of the matter
6) As per CA 1956 the surviving company shall always be a company
incorporated under the Act while the transferor company could be any
Indian or foreign body corporate, or even unregistered companies
companies in certain select countries as per rules to be framed by
central government 66
7. Purchase of Minority Shareholding (Squeeze-Out Provision) -
If an acquirer becomes holder of ninety per cent or more of the
share capital or any person holds ninety per cent of the share
capital by virtue of an merger/ share exchange etc such acquirer/
person shall notify the company of their intention to buy the
remaining shares
• The acquirer/person shall offer to buy all the shares held by the
minority shareholders at a price to be determined on the basis of
valuation by a registered valuer
• This provision known as minority squeeze out will help majority
shareholders to easily acquire the shares of minority shareholders
and reducing the lengthy process of litigation
UNNI IIM-C 67
New Features of CA 2013 for
Mergers
• On 7/11/2016, Govt. of India issued a notification for enforcement

of section dealing with mergers/demergers
• Subsequently on 14/12/2016, The Companies (Compromises,
Arrangements and Amalgamations) Rules, 2016 (CAA Rules
2016) were notified that will be effective from 15/12/2016
• Consequently, with effect from 15/12/2016 all important matters
pertaining to Compromises, Arrangements, and Amalgamations
will be covered under the provisions of CA 2013 and The CAA
Rules 2016
UNNI IIM-C 68
Ranbaxy- Sun Merger (April 2014)
• Sun Pharmaceutical Industries Limited (Sun) and Ranbaxy
Laboratories Limited (Ranbaxy) announced the decision to merge on
April 2014 (6/4/2014)
• The aim is to create the World’s 5th Largest Specialty Generic
Pharma Company and largest pharmaceutical company in India with
the leadership position in 13 specialty segments.
• Ranbaxy merged into Sun and Ranbaxy shareholders to get 0.8 shares
of Sun for every share of Ranbaxy
• The exchange ratio represents an implied value of Rs. 457 for each
Ranbaxy share, a premium of 18% to Ranbaxy’s 30-day volume-
weighted average share price and a premium of 24.3% to Ranbaxy’s
60-day volume-weighted average share price as of the close of
business on April 4, 2014.
UNNI IIM-C 69
Ranbaxy- Sun Merger
• Post merger, the holding of Sun’s promoters in the combined entity
was to be around 55% while Daiichi (Ranbaxy’s promoter) had
about 9% stake in Sun
• Daiichi would become the second largest shareholder in Sun and
had the right to nominate one director to Sun’s Board of Directors
• The transaction has a total equity value of approximately US$ 3.2
billion along with the additional net debt of about US$0.8 billion,
the total transaction value comes to around US$4 billion
• In November 2014 , Gujarat High Court (transferee company's
Court) approved the scheme of merger
• In December 2014 , CCI gave its conditional approval for merger
UNNI IIM-C 70
Ranbaxy- Sun Merger
• In January 2015, US Federal Trade Commission gave its
conditional approval for merger
• On March 2015 (9/3/2015) Punjab and Haryana High Court
(transferor company's Court) approved the scheme of merger
• Trading of shares of Ranbaxy on BSE and NSE was stopped from
6 April 2015
• Sun fixed 7 April 2015 as the record date for determining the
entitlement of Ranbaxy shareholders to the equity shares of Sun
• Subsequently Daiichi sold its entire 8.9 per cent stake in Sun
Pharmaceutical Industries for $3.2 billion at an average price of
Rs 931.60 a share to a foreign institutional investors (FIIs) led by
Goldman Sachs (21/4/2015) and exited the Indian market.
UNNI IIM-C 71
Jet- Jet Lite Merger
• In September 2015 Director Board of Jet Airways wanted to
merge its fully owned subsidiary Jet Lite into it
• In April 2016 the approval was given by the shareholders and
creditors
• In October 2016 the Bombay High Court approved the merger
subject to approval given by Ministry of Civil Aviation, GoI
• However in May 2018, Jet Airways announced that the said
ministry has not approved the merger of Jet Lite with itself
and as a result the merger scheme stands revoked and
cancelled
UNNI IIM-C 72
Merger of Banks
Merger of Banking Companies/Banks
• Banking Regulation Act 1949 contains the provisions dealing with
regulation of banks/banking companies
• RBI has the discretionary powers to approve the merger of two banks
(Sec 44A- Banking Regulation Act)
• The powers of RBI do not extend to merger between a bank and a non
banking company and in that case the merger would be governed by
relevant provisions of the CA 1956 / CA 2013
• RBI has notified the guidelines for mergers involving banks in 2005
• The guidelines cover the scheme of merger, disclosures,
determination of share exchange ratios etc;
73
UNNI IIM-C
Merger of Banks
The guidelines cover 2 situations
I. Merger of two banks
II. Merger of a Non Banking Finance Company (NBFC) with a
bank
Important Features of RBI Guidelines
1. Approval of the Board of Directors
• The draft scheme of merger shall be approved by the
board of directors of both banks, by considering the following-
a. The values at which the assets liabilities and reserves of the
transferor bank are proposed to be incorporated into the books
of the surviving bank (e.g. in a merger between Bank of Rajasthan
(BoR) and ICICI Bank, BoR is the transferor bank and ICICI
Bank is the surviving bank)
UNNI IIM-C 74
Merger of Banks
b. Whether due diligence has been undertaken with respect of
the transferor bank
c. The nature of consideration the surviving bank will pay
to the shareholders of the transferor bank
d. Whether the share exchange ratio has been determined by
independent valuation experts and whether the said ratio is
fair and proper
e. Whether the shareholding pattern of any individual, group, entity in
the surviving bank as a result of merger would be violative of the
guidelines of the RBI
f. The impact of the merger on the profitability & capital adequacy
ratio
g. Whether any changes in the composition of board of directors in the
surviving bank as a result of merger would be violative of the
guidelines of the RBI 75
UNNI IIM-C
Merger of Banks
2. Approval by Shareholders
• Meeting of the shareholders of both the banks shall be
convened after prescribed notice to the members
• Scheme containing the terms of the merger shall be placed before
the shareholders of the banks and the same shall be approved by a
majority in number representing two-thirds in value of the
shareholders, present in person or by proxy
3. Sanction by RBI
• The banks have to submit the requisite information to the RBI for
getting sanction of the merger
UNNI IIM-C 76
Merger of Banks
• Once the scheme is sanctioned, all the properties and liabilities of the
transferor bank shall be transferred and vest in the surviving bank
Amalgamation/Merger of an NBFC with a Bank
• Where the NBFC is proposed to be merged into a bank, the latter
should obtain the approval of RBI after the scheme of
amalgamation/arrangement is approved by its Director Board but
before it is submitted to the High Court for approval.
• When according its approval to the scheme, the Director Board should
give consideration to the matters examine whether:-
1. The NBFC has violated any of the RBI/SEBI norms
2. The NBFC has complied with the 'Know Your Customer' norms for
all the accounts, which will become accounts of the bank after
amalgamation.
UNNI IIM-C 77
Merger of Banks
3) The NBFC has availed of credit facilities from banks/FIs and if
so, whether the loan agreements mandate the NBFC to seek
consent of the bank/FI concerned for the proposed arrangement
/amalgamation.
• The same approach needs to be followed when an investment
bank has to merge with a bank
• In 2010 Enam Securities decided to merge with Axis Bank in a
transaction involving multiple steps
• The deal ran into some regulatory hurdles initially as RBI
proposed some changes in the scheme
• Finally in October 2012 Axis Bank completed the merger as
Gujarat High Court, RBI and shareholders/creditors have
approved the scheme of arrangement between Axis Bank, Enam
Securities Private Ltd and Axis Securities and Sales Ltd
Mergers & Demergers
V.K. Unni
Professor
UNNI IIM-C 79
TAKE OVER CODE
V.K. Unni
Professor
UNNI IIM CALCUTTA

TAKE OVER CODE
• Corporate takeovers are presently one of the most
debated topics in business law
• There can be various reasons underlying these
transactions but the most cited one is the cost
savings arising out of economies of scale
• Every take over is characterized by the presence of a
variety of interested parties/stake holders whose
interests may be beneficially or detrimentally
affected
• These stakeholders may be the target company, its
shareholders/promoters/directors, the acquirer etc;
• Thus, in order to safeguard the rights and interests of
various parties there exists laws to regulate
takeovers
UNNI IIM CALCUTTA
TAKE OVER CODE
Categories of takeover
• Horizontal: Here the acquirer and the target company are
both engaged in the same sector of industry (e.g. LG may
take over Samsung, Jet taking over Sahara)
• Vertical: Here the acquirer and target company are actual
suppliers or customers of each other ( ACC may buy
Hindustan Limestones)
• Conglomerate: This happens when both companies
belong to different sectors of business and do not share a
competitive or buyer-seller relationship (Airtel taking
over Oberoi Hotels)
UNNI IIM CALCUTTA

Horizontal Vertical Conglomerate
The acquirer and Both companies
The acquirer and belong to different
the target company target company are
sectors of business
are both engaged in actual suppliers or and do not share a
customers of each competitive or buyer-
the same sector
other seller relationship
LG may take over ACC may buy Airtel taking over

Samsung Hindustan Limestones Oberoi Hotels
Jet taking over Sahara
UNNI IIM CALCUTTA

TAKE OVER CODE
• Take Over is not defined under any law
• Take Over involves a transaction or series of transactions, whereby a
person (natural or legal) acquires shares / voting rights or gains
control of a company with the intention to manage that company’s
affairs
• In India, SEBI is the entity which regulates the take overs and with
this objective, SEBI has framed the SEBI Regulations (Substantial
Acquisition of Shares and Take Overs-SAST) popularly known as
the Takeover Code
• The Takeover Code applies only to companies/entities whose
shares are listed on a stock exchange
• It has to be noted that mergers /amalgamation/arrangement are
still governed by provisions of the Companies Act and thus not
governed by Takeover Code
UNNI IIM CALCUTTA
TAKE OVER CODE
Difference between Merger/ Take over
• In the case of a merger/arrangement/amalgamation, the
shareholding in the surviving entity will be spread between the
shareholders of both the companies
• In a takeover, a direct or indirect control over the assets of the
acquired company (also known as the Target Company) passes to
the acquirer and in a take over there is a presumption that one of
the companies is a dominant one
• The Takeover Code has been framed with the intention to protect
the interests of investors in shares and only deal with the
substantial acquisition of shares/voting rights in a company by an
acquirer
UNNI IIM CALCUTTA

TAKE OVER CODE
Takeover Regulations in India
• The initial measure on regulating takeovers in India can be traced
back to the 1990s with the insertion of Clause 40 in the Listing
Agreement.
• • Thereafter the Take Over Code 1994 which were notified in
November 1994 made way for regulation of hostile takeovers and
competitive offers for the first time;
• The 1994 initiative and the experiences gained from that highlighted
certain shortcomings which were remedied through the Take Over
Code 1997
• The Take Over Code 1997 continued with certain modifications for
more than a decade
UNNI IIM CALCUTTA
TAKE OVER CODE
• However by 2009 it was felt necessary to review the Takeover
Regulations 1997 as a result of various factors like growth of
Mergers & Acquisitions activity in India, increasing
sophistication of takeover market, regulatory experience gained in
the past 12 years
• Thus SEBI constituted a Takeover Regulations Advisory
Committee (TRAC) in September 2009 under the Chairmanship of
(Late) Shri. C. Achuthan
• Based on the report by TRAC, SEBI came out with the
(Substantial Acquisition of Shares and Takeovers-SAST) Take
Over Regulations 2011 which became effective from 22/10/2011,
consequently Takeover Regulations, 1997 was repealed from that
date
UNNI IIM CALCUTTA

TAKE OVER CODE
• Under the Take Over Code, certain specified threshold limits
activate various Open-offer requirements and disclosure
requirements
• Thus, the obligations under the Take Over code are two fold
1. Open offer to be made when the acquirer crosses a certain
percentage of voting rights (0-24.99% nil, 25-75% open offer of
at least 26%) or when it gains control in the target company
2. Disclosures to be made when the acquirer crosses a certain
percentage of shares in the target company
• Apart from the acquirer, disclosure obligations also cover other
stakeholders like the promoters, any person buying/holding more
than 5% shares/voting rights of the target company etc
UNNI IIM CALCUTTA
OPEN OFFER DISCLOSURE
To be made when the acquirer

crosses a certain percentage To be made when the acquirer
of shares/voting rights (0- crosses a certain percentage
24.99% nil, 25-75% open of shares/voting right
offer of at least 26%)
UNNI IIM CALCUTTA

TAKE OVER CODE
• Takeover code defines certain terms like the acquirer, Persons
acting in Concert (PAC), control etc;
Important Definitions
Acquirer is defined in the Code as follows
1) A person, who directly or indirectly acquires or agrees to
acquire shares/voting rights in the target company either by
himself or/with any PAC; or
2) A person, who acquires or agrees to acquire control over the
target company, either by himself or/with any PAC with the
acquirer
• Acquirer can be a natural person, a corporate entity like a
company or any other legal entity
UNNI IIM CALCUTTA
TAKE OVER CODE
• Under the regulations, a person who agrees to acquire shares will
be termed as “acquirer”
• It has been held that the moment the acquirer sets into motion the
process of acquiring shares or control, acquisition within the
meaning of the regulation takes place
• Persons Acting in Concert (PAC) are persons who for a common
purpose of substantial acquisition of shares/voting rights or
gaining control of a company co-operate by acquiring/ agreeing
to acquire shares/voting rights or gain control over the target
company
UNNI IIM CALCUTTA

TAKE OVER CODE
• The co-operation/ co-ordinated approach may either be direct or
indirect and can be even through an informal understanding
• The following persons will be deemed to be persons acting in
concert with other persons in the same category
1. A company, its holding company or subsidiary of such company
or company under same management or control
2. promoters and members of the promoter group
3. immediate relatives
4. Company with any of its directors/ any person entrusted with the
management of the company
5. Merchant banker/portfolio manager with their clients as acquirer,
stock brokers with clients etc
6. Mutual funds with its sponsor/trustee/Asset management
company, FIIs with sub accounts, collective investment scheme
and its collective investment management company, trustees etc
UNNI IIM CALCUTTA
TAKE OVER CODE
• In other words, Take Over code considers certain parties
like merchant bankers, subsidiary companies, directors,
promoters, etc. as Persons Acting in Concert or PAC
Illustration: In a listed company ABCD, if Mukesh along
with his merchant banker Dorgan Stanley buys a
substantial number of shares, then Mukesh will be
deemed to be an acquirer as per the Code. Dorgan
Stanley will be the PAC
• The code treats Mukesh as an acquirer even though
Mukesh on his own will not be holding a substantial
number of shares in ABCD
• In another instance, if Mukesh along with Dorgan
Stanley is in a position to appoint the majority of
directors or control ABCD’s policies, then also he will be
deemed to be an acquirer as per the Code
UNNI IIM CALCUTTA
TAKE OVER CODE
• Target Company means a company and includes a body corporate
whose shares are listed on a stock exchange
• Thus the Takeover Code applies only to companies/body corporates,
whose shares are listed on a stock exchange
• Promoter can be any person
1. who is in control of the target company
2. who is instrumental in the formulation of a plan or Program pursuant
to which specified securities are offered to public
3. who is named as promoter in any offer document of the target
company
Promoter group” mainly includes: a) the promoter;
b) an immediate relative of the promoter (i.e., any spouse of that person,
or any parent, brother, sister or child of the person or of the spouse);
UNNI IIM CALCUTTA
TAKE OVER CODE
When the promoter is a body corporate then promoter
group generally includes:-
• Subsidiary of that body corporate or
• holding company of that body corporate
• Any company in which the promoter holds 10% or more
of the equity capital or which holds 10% or more of the
equity capital of the promoter;
• Financial institutions, scheduled banks, FIIs and mutual
funds have been expressly excluded from the definition
of promoter, if they come within the purview of the
definition, merely by virtue of their shareholding
UNNI IIM CALCUTTA

TAKE OVER CODE
Shares
• “Shares” means shares in the equity share capital of a target
company carrying voting rights, and includes any security
which entitles the holder thereof to exercise voting rights like
convertible debentures
• It will also include depository receipts carrying an
entitlement to exercise voting rights in the target company
• As mentioned earlier under the Take Over Code, certain
specified threshold limits activate various open offer and
disclosure requirements
• The emphasis of the Takeover Code is on the acquisition of
‘voting rights’ attached with the shares
UNNI IIM CALCUTTA

TAKE OVER CODE
Control includes
• the right to appoint majority of the directors or
• to control the management or policy decisions by virtue of the
shareholding/management rights or shareholders agreements/
voting agreements or in any other manner
Concept of Indirect Acquisition
• Buying/acquisition of shares in an unlisted company is exempted
from the Takeover Code
• However, under the Code it has been provided that indirect
acquisition, i.e. any acquisition of shares of an unlisted company
which results in the acquirer acquiring shares /voting rights or
gaining control over a listed company, will not be exempted from
the purview of the Code
UNNI IIM CALCUTTA
TAKE OVER CODE
• This is applicable even if the acquirer or a target company is an
Indian company or a foreign company
• The indirect acquisition could result due to any acquisition in
India or abroad resulting in an ultimate acquisition of an Indian
listed company
A very good example of indirect acquisition can be illustrated as
follows:-
• A is a listed company wherein X a private company holds
25% shares, if B gains control in X by acquiring its 51%
shares, then by virtue of the indirect acquisition concept in
Take Over Code, B has indirectly acquired 25% shares in A.
Thus B will be treated as an acquirer and the obligations
under the Takeover Code will be applicable to B
UNNI IIM CALCUTTA

TAKE OVER CODE
• Under the 1997 Regulations, voting rights triggers and the control
triggers had the same effect over indirect acquisitions of listed
companies
• Voting rights triggers were made applicable through the
“proportionate” test or the “effectuality” test,
(i) Proportionate test: It is a pure mathematical test wherein the indirect
shareholding of the acquirer is calculated on the basis of a pro rata
calculation of the shareholding of the intermediate company
(unlisted)in the target company and the acquirer’s shareholding in the
intermediate company; and
(ii) Effectuality test: which is depended on whether the acquisition of
shares/voting rights/control in the intermediate company by the
acquirer had any effect on the way in which the intermediate company
exercised its voting rights in the target company,
TAKE OVER CODE
• The control rights trigger in an indirect acquisition was tested by the
Supreme Court of India in the landmark Technip v. SMS Holdings case
in 2005 and the Court preferred the effectuality test over the
proportionality test
• As per the 2011 Regulations, an indirect acquisition is one where the
acquirer gains the ability to exercise or direct the exercise of such
percentage of voting rights in or control over the target company that
would trigger the initial, consolidation or control triggers
• The initial trigger for an open offer is the acquisition of 25% or more
of the shares/ voting rights that entitles such acquirer to exercise 25%
or more of the voting rights in the target company (under the previous
regulation it was kept at 15%)
UNNI IIM CALCUTTA

TAKE OVER CODE
• Consolidation trigger is anything above 5% voting rights in any
financial year when the acquirer already holds between 25% and 75%
of the voting rights.
• Transactions that trigger the thresholds described earlier shall be
subject to obligations under the 2011 Regulations, and may be
categorized into one of the following 2 categories
1. Indirect acquisition based on proportionate net asset value or sales
turnover or the market capitalization (also called as Deemed Direct
Acquisition) of the target company. The most notable feature here is
that the target company is a “predominant part of the business” of the
entity/company being acquired
2. Indirect acquisition not based on any such thresholds ( also called as
True Indirect Acquisition)
UNNI IIM CALCUTTA
• Indirect acquisition based on
Deemed proportionate net asset value,
Direct sales turnover or the market
capitalization of the target
Acquisition company
• Indirect acquisition not based

True on any such thresholds
Indirect
Acquisition
UNNI IIM CALCUTTA
TAKE OVER CODE
1 Deemed Direct Acquisition deals with an indirect acquisition
where,—
A. the proportionate net asset value of the target company as a
percentage of the consolidated net asset value of the entity or
business being acquired; or
B. the proportionate sales turnover of the target company as a
percentage of the consolidated sales turnover of the entity or
business being acquired; or
C. the proportionate market capitalisation of the target company
as a percentage of the enterprise value for the entity or
business being acquired;
is in excess of eighty per cent*, such indirect acquisition shall be
deemed to be a direct acquisition of the target
* on the basis of the most recent audited annual financial statements
UNNI IIM CALCUTTA
TAKE OVER CODE
• RATA SONS is an unlisted company, the value of RATA is
predominantly derived from a listed company called BALLIS. The
Consolidated Sales Turnover of RATA is Rs. 3000 Crores and the
Consolidated NAV is Rs. 1000 Crores. The Standalone Sales
turnover of BALLIS is 2700 and its standalone NAV is 810 Crores.
• Proportionate NAV of BALLIS as a percentage of the consolidated
NAV of RATA is 81.00%
• Proportionate Sales of BALLIS As a percentage of the consolidated
sales of RATA is 90%
• Hence if X acquires 26 % in RATA this acquisition shall be
Deemed as a Direct Acquisition of BALLIS and hence all the
rules for direct acquisition prescribed under the Regulations shall
be applicable on X including timing and pricing of open-offer to
shareholders of BALLIS
TAKE OVER CODE
2 True Indirect Acquisition
If the 80% threshold is not met, the acquisition is treated as an indirect
acquisition under the 2011 Regulations if the following conditions are
fulfilled
1. There should be an acquisition of shares/voting rights or gaining
control over the company by the acquirer (either alone of along with
PAC) which is an unlisted entity
2. Such acquisition in that unlisted entity should enable the acquirer to
exercise such percentage of voting rights in, or control over a listed
company, (the target company)
•If both the conditions are satisfied the acquirer has indirectly acquired
shares/gained control in a target company and Take Over Code
Regulations will be applicable
• In true Indirect acquisitions certain distinct provisions in relation to
timing and pricing of open offer shall apply
UNNI IIM CALCUTTA
TAKE OVER CODE
Illustration 1
• ICT a private company owns 60% of shares of
BoyBoy Hotels Ltd. a BSE listed company. Mr.
Mukesh owns 5% and Mrs. Mukesh has 10%
equity shares in BoyBoy. Mr. Mukesh acquires
20% stake in ICT. Whether Mukesh needs to
make an open offer in BoyBoy ???
• As 20% stake is a minority stake which does not
enable Mukesh to influence the decisions of ICT and
it does not enable him to exercise voting rights over
BoyBoy hence no open offer is needed.
UNNI IIM CALCUTTA

TAKE OVER CODE
Illustration 2
•Macrohard a private company owns 11% of shares of Mango
Mobile Ltd. a NSE listed company. Mr. RK owns 5% and Mrs. RK
has 10% equity shares in Mango. Mr. RK acquires 60% stake in
Macrohard Whether RK needs to make an open offer in Mango ?
•As 60% stake is a majority stake which enables the holder (RK) to
influence the decisions of Macrohard. It enables him to exercise
voting rights of 26% over Mango and thus open offer is triggered
•The possible acquisition of a controlling stake in Fortis Healthcare
Ltd. (FHL) by IHH Healthcare has led to a open offer in the case of
Fortis Malar Hospitals Ltd. (listed in BSE), as FHL holds close to
62% in Fortis Malar as per the June 2018 quarter
• Thus IHH has also made an open offer to the shareholders of Fortis
Malar in July 2018 because the controlling stake in FHL amounts to a
true indirect acquisition of Fortis Malar by IHH
UNNI IIM CALCUTTA
TAKE OVER CODE
Open offer Norms
• Regulation 3 of the Takeover Code deals with

open offer norms
• It will be triggered, if an acquirer buys shares/
voting rights which alone or taken together with
that of PAC entitles such acquirer to exercise 25%
or more of the voting rights in the target company
➢ Then the consequence is that the acquirer will
have to make an open offer by way of public
announcement to buy at least 26% shares of the
target company from the general public
UNNI IIM CALCUTTA

TAKE OVER CODE
Illustration 1
• In Company A which is listed, Mr. X buys 25%
shares which grants him the same per centage of
voting rights in A, in such case Mr. X will have to
make an open offer in the form of a public
announcement whereby he has to offer to buy at
least 26% of the shares of A, from the public
shareholders of A.
Illustration 2
• In Company B which is listed , Mr. Y is already
having 13% shares, Y buys 12% more shares to
raise his shareholding/voting rights to 25%. Here
also Mr. Y will have to make an open offer to buy
at least 26% of the shares of B from its public
shareholders UNNI IIM CALCUTTA
TAKE OVER CODE
• In 2013 Diageo made an open offer to shareholders of United
Sprits Ltd. (USL) to purchase 26% from them
• The open offer was triggered when Diageo purchased 27.4%
shares in USL
• In November 2012, Diageo agreed to buy a 53.4% stake in
United Spirits for about Rs.11000 crore.
• The transaction included the purchase of a 19.3% stake from
promoters of USL and remaining 8.1% allotted to Diageo by
USL under preferential allotment
• Diageo was to buy the remaining 26% from the public
shareholders of United Spirits.
UNNI IIM CALCUTTA

TAKE OVER CODE
• Diageo’s offer price was Rs. 1440/ per share and this was around 25%
less than USL’s closing price one day before the commencement of
open offer
• As a result in May 2013 Diageo’s open offer failed as only 0.4% USL
shareholders tendered their shares to Diageo
• However the share purchase agreement (SPA) signed between Diageo
and promoters of USL should help Diageo to safeguard its rights in
USL
• In the said SPA , Diageo had added a clause that if it ended up owning
less than 50.1 per cent after the open offer , the promoters of USL shall
vote in favour of all resolutions proposed by Diageo for four years
• Finally in April 2014 Diageo launched another (voluntary) open offer at
Rs. 3030/ for acquiring 26% shares from the public shareholders of
USL and this is reported to be a success. Diageo’s stake in USL after
the open offer is 54.78%
UNNI IIM CALCUTTA
Acquisition of Pipavav Defence by Reliance – December 2015
• In March 2015, shares of Pipavav Defence & Offshore Eng. Co. Ltd.
(target company) was being acquired by Reliance Defence Systems Pvt.
Ltd. (Acquirer) along with Reliance Infrastructure Ltd. (PAC)
• The Acquirer along with PAC had agreed to purchase from promoters of
the target company 17.66% of its shares/voting rights and shall buy an
additional 7.44% to take their stake to 25.1%, and the price is Rs. 63/ per
share
• The abovesaid deal triggered the open offer to public shareholders of
Target Company where the Acquirer had to buy a minimum of 26% of
shares at an offer price of Rs. 66/ determined as per the Takeover Code
• Because of delay in approval by the Gujarat Maritime Board the open
offer could only start in December 2015 and only 17% of Pipavav’s
public shareholders tendered their shares in the open offer
• Pipavav has been renamed as Reliance Defence and Engineering Ltd. in
March 2016
UNNI IIM CALCUTTA
Acquisition of Fortis Healthcare by IHH Healthcare
Berhad (July 2018)
• In July 2018 the Director Board of Fortis Healthcare Ltd. (FHL) a
NSE and BSE listed company passed a resolution for a preferential
allotment of the company’s shares amounting to 31.1 % to IHH and
its PACs (13/7/2018)
• As a consequence of the Board Resolution and the Share
Subscription Agreement the Acquirer and the PACs have made a
mandatory open offer, by filing the public announcement dated July
13, 2018,
• As per the public announcement made to the equity shareholders of
FHL the Acquirer offers to buy 26% of the FHL Share Capital at Rs.
170/ per share
• The detailed public statement was published on 20/7/2018 and as
per the same the entire procedure for the open offer will be
completed by 16/10/ 2018
UNNI IIM CALCUTTA

TAKE OVER CODE
Consolidation of holdings, Reg. 3(2)
• if the acquirer holds between 25% and 75%
shares/voting rights in a Company, he cannot acquire
more than 5% voting rights in a single financial year
• In case he wants to acquire more than 5% shares/ voting
rights then he will have to make an open offer to buy at
least 26% shares/voting rights of the said company from
the general public
• Permitting a person to increase his Shareholding/voting
rights gradually in a company is called creeping
acquisition, here the creeping acquisition limit is capped
at 5% per year
UNNI IIM CALCUTTA
TAKE OVER CODE
Illustration
• In the year 2012-13, Mr. X holds 27 % shares in a listed
Company A, X can buy only 5% shares in the financial year
2012-13, i.e. X’s stake can only be increased up to 32% in
2012-13
• In case X buys 7 % shares (in 2012-13) of A, then he will
have to make an open offer by way of public announcement
• For computing acquisitions limits for creeping acquisition
gross acquisitions/ purchases shall be taken in to account
• Any intermittent fall in shareholding or voting rights owing
to disposal of shares/dilution of voting rights on account of
fresh issue of shares by the target company, shall not be
considered
UNNI IIM CALCUTTA
TAKE OVER CODE
• Mr. RK holds 26% of shares of a listed company ABC
as on 31st March 2012. Mr. RK acquires additional 3
% on 1st APRIL 2012 and another 2 % on 31st May
2012. He sold 4 % of his shares on 30th June 2012 in
open market. If RK wants to acquire another 1% on 1st
August 2012, RK will have to make an open offer
• This because for computing acquisitions limits for
creeping acquisition, only the gross purchases shall be
taken in to account
• The intermittent fall in shareholding of RK in ABC
due to disposal of 4% shares shall not be considered
UNNI IIM CALCUTTA
TAKE OVER CODE
Acquisition of Control of Company: Reg 4
• Reg. 4 deals with circumstances when an acquirer gains
control of the company even if there is no substantial
acquisition of shares/voting rights
Illustration
• D is a listed company and its articles states that its
technology collaborator shall decide its policy decisions
• Mr. X is the technology collaborator of D. Thus as per
D's articles, X will be deciding its policies, this in turn
gives X control over D
• The consequence is that X will have to make an open
offer since it has acquired control over D
UNNI IIM CALCUTTA
TAKE OVER CODE
Voluntary Open Offer
• The concept of voluntary open offer has been dealt in the Take Over
Code 2011.
• It provides the eligibility criteria’s, conditions and restrictions for the
same.
Eligibility
• Prior holding of atleast 25% or more shares of the Company
• No acquisition during the preceding 52 weeks except by way of Open
Offer. (The acquirer or PAC should not have acquired any shares by
creeping acquisition)
• Aggregate shareholding not to exceed 75% of non-public
shareholding after the completion of Open Offer
• No acquisition during the offer period except under the Open Offer
TAKE OVER CODE
• In case of voluntary open offer, the offer size may be of 10% or
more at the will of the Acquirer
• Such Acquirer or PACs will not be eligible to acquire shares of
target company for the next 6 months otherwise than through
another Voluntary Offer or Competing Offer or bonus issue or
stock splits
• In June 2013 Unilever PLC, UK (Acquirer) along with Unilever
NV, Netherlands (PAC) made a voluntary open offer to
shareholders of Hindustan Unilever Ltd. (HUL) to acquire 22.5 %
voting rights/shares at a price of Rs. 600/ per share
• Acquirer is also the promoter of HUL and along with other
promoter group entities already hold 52.47% shares of HUL
before the commencement of voluntary open offer
UNNI IIM CALCUTTA

TAKE OVER CODE
• When the offer closed on 4th July 2013 Unilever could not achieve
its target of hiking its stake to around 75 per cent from the earlier
stake of 52.48 per cent
• Based on the shares tendered Unilever’s stake would go up to
around 67.28 per cent
• In 2014 Diageo also successfully completed a voluntary open offer
Offer Price
• This is the price at which the acquirer announces to acquire shares
from the public shareholders under the open offer.
• The offer price shall not be less than the price as calculated under
the Takeover Code (Reg 8) for frequently or infrequently traded
shares
• Acquirer can make an upward revision to the offer price at any time
up to 3 Working days prior to the opening of the offer
UNNI IIM CALCUTTA
TAKE OVER CODE
• The Takeover Code has defined the concept of frequently
traded shares
• As per the definition a share shall be frequently traded if the
traded turnover on any stock exchange during the 12 calendar
months preceding the calendar month, in which the PA is
made, is at least 10% of the total number of shares of the target
company
• If it is less than 10% then it will be considered as infrequently
traded shares
• In the case of infrequently traded shares the officer price
calculation method is slightly different from the one followed
to determine the price of frequently traded shares
UNNI IIM CALCUTTA

TAKE OVER CODE
Offer Price for Frequently Traded Shares: If the target company’s
shares are frequently traded then the open offer price for
acquisition of shares under the minimum open offer shall be
highest of the following
i. Highest negotiated price per share under the share purchase
agreement (“SPA”) triggering the offer;
ii. Volume weighted average price of shares acquired by the
acquirer during 52 weeks preceding the public announcement
(“PA”);
iii. Highest price paid for any acquisition by the acquirer during
26 weeks immediately preceding the PA;
iv. Volume weighted average market price for sixty trading days
preceding the PA.
UNNI IIM CALCUTTA

TAKE OVER CODE
• Volume weighted average price” means the product of the number of
equity shares bought and price of each such equity share divided by
the total number of equity shares bought;
• Number of shares bought on a particular day: A , Market Price: B
Volume weighted Average Price =
A1xB1+A2XB2+A3XB3…..
______________________
A1+A2+A3…………………
• Minimum price shall include any price paid or payable in any form or
manner and includes:
• a) control premium, if any;
• b) non-compete fees or otherwise
UNNI IIM CALCUTTA
TAKE OVER CODE
Time-Period
• The offer is required to be kept open for ten working days
Special provisions for Offer Price in indirect acquisition of a
target company
• Since indirect acquisitions involve acquiring the target
company as a part of a larger business, Takeover Code has
provided additional parameters to be taken into account for
determination of the offer price.
• In the case of Deemed Direct Acquisitions the acquirer is
required to compute and disclose in the letter of offer, the per
share value of the target company taken into account for the
acquisition, along with the methodology
UNNI IIM CALCUTTA
TAKE OVER CODE
• With respect to indirect acquisitions which are considered as true
indirect acquisitions (less than 80% value) the methodology is
different
• In such cases 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 date on which primary acquisition was contracted and the
date of Detailed Public Statement
• Thus the Takeover Code tries to make a distinction with respect to
Direct Acquisitions and Indirect Acquisitions with respect to the
methodologies adopted with respect to the offer price
Conditional Offer
• An acquirer may make an open offer conditional as to minimum level
of acceptance (conditional offer)
UNNI IIM CALCUTTA
TAKE OVER CODE
Illustration: Goyal wants to buy 30% of the shares in Company ‘AIR
SAHARA' but, stipulates that he will buy the shares only if a
minimum of 20% of the shareholders accept his offer
• Thus, Goyal will not buy 17% of the shares tendered as part of open
offer but will buy only if, a minimum of 20% of the shareholders
accept his offer
Competitive / Counter Offers
• Take Over Code permits a higher competitive bid, if the said
competitive offer is made within a specified time (15 days) from the
public announcement of the first offer,
• Further, the competitive bidder also has to make a public
announcement for such number of shares, which shall be at least equal
to the number of shares for which the first public announcement has
been made
UNNI IIM CALCUTTA
TAKE OVER CODE
• A competing offer is not considered as a voluntary open offer and
therefore all the provisions of the Takeover Code, including that of offer
size (minimum of 26%), apply accordingly
• When there is a competing offer, an acquirer who has made a preceding
offer can revise the terms of his open offer; if the terms are more
beneficial to the shareholders of the target company
Withdrawal of Offer
• Offer can be withdrawn only in the following cases:-
1. Refusal of statutory approvals
2. Death of acquirer, incase its is a natural person
3. Unavoidable circumstances in the opinion of SEBI
4. If the acquisition agreement is cancelled as a result of the triggering of
any “Material Adverse Change” clause then it shall be a ground for
withdrawal of the offer
UNNI IIM CALCUTTA

TAKE OVER CODE
• Once a takeover offer is made, it is extremely
difficult for acquirers to withdraw the offer.
• This legal position has been made clear
through a number of decisions of courts and
appellate tribunals, including decisions of the
Supreme Court (the latest SC decision
affirming this position in the case of Pramod
Jain v. SEBI (November 2016)
UNNI IIM CALCUTTA

TAKE OVER CODE
The following are some of the important transactions that
are exempted from making an open offer
1. Allotment in pursuance of an application made in a
public issue
2. Allotment in pursuance of an application made in a
rights issue,
3. Acquisition of shares in the ordinary course of business
• by registered stock broker on behalf of clients,
• by Public Financial Institutions on their own account;
• by banks and public financial institutions as pledgees
4) Acquisition of shares by succession or inheritance,
5) Allotment to the underwriters pursuant to any
underwriting agreement Reg. 3(1) (d)
UNNI IIM CALCUTTA
TAKE OVER CODE
6) Acquisition of shares pursuant to any arrangement or reconstruction
including amalgamation or merger or demerger under any law or
regulation, Indian or foreign
7) Transfer of shares from venture capital funds or foreign venture capital
investors registered with SEBI to promoters of a venture capital
undertaking or the venture capital undertaking itself
8. Inter se transfer of shares amongst

• a company, its subsidiaries, its holding company, other subsidiaries of
such holding company, persons holding not less than fifty per cent of the
equity shares of such company etc
• Immediate Relatives ( any spouse of a person, and includes parent,
brother, sister or child of such person or of the spouse)
• Persons named as promoters for the past 3 years
• Persons Acting in Concert (PAC) for the past 3 years and disclosed to
stock exchange of their status as PAC
UNNI IIM CALCUTTA
TAKE OVER CODE
• However Inter se transfer amongst the categories mentioned
shall not be exempted if Acquisition price per share is 25 %
higher than the Volume Weighted Average Market Price
(VWAMP) for a period of 60 trading days before the date of
issuance of notice for such inter-se transfer
Illustration
• In a listed company ABC , there are 2 promoters Mr. X and
Mr. Y who hold 35 % each. On 1st June 2012 Mr. X sold his
30% stake to Mr. Y at a price of Rs. 1300/ .
• On 2nd June 2012 notice of such inter se transfer was made.
The VWAMP of ABC during the past 60 days before 2nd June
is Rs. 1000/. In this case inter se transfer between X and Y will
not be exempted as the transfer price is more than 25% higher
than Rs. 1000/ and Y willUNNI
have to make the open offer
IIM CALCUTTA
TAKE OVER CODE
Anatomy of an Open Offer
1. In most of the cases, except True Indirect Acquisitions, on the
day of the triggering event the acquirer is required to make a
Public Announcement (PA) to the stock exchanges where shares
of Target Company are listed and to SEBI.
2. Within 5 working days⃰ from PA, the acquirer is required to
publish a Detailed Public Statement (DPS) in newspapers and
also submit a copy to SEBI, after creation of an escrow account
3. Within 5 working days of publication DPS, the acquirer through
the manager to the offer is required to file a draft letter of offer
with SEBI for its observations along with fees.
4. SEBI shall normally send its comments within 15 working days
from receiving the draft letter of offer
* ( The term within includes the mentioned day also)
TAKE OVER CODE
5) After receiving the SEBI’s comments the acquirer
shall send the Letter of offer within 7 working days to
the shareholders of the target company after duly
incorporating the changes indicated by SEBI, if any
6) The open offer shall start within 12 working days
from the date of receipt of SEBI’s observations.
7) The acquirer is required to issue an advertisement
announcing the final schedule of the open offer, one
working day before opening of the offer.
8) The offer shall remain open for 10 working days from
the date of opening of the offer.
TAKE OVER CODE
9) Within 10 working days from the closure of the
offer, the acquirer shall make payments to the
shareholders whose shares have been accepted.
10)A post offer advertisement, giving details of the
acquisitions, is required to be published by the
acquirer within 5 workings days of the
completion of payments under the open offer.
11)This timeline envisages completing the entire
process on or before the 62nd working day
from the date of public announcement in ideal
circumstances
UNNI IIM CALCUTTA

The Acquirer is required to The Acquirer through the
On the day of the triggering publish a Detailed Public manager to the offer is
event the Acquirer is Statement (DPS) in Within 5 required to file a draft
Within 5 newspapers and also submit
required to make a Public working Letter of Offer with SEBI
working days a copy to SEBI, An escrow
Announcement to the stock days for its observations
exchanges where shares of account needs to be opened
Target Company are listed before DPS
Within
and to SEBI.
15
working
days
From the Acquirer

receiving the letter of offer
from SEBI, the Open Offer SEBI shall send the
The offer shall remain open for shall start Draft Letter of Offer
10 working days from the date of (One day before the Open with or without its
opening of the offer Offer starts the Acquirer Within 12 comments to Acquirer,
needs to give an working days Acquirer shall
advertisement announcing incorporate the changes
the final schedule) suggested by SEBI
Within 10
working
days after
closure
A post offer advertisement giving details

of the acquisitions is required to be
The Acquirer shall make Within 5 working days of published by the Acquirer under the open
payments to the shareholders completing the payments offer
whose shares have been accepted.
UNNI IIM CALCUTTA

TAKE OVER CODE
• Timing of the Public Announcement for Indirect Acquisitions
• The 2011 Regulations envisage an initial public announcement
followed by a more detailed public statement of the tender offer.
• For True Indirect Acquisitions, the 2011 Regulations provide that a
public announcement (which is to be summary document) may be
made within 4 working days of the date on which the primary
(direct) acquisition is contracted
• The detailed public statement need to be made only within 5
working days of the completion of the primary acquisition
• Deemed Direct Acquisitions are not given any benefit with the
public announcement and in such cases public announcement is
required to be made on the day on which the primary (direct)
acquisition is contracted. UNNI IIM CALCUTTA
TAKE OVER CODE
Important Obligations of Various Parties during Open Offer
Acquirer
1. Before making Open Offer make sure that necessary
financial arrangements are made.
2. Ensure that the contents of Open Offer , advertisements
etc. are true, fair and correct.
3. Cannot sell shares of the target company
4. Acquirer cannot acquire more than 75% shares of the
company if it crosses 75% then it shall be brought down
to 75%
UNNI IIM CALCUTTA
TAKE OVER CODE
5. Until March 2015 voluntary delisting of the
target company was prohibited for 12 months
after an open offer even if an acquirer’s
shareholding exceeded 75% of share capital
pursuant to open offer.
6. After the amendment made in March 2015 an
acquirer can declare its intent to delist a target
company at the time of making a detailed
public statement of the open offer and de-list
the company by following the De-listing
Regulations
UNNI IIM CALCUTTA

TAKE OVER CODE
Target company
• It has to carry on business in the ordinary course consistent with past
practice.
• Take decisions on important events such as alienation of assets,
buyback, issue of shares, material contracts etc. in it or any of its
subsidiaries, only by way of special resolution of target company
• Constitute committee of independent directors to provide reasoned
recommendations on open offer and publish the recommendations
Directors of the target company
• Cannot appoint any person representing the acquirer as directors of
the target company
• Cannot allow the director on board who represents the acquirer to
participate in any deliberations or vote on any matter in relation to
UNNI IIM CALCUTTA
open offer
TAKE OVER CODE
Disclosures
• Apart from the open offer the Take Over Code also obligates various parties
like Acquirer, promoters etc to make certain disclosures to the company and
stock exchanges
Transaction Based Disclosures
1. Acquirer has to make disclosures of purchase of shares/Voting rights if it
crosses 5% or more of the Target company’s share capital
• Such a disclosure has to be made to the to the target company and stock
exchanges within 2 working days of his purchase
2. Any person who holds 5% or more shares/voting rights in a company has
to disclose every sale as well as purchase exceeding 2% of shares/voting
right to company/stock exchanges within 2 working days of the transaction
• In a listed company AIRTEL, B holds 6% shares, later on if B sells 3%
shares to any other person, then B will have to disclose this purchase to
Airtel and the concerned stock exchanges where it is listed
UNNI IIM CALCUTTA
TAKE OVER CODE
3. Promoters need to disclose any creation of any pledge, lien,
encumbrance on shares by Promoters/ PAC shall be disclosed to
company and stock exchanges
• Since the above said three disclosures are based on some
transactions they are called transaction based disclosures
Continual disclosures
• Every person holding more than 25% shares, every promoter,
every person having control shall disclose the number and
percentage of shares held by him / PAC with him to the company
and stock exchanges, at the end of every financial year
• This disclosure has to be made within 7 days from the end of
financial year
UNNI IIM CALCUTTA
Covid Specific Amendments to Take
Over Code
• SEBI made some amendments to Take Over Code in June 2020
• The first of two amendments increases the creeping acquisition limits
from 5% per financial year to 10%.
• But this change is temporary and it is limited to the financial year 2020-
21, and covers only acquisition of shares by promoters in a preferential
allotment.
• The second amendment relates to voluntary open offers by shareholders
already holding more than 25% shares.
• Currently the regulation permits de facto controllers such as promoters
to make voluntary offers for an additional 10% shares in the company.
• But it disqualifies acquirers who have acquired shares in the target in the
preceding 52 weeks without triggering the obligation to make a takeover
offer (for example, acquisitions under the creeping acquisition
mechanism) from making a voluntary offer
• By way of the amendment, SEBI has relaxed this disqualification
temporarily until 31 March 2021.
UNNI IIM CALCUTTA
TAKE OVER CODE
V.K. Unni
Professor
UNNI IIM CALCUTTA

Private Placements
V.K. Unni
Professor
V.K. Unni IIM-C 1

Further Issue of Capital by Companies
• There are provisions in the Companies Act 2013 (CA 2013) dealing
with further issue of capital by a company
Further issue of capital can be either by way of
• a) Follow-on public offering / FPO
• b) Rights Issue or
• c) Private Placement which is further sub classified into Preferential
Allotment and Qualified Institutional Placement (QIP)
• Further issue of capital in the form of Rights Issue is covered by Sec
62(1)(a) of the CA 2013 and is based upon the principle that an
existing shareholder has an inherent right to get proportionately the
shares allotted in any further issue
• However provisions dealing with preferential allotment i.e., Sec. 62
(1)( c) empower companies to allot further shares notwithstanding the
requirement under rights issue
•
V.K. Unni IIM-C 2
Private Placements
• Thus, preferential allotment completely overrides the operation of

provisions dealing with Rights Issue
• As per the relevant provisions of company law, preferential
allotment can be made if the shareholders of the company pass a
special resolution
Definition of Private Placements
• Private Placement means any offer of securities or invitation to
subscribe securities(equity /convertible securities ) to a select
group of persons by a company, other than by way of public offer,
through issue of a private placement offer letter.
V.K. Unni IIM-C 3

Private Placements
• As per the Companies Act 2013 (CA 2013) , all types of companies
will have to follow the processes for private placement of securities
• Securities means equity shares, preference shares and debentures,
convertible instruments, redeemable instruments.
• Previously under the Companies Act 1956 (CA 1956) law dealing
with private placement was applicable to public companies only
General Conditions for Private Placement (Sec. 42, CA 2013)
• An offer made under a Private Placement cannot be made to more
than 200 persons in a financial year
• The limitation of 200 persons is not only for purpose of allotment,
even an invitation to subscribe cannot be made to more than 200
people
V.K. Unni IIM-C 4
Private Placements
• The limit of 200 persons excludes QIBs and Employees of the
company who are issued shares under ESOPs
• The Articles of Association should provide for such private placement
and shareholders of the company through special resolution approve
the same and this resolution should be acted upon within 12 months
• Allotment has to be carried out within 60 days, else from the 75th day
the money will have to be repaid
• As mentioned Private Placements are sub classified into
Preferential Allotment and QIPs
• Preferential issue generally means allotment of equity shares to
promoter group or selected investors
V.K. Unni IIM-C 5
Preferential Allotments
• The selected investors might be institutional investors, private equity

investors, high net-worth individuals, or other companies
• Preferential issue is one of the main sources of funding for companies
• QIP is another category of private placement under which a listed
company issues equity or equity linked instruments to institutional
buyers only, as per the provisions mentioned in SEBI (ICDR)
Regulations 2018
• This process was introduced in 2006 to provide listed companies a
new window to raise funds from the domestic market rather than
going to foreign markets
V.K. Unni IIM-C 6

▪ Since preferential allotments and QIPs are subject to potential abuse
there are some regulations which govern such allotments
▪ One of the biggest advantages is that the company can raise money
quickly and cheaply compared with other means of raising money,
like IPO or issue of shares on a rights basis
▪ The allotees may or may not be existing shareholders of the
company
▪ Preferential issues generally benefit promoters or institutions as they
can buy shares in bulk at a fixed price without any price escalation
▪ The preferential allotment is often accused of being misused by the
promoters as they could secure it because of majority holding by
them
V.K. Unni IIM-C 7

• The disadvantage is that a preferential issue is only for selected class

of investors and not for the retail investors
• Thus it is like a wholesale market, where institutions/potential venture
capitalists/existing promoters are allowed to participate
• A listed company going for preferential allotment has to comply with
the requirements contained in (ICDR) Regulations 2018 in addition to
the requirements specified in CA 2013 (Sec. 42 and Sec. 62, as well as
Companies (Prospectus and Allotment of Securities) Rules, 2014.
• All Non listed companies have to comply with CA 2013 (Sec 42 and
Sec 62, as well Companies (Share Capital and Debentures) Rules,
2014
V.K. Unni IIM-C 8

Preferential Allotments in Listed Companies
Important Conditions for preferential issue under SEBI (ICDR)
Regulations 2018,
A listed issuer may make a preferential issue of specified securities,
if:-
1. A special resolution has been passed by its shareholders
2. The issuer is in compliance with the conditions for continuous
listing of equity shares as specified in the listing agreement with
the recognised stock exchange
• The issuer shall not make preferential issue of specified
securities to any person who has sold any equity shares of the
issuer during the six months preceding the relevant date,
however this is not applicable to mutual funds and insurance
companies
• Relevant date means, the date thirty days prior to the date on
which the meeting of shareholders is held to consider the
proposed preferential issue 9
V.K. Unni IIM-C
• Illustration: ABC a listed company holds a meeting on 31st August
2009 to pass a special resolution dealing with preferential
allotment. In this case July 31st 2009 shall be the relevant date.
Thus, any person who has sold shares of ABC during the time period
from 30th January 2009 to 30th July 2009 cannot be allotted shares
by way of preferential allotment
Disclosures
• The issuer will have to make certain disclosures in the explanatory
statement to the notice for the general meeting proposed for
passing special resolution
V.K. Unni IIM-C 10

The disclosures shall mainly cover:-
I. The objects of the preferential issue;
II. The proposal of the promoters, directors or key
management personnel of the issuer to subscribe to the
offer;
III. The shareholding pattern of the issuer before and after the
preferential issue;
IV. The time within which the preferential issue shall be
completed;
V. The identity of the proposed allottees, the percentage of
post preferential issue capital that may be held by them and
change in control, if any, in the issuer consequent to the
preferential issue;
V.K. Unni IIM-C 11
Time Period
• Allotment pursuant to the special resolution shall be
completed within a period of fifteen days from the date of
passing of such resolution
• If the allotment of specified securities is not completed within
fifteen days from the date of special resolution, a fresh special
resolution shall be passed
• However, there are some exemptions provided for companies
whose management has been superseded by the government
like Satyam or companies undergoing corporate debt
restructuring as per the RBI regulations
V.K. Unni IIM-C

12
Pricing
1) If the equity shares of the issuer are listed for more than six
months as on the relevant date, the equity shares shall be allotted
at a price, whichever is higher amongst
a) The average of the weekly high and low of the Volume
Weighted Average Price (VWAP) of the equity shares during the
26 weeks preceding the relevant date; or
b) The average of the weekly high and low of the VWAP of the
shares during the two weeks preceding the relevant date
2) A preferential allotment of shares to a maximum of five

qualified institutional buyers, can be made at a price not less than
the average of the weekly high and low of the VWAP of the shares
during the two weeks preceding the relevant date
13
V.K. Unni IIM-C
Payment of Price
• The allottees shall pay the full amount at the time of allotment of the
shares
• However, in the case of convertible warrants the allottee of a
warrant needs to pay only 25% of the share price
• The balance 75% of the consideration shall be paid at the time of
allotment of equity shares pursuant to exercise of option by the
warrant holder
• If the warrant holder does not exercise the option to take equity shares
against any of the warrants held by him, then the 25% price paid
earlier shall be lost
V.K. Unni IIM-C 14

Convertible Warrants
• A convertible warrant is a security issued by the
company which can be converted into equity at
a fixed price any time over 18 months from the
date of issue, usually at the option of the
holder
• Under SEBI Regulations, a warrant holder has to
pay a minimum 25% of total price at the time of
issue of warrants and the balance at the time of
conversion
V.K. Unni IIM-C 15
This structure allows promoters to increase their stake at a fixed price
by paying just 25% of the consideration and paying the balance over
18 months.
In previous years, a number of listed companies have issued warrants
to promoters and this is done basically to hike the promoters’holding
In 2010 November SEBI made the rules tougher for
promoters/promoter group who decides not to convert a warrant
According to the new provision when any person belonging to
promoter/promoter group who has previously subscribed to warrants
of an issuer but failed to exercise the warrants, will be ineligible for
issue of specified securities of such issuer on preferential basis for a
time period
V.K. Unni IIM-C 16

Such promoters will be ineligible to be issued shares under

preferential allotment route for a period of one year from the
date of expiry of the tenure of the warrants due to non exercise of
the option to convert
Lock-In Period
In the case of promoter/promoter group the shares allotted on
preferential basis shall be locked-in for a period of three years
from the date of trading approval
However, this applies only to a maximum of 20% of the paid up
capital and includes capital brought in by way of preferential
allotment
V.K. Unni IIM-C 17
If the promoter’s shareholding crosses 20% after the allotment, the
shareholding above 20% shall be locked-in for one year from the
date of trading approval
Illustrations
XYZ a listed company makes a preferential allotment of 5% shares
to A, its promoter in April 2009. The said 5% shares shall be
locked-in for a period of 3 years from April 2009
However, if A already has 17% stake in XYZ then out of the 5%
shares allotted, 3% will be having a 3-year lock-in period from
April 2009 and the remaining 2 % shares will be having a one year
lock-in period from April 2009
This is because the lock-in of 3 years can be exercised only up to
the promoter’s shareholding of 20%
V.K. Unni IIM-C 18

In the case of others
• The shares allotted on preferential basis to persons other than
promoter/promoter group shall be locked-in for a period of one year
from the date of trading approval
• The entire pre-preferential allotment shareholding of the allottees, if
any, shall be locked-in from the relevant date up to a period of six
months from the date of trading approval, however this six months
lock-in is not applicable to Mutual Funds and Insurance Companies
Illustration
ABC is a listed company in which Mr. X holds 5% shares and in April
2009 by way of preferential allotment X was allotted 10% shares. X
can sell 5% shares only after 6 months from April 2009 and the
allotted 10% shares , only after 1 year from April 2009
V.K. Unni IIM-C 19

• The equity shares issued on a preferential basis pursuant to any
resolution of stressed assets under a framework specified by the
Reserve Bank of India or a resolution plan approved by the NCLT
under the Insolvency and Bankruptcy Code 2016, shall be locked-
in for a period of one year from the trading approval
General Exceptions
Provisions dealing with preferential allotment will not apply
where shares are issued
1. pursuant to a scheme approved by a NCLT under section Sec.
230- 239 of CA 2013
2. Provisions dealing with disclosures and pricing will not apply to
companies whose director boards are superseded by the
government (e.g. Satyam)
3. The provisions except the lock-in provisions, shall not apply
where the preferential issue of specified securities is made under
the resolution plan approved under Insolvency & Bankruptcy
V.K. Unni IIM-C
Code, 2016 21
IndusInd Bank: Preferential Allotment
• In June 2015 IndusInd Bank has issued shares worth about

Rs. 753 crores to its promoters IndusInd International
Holdings Ltd and Induslnd Ltd., on a preferential basis
• The shares were allotted at an offer price of Rs. 857.20 per
equity share
• The funds raised by this preferential allotment would be
used to meet the needs of its growing business, including
long term capital requirements and also to enhance its
capital adequacy ratio, general corporate purposes etc
• After the completion of the preferential allotment, the
shareholding of promoterswill increase from 15.04% to
16.42 %
V.K. Unni IIM-C 21
HDFC Bank: Preferential Allotment
• HDFC Bank in July 2018 raised Rs 8,500 crore by issuing over 3.9
crore shares on preferential basis to its promoter HDFC Ltd.
• It has allotted shares to HDFC Ltd. at an issue price of Rs 2,174.09
per equity share
• This allotment is part of HDFC Bank’s Rs 24,000 crore fund raising
plan that was approved by the Director Board in December 2017
• Out of Rs. 24000 crores, about Rs 8,500 crores shall be raised by
issuing equity shares to HDFC Ltd. on a preferential basis and the
balance through issuance of equity shares to a QIB or through
ADR/GDR
• As on June 30, 2018, the promoter HDFC Ltd held 20.86 per cent of
HDFC Bank’s shareholding
V.K. Unni IIM-C 22
Covid Specific Provisions
• In June 2020 SEBI has given an additional option to the existing
pricing methodology for preferential issuance.
• According to the new pricing formula, the price for allotment of

shares under preferential issue will be volume weighted average of
weekly highs and low for 12 weeks or two weeks--whichever is
higher
• However, such specified shares allotted based on the above pricing
formula shall be locked-in for a period of three years
• The new rules will apply for preferential allotments made during the
period 1st July 2020 and 31st December 2020
Qualified Institutions Placements
A Qualified Institutions Placement (QIP) is a private placement of
equity shares by a listed company to Qualified Institutional Buyers
(QIB) on according to the provisions of SEBI’s (ICDR) Regulations
2018
QIP was introduced in 2006
This is a private placement within the meaning of CA 2013
Conditions for QIP
• Earlier QIP only dealt with issue of new shares but as per ICDR 2018
QIP can also cover offer for sale by promoter/promoter group
A listed company upon satisfying the following conditions shall make QIP
1. Special resolution approving the QIP has been passed by the company
(however no resolution by the company is needed if the QIP is an offer
for sale by promoters/ promoter group for compliance with minimum
public shareholding requirements)
V.K. Unni IIM-C 30
QIP…
2. Shares have been listed on a recognised stock exchange having
nation wide trading terminals (BSE or NSE) for at least one year
3. It is in compliance with the requirement of minimum public
shareholding specified in the listing agreement with the stock
exchange
Securities which can be issued through QIP are equity shares or
any security other than warrants which are convertible into equity
shares
QIP shall be managed by merchant banker registered with SEBI
• QIP is done through a placement document which shall be serially
numbered and copies shall be circulated only to select investors
V.K. Unni IIM-C
31
QIP…
QIP by Promoter/ Promoter Group for satisfying minimum public
shareholding
• The promoters/ promoter group may make an offer for sale of fully
paid up equity shares, through a qualified institutions placement, for
the purpose of achieving minimum public shareholding
• In such case promoters/promoter group should not have purchased
or sold any equity shares of the issuer during twelve weeks period
prior to the date of the opening of the QIP (however selling shares
through POFS through stock exchange is allowed)
• They shall not purchase or sell any equity shares of the issuer during
the twelve weeks period after the date of closure of the QIP
• When a QIP is undertaken by the Promoter/ Promoter group to
comply with the minimum public share holding requirement then
the company need not pass any resolution
V.K. Unni IIM-C 32

QIP…
Nature of Allottees, Reg. 81(b)
• Under QIP, shares can be issued only to Qualified
Institutional Buyers (QIB)
• Following are the QIB recognised by SEBI
I. Scheduled banks
II. Mutual Funds, Venture Capital Fund, Foreign Institutional
Investor registered with SEBI
III. Insurance companies registered with IRDA
IV. State Industrial Development Corporation, public financial
institutions etc;
V.K. Unni IIM-C 33

QIP…
• Such QIB cannot be promoters or related to promoters of the
issue
QIB shall be deemed to be a person related to the promoters of the
issuer: if it has any of the following
I. rights under a shareholders’ agreement or voting agreement
entered into with promoters or persons related to the
promoters;
II. veto rights; or
III. right to appoint any nominee director on the board of the
issuer
V.K. Unni IIM-C 28

QIP…
Allotment
• Minimum 10% of eligible securities shall be allotted to mutual
funds
• If the mutual funds do not subscribe to said minimum
percentage then it may be allotted to other QIB
• For each placement there has to be a minimum of 2 allottees
for issue size up to Rs. 250 crore
• If the issue size is above Rs. 250 crores then there should be a
minimum of 5 allottees
• No single allottee shall be issued more than 50% of the issue
size
V.K. Unni IIM-C 29

QIP...
• QIB shall not be allowed to withdraw their application after the
closure of the issue
Pricing
• The QIP shall be made at a price not less than the average of the
weekly high and low of the closing prices of the equity shares
during the two weeks preceding the relevant date
• The relevant date is the date of the meeting in which the board of
directors of the issuer has decided to open the proposed issue
• The issuer may offer a discount of 5% on the price calculated as per
rules subject to approval of shareholders
V.K. Unni IIM-C 30

QIP...
Time Period
• Allotment pursuant to the special resolution shall be completed
within a period of 12 months from the date of passing of the
resolution
• There has to be a gap of at least 2 weeks between each QIP
Placement Document
• The QIP shall be made on the basis of a placement document
which shall contain all material information
• It shall be circulated only to select investors
• The issuer shall, furnish a copy of the placement document while
seeking in-principle approval from the recognised stock
exchange
• A copy shall also be filed with SEBI within 30 days of allotment of
securities
V.K. Unni IIM-C 31

QIP…
Transferability
• The eligible securities allotted under QIP shall not be sold by
the allottee for a period of one year from the date of
allotment, however this is not applicable to sale done through
a stock exchange
Preferential Allotment Vs. QIP
Obviously the QIP has some advantages over preferential
allotments
1. Flexibility: QIP is very flexible and it does not have rigid
provisions like lock-in , tight time schedules etc. which apply to
preferential allotments
2. Eligibility: Under a QIP, only QIBs are eligible to invest, under a
preferential allotment there is no such stipulation
V.K. Unni IIM-C 32

3. Lock- In Period: Though off-market transactions are not
allowed for one year from the date of allotment in the case
of QIP, there is greater flexibility to sell
However, there are stringent conditions with respect to
lock-in in the case of preferential allotment for promoters (3
years) as well as other allottees (1 year)
4. Validity of the Resolution : In the case of QIP the special
resolution approving the QIP is valid for one year while in
the case of preferential allotment the special resolution is
valid only for 15 days
V.K. Unni IIM-C 39

5. Disclosures in Resolution: The disclosures needed in the
special resolution is much more elaborate than the
disclosures required for making a QIP
6. Checks & Balances: The QIP mechanism has some checks and
balances and it mandates the appointment of a merchant
banker who will lead the process
7. Minimum Allottees: In a QIP, there should be a minimum of 2
allottees upto Rs. 250 crores and a minimum of five allottees
if the issue exceeds Rs. 250 crores, while in the case of
preferential allotments there is no such stipulation
V.K. Unni IIM-C 40

8. Retail Participation: In the case of a QIP, since 10% is reserved
for mutual funds retail investors can indirectly participate,
while in the case of preferential allotments there is no such
reservation
9. Withdrawal of Application: In QIP, application cannot be
withdrawn by the QIB after the closure of the issue, this is no
such stipulation in the case of preferential allotment
• Such prohibition on withdrawal of application will ensure that
only serious QIBs who are willing to take part in the allotment
takes part in the entire process
• In the case of the preferential allotments (after the latest
changes) promoters now will have to forfeit the upfront
payment made on unexercised warrants
V.K. Unni IIM-C 41
IDEA Cellular QIP: 2014
• In June 2014 Idea Cellular raised close to Rs. 3000/ crores via
QIP
• The QIP opened on 5/6/2014 and the bids by QIPS were
accepted until 9/6/2014
• The allotment to QIBs was done on 11/6/2014
• Merchant Bankers involved in the process were Axis Capital,
Citi, Standard Chartered etc
• The issue price was Rs. 134 per share , about 22.38 crore shares
were allotted
• The company resolution which authorised QIP was made on
16th September 2013
V.K. Unni IIM-C 36

IDEA Cellular QIP: 2014
• Idea plans to use the money raised from QIP for meeting business
requirements including payment towards spectrum that may be
auctioned by the Dept. of Telecom in future and for general corporate
purposes
• After the closure of QIP it was disclosed on 12/6/2014 that the QIP
was a success and Rs. 3000 crores had been raised
• The overall allocation to foreign investors is approximately 62% of
the issue and to domestic investors is approximately 38% of the issue
• International Finance Corporation, Merrill Lynch Capital Markets
Espana, ICICI Prudential Life Insurance etc were amongst the major
allotees
V.K. Unni IIM-C 37
ICICI Bank QIP : 2020
• In August 2020 ICICI Bank raised about Rs 15000 crores through a
QIP
• The Issue opened on 10 August 2020 and closed on 14 August 2020
• The Issuance Committee of the Director Board of the Bank at its
meeting held 15 August 2020, approved allotment of shares to
eligible qualified institutional buyers at the issue price of Rs. 358.00
per Equity Share
• The bank had set a floor price at Rs.351.36 per share for its QIP.
• Government of Singapore , Morgan Stanley and Societe Generale
were amongst the prominent QIBs which were allotted the shares
• The proceeds of the issue will be used towards strengthening the
capital adequacy ratio of the bank, improving the bank’s competitive
positioning and/ or general corporate requirements
India Bulls Housing Finance QIP: 2015
• In September 2015, India Bulls Housing Finance (IBHFL), raised
about Rs 4,000 crore from QIBs through QIP
• The QIP was approved by IBHFL’s, Director Board on 24th April 2015
and the company passed a special resolution for the same on 7th
September 2015
• The issue opened on 8th September 2015 and closed on 11th September
2015 with DSP Merrill Lynch , CLSA India, SBI Capital Markets and
Axis Capital acting as merchant bankers to the QIP.
• The price as per SEBI regulations was Rs. 738.64/, but the company
decided to give a 5% discount and thus the issue price was Rs.702/
• The allottees included Capital International, Blackrock, GIC of
Singapore etc..
• The funds raised through the QIP will be used for expanding IBHFL's
lending business V.K. Unni IIM-C 44
Thank You Very Much
V.K. Unni
Professor
V.K. Unni IIM-C 53

Public Offers
V.K. Unni
Professor
UNNI IIM CALCUTTA
Public Offers…
• Issues of shares made by an Indian company can be categorized as
1. Public Issue
2. Rights Issue
3. Bonus Issue
4. Private Placement
• In the case of public and rights issues detailed and time consuming
procedure are involved while bonus issues and private placements
can be done much faster and simpler
• Public issue is again sub-classified into Initial Public Offering (IPO)
Further Public Offering (FPO), Institutional Placement Program
(IPP 2012-18), and Promoter’s Offer for sale of shares through the
Stock Exchange Mechanism (POFS through Stock Exchange)
• Private placement can also be sub classified into Preferential
Allotments and Qualified Institutional Placements (QIPs)
UNNI IIM CALCUTTA

Issue of Shares: Classification
Public Issue
Rights Issue
Issue of Shares Bonus Issues
Private
Placement
UNNI IIM CALCUTTA

Public Issue
Public Issue
IPP
IPO FPO (2012- Promoters Offer for Sale
2018) through the Stock
Exchange (POFS)
UNNI IIM CALCUTTA

Private Placement
Private
Placement
Preferential
QIP
Allotment
UNNI IIM CALCUTTA
Public Offers
• IPO is the process used by unlisted
companies to list their shares in a recognised
stock exchange
• IPP (2012-2018) and POFS through Stock
Exchange Mechanism are used by companies
which are already listed to comply with the
minimum public shareholding requirement
UNNI IIM CALCUTTA

Public Offers
• Initial public offer (IPO) happens when an unlisted company
offers for the first time to the public by way of
• 1)a fresh issue of shares or
• 2) sale of its existing shares or
• 3) combination of the above two
• This will result in listing of the company’s share and trading in
the Stock Exchanges.
• When an already listed company makes either a fresh issue of
shares to the public or an offer for sale to the public of existing
shares it is called FPO.
• SEBI (Issue of Capital and Disclosure Requirements)
Regulations, 2018 (ICDR Regulations) mainly govern the
provisions dealing with issue of shares by companies in India
Public Offers
• Prior to ICDR Regulations 2018, all public offers were governed by
SEBI’s Disclosure & Investor Protection (DIP) Guidelines 2000 and
ICDR 2009
• Rights issue (RI): When a company issues shares to its existing
shareholders according to a particular date fixed (i.e. record date), it
becomes a rights issue.
• The shares are offered in a particular ratio to the number of shares
held as on the record date.
• Bonus Issue : When a company issues shares to its existing
shareholders as on a record date, without any consideration from
them, it is called a bonus issue.
• Bonus shares are issued out of the Company’s free reserve or share
premium account in a particular ratio
UNNI IIM CALCUTTA
Public Offers
• Private placement: When a company issues shares to a select group
of persons not exceeding 200 in number, and which is neither a
rights issue nor a public issue, it is called a private placement
• Private Placement is sub classified into Preferential Allotment and
Qualified Institutional Placement
• ‘Offer Document’ is the document which has all the relevant
information about the company/promoters/ projects/ financial
details etc and is used for inviting subscription to the issue being
made by the issuing company
• Offer Document is known as Prospectus in the context of a public
issue
UNNI IIM CALCUTTA

Public Offers
• Offer Document is known by various terms depending upon the
stage or type of the issue where the document is used
• Draft offer document: is an offer document filed with SEBI for
specifying changes, prior to its filing with the Registrar of
Companies (ROC)
• It is posted in SEBI’s website, for enabling general public to give
comments
• Red herring prospectus is an offer document used in case of a book
built public issue that has all the relevant details except that of price
or number of shares being offered.
• It is filed with RoC prior to the opening of the issue, with a copy to
SEBI
UNNI IIM CALCUTTA
Public Offers
• Prospectus is an offer document in case of a public issue
and this contains all relevant details including price and
number of shares being offered.
• This document is registered with RoC before the issue
opens in case of a fixed price issue and after the closure in
case of a book built issue
• Abridged prospectus is an abridged version of offer
document in public issue and is given along with the
application form of a public issue.
• It will contain all the salient features of a prospectus
UNNI IIM CALCUTTA

Public Offers
Entry norms for

IPO
Networth/ Profitability
Route QIB Route
Based on a certain Allotment of at least 75% to
net worth of the Issuer QIBs through book building
UNNI IIM CALCUTTA

Public Offers
Entry Norms
• There are many ways available to an issuer for accessing the capital
market
• (i) An unlisted issuer making a public issue is required to satisfy the
following provisions:
Entry Norm I (Networth /Profitability Route)-
The Issuer Company shall meet all the following requirements:
1. Net worth of at least Rs. 1crore in each of the preceding three years.
2. Issuer should have minimum average operating profit of Rs. 15 crore,
during the 3 most profitable years out of the immediately preceding 5
years
3. Net tangible assets of Rs. 3 crores in each of the preceding 3 years
4. If the company has changed its name within the last one year, at least
50% revenue for the preceding 1 year should be from the activity
suggested by the new name
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Public Offers
Entry Norm 2 (QIB Route)
For issuers not satisfying Entry Norm 1 they can make the initial
public offer with the following conditions
➢ Issuer through the book-building process has to allot the
Qualified Institutional Buyers (QIBs) at least seventy five
percent (75%) of the net offer to public
➢ If the Issuer fails to make the said minimum allotment to (QIBs)
it will have to refund the full subscription money collected
UNNI IIM CALCUTTA

Public Offers
• Under both the norms the Issuer Company shall also satisfy the
criteria of having at least 1000 prospective allotees in its issue
Promoter's Contribution and Lock-In
• Apart from the entry norms an issuer making a public issue is required
to comply with the following provisions in the ICDR Regulations :
• In a public issue by an unlisted issuer, the promoters shall contribute
not less than 20% of the post issue capital which should be locked in
for a period of 3 years from the date of commencement of commercial
production or date of allotment in the public issue, whichever is later;
• In case the post issue shareholding of the promoters is less than
twenty per cent, alternative investment funds (Private Equity Funds/
Hedge Funds etc) may contribute for the purpose of meeting the
shortfall in minimum contribution as specified for promoters, subject
to a maximum of ten per cent of the post issue capital
Public Offers
• Promoter’s remaining pre issue capital (in excess of 20%)
should also be locked in for a period of 1 year from the date
of allotment in the public issue
• The entire pre-issue capital held by persons other than
promoters shall be locked-in for a period of one year from
the date of allotment in the public issue, (however this will
not apply to ESOPs/VC/PE Funds etc)
Issue Pricing
• SEBI has no role in price fixation of the issue
• In the case of fixed price issues, the issuer in consultation
with the merchant banker on the basis of market demand
decides the price.
Public Offers
• The offer document shall contain full disclosures of the factors which
are considered by merchant banker and the issuer for deciding the
price
• They include EPS/return on net worth and comparison of these
parameters with peer group companies
Book Built Issue
• When the price of an issue is discovered on the basis of demand
received from the prospective investors at various price levels, it is
called a Book Built issue
• The issuer discloses a price band or floor price before opening of the
issue of the securities offered.
• On the basis of the demands received at various price levels within the
price band specified by the issuer, Book Running Lead Manager
(BRLM) in close consultation with the issuer arrives at a price at
which the shares offered by the issuer can be issued
Public Offers
• The price band is a band of price within which investors can bid.
• The spread between the floor and the cap of the price band shall not
be more than 20% and the bidding period is for 3 days
• The price band can be revised, but if it is revised, the bidding period
shall be extended for a further period of 3 days
• If the floor price or price band is not mentioned in the red herring
prospectus, the issuer shall announce the floor price or price band at
least two working days before the opening of the issue
Differential Pricing
• Retail individual investors may be offered shares at a price lower than
the price at which net offer is made to other categories of applicants:
but such difference shall not be more than ten per cent of the price
offered to other categories
UNNI IIM CALCUTTA

Public Offers
• In case of a book built issue, the price of the specified securities
offered to an anchor investor shall not be lower than the price offered
to other applicants
• Anchor investor is a new concept introduced by the ICDR Regulations
and it means a qualified institutional buyer making an application for
a value of ten crore rupees or more in a public issue made through the
book building process
Minimum offer to public :
• Until June 2010 the minimum offer to public was different for
different companies
• However this began to change from June 2010 and for companies
which were following a different pattern a 3 year grace period was
allowed to align them to the minimum public shareholding norms
• This 3 year grace period ended in June 2013
UNNI IIM CALCUTTA
Public Offers
• In fact minimum offer to the public is governed by Securities Contract
Regulation Rules (SCR Rules) of Ministry of Finance, (MoF) Govt. of
India
• In the case of companies other than public sector companies at least
twenty five per cent of the post-issue capital, shall be with public
shareholders
• In the case of public sector companies at least ten per cent of the post-
issue capital, shall be with public shareholders
• This rule is being strictly enforced from June 2010
• In June 2014, SEBI has recommended to MoF, to make changes in
SCR Rules so that all the listed companies including PSUs shall have
a minimum public shareholding of 25% shares within a time period
of three years
• In October 2014, MoF has notified that all listed PSUs should have a
minimum public shareholding of 25% by August 2017
Rule on Minimum Public Shareholding
Situation before June 2010
• Even prior to 2010, the rules provided for a minimum
float at 25%
• However the stock exchanges and SEBI had ample
discretion to exempt this criterion if the following 3
conditions were met, (Rule 19(2(b) of the SCR Rules
1957)
I. minimum offer is for 2 million shares/securities
II. size of the offer is a minimum of INR 100 crores and
III. the issue is undertaken through the book-building
process with allocation of 60% of the issue to qualified
institutional buyers.
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• Once listed, companies were required to maintain a minimum

public float which too provides that listed companies maintain the
25% public float threshold. (Clause 40A of Listing Agreement)
• As with an IPO, the rules for continuous listing allowed flexibility
and this number could be reduced to 10% in two circumstances,
I. company has offered between 10-25% shares to the public, or
II. company has more than 20 million shares outstanding or its
market capitalization is at least INR 10 billion
SCR Rules Amendment
• The flexibility available under the previous rules has now been
removed from 2010 June
• A company may increase its public shareholding by less than 5% in a

year if such increase brings its public shareholding to the level of 25%
in that year
• Those who fail to adhere with the minimum public float within the
stipulated time period could face compulsory delisting, suspension of
trading or a fine up to Rs. 25 crores and/or prosecution
• According to the SCRA Amendment, public excludes the promoter,
promoter group, subsidiaries and associates of a company.
• Public shareholding means equity shares of the company held by the
public and not the shares held by the custodian against depository
receipts issued overseas.
• All listed companies should have 25% minimum threshold level of
public holding.
• In case the percentage dips below 25% then the company will have to
ensure that the shareholding is enhanced to 25% within a maximum
period of 12 months from the date of such reduction
• Existing listed companies below 25% public holding have to reach the
prescribed minimum level by ensuring an annual addition of at least
5%
• However, for any new IPO if the post-issue capital of the company
calculated at offer price is more than INR 4000 crores the company
may be allowed to go public with 10% public shareholding and
comply with the 25% rule by increasing its public shareholding by, at
least, 5% annually (i.e within 3 years from listing)
• A good example of an IPO where promoters hold more than 75%
even after the IPO is the HDFC AMC’s public issue of July 2018
(here the post issue capital is more than Rs. 4000 crores)
Rule on Minimum Public
Shareholding
• Companies with a post-issue capital of less than Rs.4,000 crore will
have to sell a 25% stake or stocks worth Rs.400 crore, whichever is
less, to the public in an IPO
• The above said change was made in 2014 to remove the anomaly that
a company just short of Rs.4,000 crore market capitalization was
required to dilute about Rs.1,000 crore while another company at
Rs.4,500 crore market capitalization was required to dilute only
Rs.450 crores
• In case the IPO of Rs.400 crore size is not equivalent to 25% of its
post-issue capital, the minimum public shareholding of 25% has to be
achieved within three years of listing.
UNNI IIM CALCUTTA

Special Provision for Public Sector Companies

• There was a second amendment made to SCRA in August 2010 to
provide flexibility to public sector companies (PSC)
• The main feature of the amendment is that the minimum requirement
of public shareholding for all PSCs is lowered to 10%.
• A listed public sector company which has a public shareholding below
10% shall increase its public shareholding to at least 10% within a
period of three years
• However this minimum public shareholding of 10% has been
increased to 25% in 2014
• Ministry of Finance (Govt. of India), has notified that all listed PSUs
should have a minimum public shareholding of 25% by August 2017
UNNI IIM CALCUTTA

Allocation in Net Offer to Public
If IPO is under (Networth If IPO is under QIB Route
/Profitability Route )
a) Minimum 35% to retail Maximum 10% to retail individual
individual investors; investors;
b) Minimum 15% to non- Maximum 15% to non-institutional
institutional investors; investors;
c) Maximum 50% to QIBs, out of Minimum 75% to QIBs, 5% of
which 5% of which shall be which shall be allocated to mutual
allocated to mutual funds: funds:
(In addition to 5% allocation to
mutual funds, they shall be eligible
for allocation under the balance
available for QIBs)
UNNI IIM CALCUTTA
Public Offers
General Conditions of Public Offer,
Issuer shall not make a public/rights issue
I. if the issuer/its promoters/promoter group/directors/persons in
control of the issuer are debarred from accessing the capital market
by SEBI
II. if the issuer is in default of payment of interest/repayment of
principal amount in respect of debt instruments issued by it to the
public
III. Before making the public/rights issue the issuer will have to make
an application to one or more recognised stock exchanges for
listing of shares
Public Offer
4) In case of an IPO the issuer shall make an application for listing
in at least one stock exchange having nationwide trading
terminals
5) Before making the public offer the issuer has to enter into an
agreement with a depository for dematerialization of shares
already issued and proposed to be issued
6) Before making the public offer the issuer has to convert all the
existing partly paid up shares into fully paid up shares
7) Furthermore the issuer before making a public offer shall make
firm arrangements of finance through verifiable means towards
75% of the stated means of finance, excluding the amount to be
raised through proposed issue
UNNI IIM CALCUTTA

Public Offer
Example
• If a project size of Rs.10000 crores is being financed through public
issue of Rs.2000 crores and debt from banks of Rs.8000 crores. The
provisions shall be considered to have been sufficiently complied
with, if firm arrangements are made to the extent of Rs.6000 crores
(i.e., 75% of Rs.8000 crores)
• Debt funding from financial institutions/ banks is considered as “firm
arrangement of finance”
• General Corporate Purposes as an object of the issue should not
exceed 25% of the issue size
UNNI IIM CALCUTTA

Public Offers
General Conditions Applicable to All Public Issues
Minimum subscription
• The minimum subscription to be received in an issue shall not be
less than 90% of the offer through offer document
• Upon non-receipt of minimum subscription all application moneys
received shall be refunded to the applicants forthwith
• The issuer and merchant bankers shall ensure that specified
securities are allotted and/or application moneys are refunded within
15 days from the date of closure of the issue, otherwise they will
have to pay interest for the period
• The size of excess allotment/green-shoe option shall not exceed
15% of the total issue size
UNNI IIM CALCUTTA

Green Shoe Option
• A “green shoe option” (over-allotment option) in an IPO enables the
issuing company to offer more shares than the original prospectus
amount if the issue is heavily over subscribed.
• It is essentially a clause contained in an underwriting agreement that
gives the underwriter the right to sell investors more shares than
originally planned by the issuer.
• This can generally happen if the demand for a shares proves higher
than expected.
• The term is derived from the fact that The Green Shoe Company was
the first to issue this type of option
• In India Green Shoe option was allowed by SEBI from 2003 and TCS
was the first company to provide this in their IPO during 2004
UNNI IIM CALCUTTA

Green Shoe Option
• The main objective of ‘green shoe option’ is not to have additional

share capital to company, but to act as stabilizing force
• The company shall appoint one of the Lead book runners as the
"stabilizing agent" (SA), who will be responsible for the price
stabilization process, if required.
• The SA shall enter into a contract with the issuer company
• The SA shall also enter into a contract with the promoters / pre-issue
shareholders who will lend their shares to the SA
• Maximum number of shares that may be borrowed shall not be in
excess of 15% of the total issue size
UNNI IIM CALCUTTA

Green Shoe Option
• The stabilization mechanism shall be available for the period
disclosed by the company in the prospectus,
• However it cannot exceed 30 days from the date when trading
permission was given by the exchanges
• The prime responsibility of the SA shall be to stabilize post listing
price of the shares
• The idea is that due to excess supply of shares (permitted up to 15%),
market price will not shoot up at abnormally high level
• However, if price of shares goes below issue price, SA will buy share
from the market, so that the price will rise
• In spite of the excess supply of shares, if the price continues to be
higher than the issue price, then the SA will not buy the shares from
market, as this will further aggravate the market price
UNNI IIM-C
Green Shoe Option
Mechanism:
• The SA shall open a Special Bank Account, distinct from the issue
account, with a bank for crediting the monies received from the
applicants against the over-allotment
• The SA shall also open a Special De-mat Account for crediting
specified securities to be bought from the market during the
stabilization period out of the monies credited in the Special Bank
Account.
• Lock-in provisions do not apply to the promoter’s shares which have
been lent to the SA
• Once the trading starts the SA will use the money in the Special
Bank Account to buy shares from the market to stabilize the price
UNNI IIM CALCUTTA
Green Shoe Option
• The shares so bought will be credited to the Special De-mat Account
• After the stabilization period is over the Special De-mat Account is
analyzed to find out the shortfall (i.e, Difference between the quantity
of shares lent by the promoter vis a vis the amount of shares bought
back during the stabilization period)
• On expiry of the stabilization period, if the SA has not been able to
buy shares from the market to the extent of such shares over-allotted,
the company shall allot specified securities at issue price to the extent
of the shortfall to the Special De-mat Account and such shares shall be
returned by the SA to the promoters
• SA will pay the company the money from the Special Bank Account,
any remaining amount will be transferred to Investor protection fund
of SEBI
• Thereafter the Special De-mat Account and Special Banking Account
shall be closed
UNNI IIM CALCUTTA
Public Offers
• Depending upon the market price post listing 2 scenarios happen
1. If the share prices are low after listing SA will buy back shares from
the market and deposit it in the special de-mat account and return
those shares to the original lenders (any remaining amount in
Special Bank Account will be transferred to Investor protection fund
of SEBI)
• This means that the company is not exercising the Over
allotment/green shoe option (whatever additional shares were issued
had been bought back and returned to its original lenders)
2) If the share prices are high after listing the SA will not buy any
shares from the market, in this case the company will issue
additional shares up to 15% to SA who will return those shares to
the original lender
Public Offers
• This means that the company is exercising the Over allotment/green
shoe option (whatever additional shares issued are still in the market)
Minimum application value
• The issuer shall stipulate in the offer document, the minimum
application size in terms of number of specified securities which shall
fall within the range of minimum application value of Rs. 10000 to
Rs. 15000
• The issuer shall invite applications in multiples of the minimum
application value
• An investor can alter his bid, both price and quantity, anytime before
the close of the issue
• An investor can cancel the bid anytime before the finalization of the
basis of allotment by approaching/ writing/ making an application to
the registrar to the issue
Public Offers
• After the bidding process is complete, the ‘cut-off’ price is arrived at
based on the demand of securities.
• The basis of Allotment is then finalized and allotment/refund is
undertaken.
• The final prospectus with all the details including the final issue price
and the issue size is filed with ROC, thus completing the issue
process.
• Only the retail investors have the option of bidding at cut-off
• Here the retail investors are required to tick the cut-off option which
amounts to their willingness of subscribing to shares at any price
discovered within the price band
• While price bids can be invalid if the price given by applicant is lower
than the price discovered, the cut-off bids always remain valid for the
purpose of allotment
UNNI IIM CALCUTTA

Public Offers
• After the issue is over the merchant banker collates the data
on bids and fixes a final issue price with the involvement of
stock exchange.
• This price is normally the highest price point at which there
is enough bids to fully subscribe the total shares on offer
• If the issue is oversubscribed at the final issue price and
above, then shares shall be allotted on a proportionate basis
• As per SEBI, time between issue IPO closure and listing
shall not exceed six working days
• All the general obligations of the issuer and intermediaries
with regard to public/rights issue are given in ICDR
Regulations 2018
UNNI IIM CALCUTTA

L&T Infotech IPO - July 2016
• L&T Infotech Ltd. a subsidiary of L&T Ltd. went for a 1243 crore
IPO in July 2016.
• Prior to the IPO the holding company/promoter (i.e. L&T) held about
95% in L&T Infotech Ltd.
• This IPO is only through the Offer for Sale route and thus L&T will
reduce its stake to 84.7%
• Since it is an Offer for Sale the entire money from the IPO will go to
the promoter i.e L&T , L&T Infotech will not get any money from the
IPO
• Price band was fixed at 705-710 and retail investors were given a
discount of Rs. 10/ of the IPO price.
• The book building happened during the three days from 11th July to
13th July 2016 UNNI IIM CALCUTTA
L&T Infotech IPO- July 2016
• As many as 22 anchor investors, including Auburn Ltd and
General Insurance Corp, were allotted shares by the company on 8th
July 2016 for a price of Rs. 710/
• When the book-building closed on 13 July 2016, it was informed that
the issue was oversubscribed by 11.67 times with the number of
applications crossing 1 million on the final day.
• Kotak Mahindra Capital Company, Citigroup Global Markets India
and ICICI Securities managed the IPO
• The issue price after booking building was Rs. 710/
• After the IPO, L&T Infotech’s shares were listed in BSE and NSE on
21st July 2016
UNNI IIM CALCUTTA

Bharti Infratel IPO
Bharti Infratel IPO
• Since IPO / FPO involves satisfying various regulatory commitments,
co-ordination with various entities like stock exchanges, depositories,
ROC, SEBI etc there will be many merchant banks involved in the
process as Book Running Lead Managers (BRLM)
• In the Bharti Infratel IPO which happened in December 2012 there
were 4 Global Co-ordinators cum BRLM which included DSP Merril
Lynch, JP Morgan, Standard Chartered and UBS
• It had 5 BRLMs: Kotak, Enam, Barclays, HSBC and Deutsche
• There were also 4 Co-BRLMs including BNP Paribas, ICICI
Securities
UNNI IIM CALCUTTA

Bharti Infratel IPO
• Each Merchant bank will be doing a portion of the entire IPO/FPO
process,
• In this IPO, topics dealing with due diligence of the Company’s
operations/ business plans/ legal, drafting and design of the Draft Red
Herring Prospectus, Red Herring Prospectus were co-ordinated by
Standard Chartered
• Pricing and managing the book was done by JP Morgan while the
post issue activities were co-ordinated by HSBC
a) The issue size was Rs. 4155 crores and objects to the Issue are
Installation of 4,813 new towers
b) Upgradation and replacement on existing towers;
c) Green initiatives at tower sites;
d) General corporate purpose
UNNI IIM CALCUTTA
Bharti Infratel IPO
• It consisted of Fresh Issue of shares as well as an Offer for Sale
• Offer for Sale was done by 4 existing shareholders including
Nomura and Compassvale Investments
Just Dial IPO (2013)
• This IPO only consisted of Offer for Sale and no fresh shares were
issued by the company
• The Issue size was Rs. 950 crores and was done under the QIB
route
• Citigroup and Morgan Stanley were the BRLMs
UNNI IIM CALCUTTA

IPP (2012-2018)
Institutional Placement Program (2012-2018)
• This existed during the period (2012-2018), IPP is abolished under
ICDR 2018 from September 2018
• This is available only for companies which are currently not in
compliance with the minimum public shareholding requirements
• This applies to offering by way of fresh issue of capital or by
dilution of the promoter shareholding through an offer for sale.
• Here any offer, allocation and allotment of securities under the IPP
route shall be made only to qualified institutional buyers
• An IPP shall be made only after a special resolution approving the
institutional placement programme
• No partly paid-up securities shall be offered.
• The issuer shall obtain an in-principle approval from the stock
exchange(s).
UNNI IIM CALCUTTA
POFS Through Stock Exchange
Offer For Sale of Shares by Promoters through the Stock Exchange
Mechanism
• From the year 2012, in order to help promoters to dilute their holding
in listed companies in a transparent manner, SEBI has allowed the
offer for sale of shares by promoters through a separate window
provided by the stock exchanges
• Presently it is only available with BSE and NSE
Eligible Sellers/ Offerers
1. Promoter / promoter group entities of listed companies which are
required to comply with minimum public shareholding requirements
can avail the POFS window.
2. Promoters / promoter group entities of companies with market
capitalization of Rs.1000 crores and above can avail this (market
capitalization computed as the average daily market capitalization
for six months period prior to the month in which the OFS opens) .
3. Non promoter share holder who holds more than 10% shares in the
abovesaid category of companies can also use the POFS route
• The Sellers should not have purchased and/or sold the shares of the
target company in 12 weeks prior to the POFS
• The Sellers will have to undertake not to purchase and/or sell shares
of the target company for a period of 12 weeks after the POFS.
Eligible Buyers
• All investors registered with the brokers of the Stock
Exchanges, other than the Promoters, shall be eligible to
buy the shares
• In case a non-promoter shareholder offers shares through
the POFS mechanism, promoters/ promoter group entities
of such companies may participate in the POFS to
purchase shares subject to compliance with applicable
provisions of SEBI
UNNI IIM CALCUTTA

Minimum Size of POFS
• Generally the size of the offer shall be at least 1% of the paid-up
capital of the company, subject to a minimum of Rs 25 crores
• If 1% of paid-up capital is less than 25 crores then dilution would be
at least 10% of the paid-up capital or such lesser percentage so as to
achieve minimum public shareholding
• Seller shall announce the intention of sale of shares by 5 pm on the
previous trading day, (i.e, If POFS starts on 9th August 2016 the
announcement shall be made by 5 pm of 8th August 2016)
• Announcement shall contain the following information
1. Name of the seller(s) (promoter/ promoter group).
2. Name of the Exchange(s)
3. Date and time of the opening and closing of the offer
4. Allocation methodology
• Sellers have an option to declare a floor price, either in the
announcement or in a sealed envelope to Stock Exchange
• The floor price if not declared to the market, shall not be disclosed to
anybody, including the selling broker
• The duration of the offer for sale shall not exceed two trading days
with the second day reserved for retail investors.
• On first day only non-retail investors shall be permitted to place their
bids
• Lot of companies have used this route to comply with the public
shareholding norms and they include, SAIL, Coal India Ltd., L&T
Finance Holdings, Hindustan Aeronautics Ltd. and Bharat Dynamics
Ltd. (the last two went for POFS in the year 2020)
UNNI IIM CALCUTTA

Allocation
• Minimum of 25% of the shares offered shall be reserved for
mutual funds and insurance companies, subject to allocation
methodology, and any unsubscribed portion thereof shall be
available to the other bidders
• Minimum 10% of the issue size shall be reserved for retail
investors (i.e. for the investors bidding for amounts less than Rs.
two lakhs)
• In case this percentage is not fully utilized, the unutilized portion
may be offered to other investors
• No allocation will be made incase of order/ bid is below floor
price.
• No single bidder other than mutual funds and insurance
companies shall be allocated more than 25% of the size of offer
for sale.
• The POFS, once announced, can be withdrawn prior to its
proposed opening
• There shall however be a gap of 10 trading days from the date of
withdrawal before a subsequent POFS can be launched
• Cancellation of offer shall not be permitted during the bidding
period
• If the seller fails to get sufficient demand at or above the floor
price, he may choose to either conclude the offer or cancel it in
full.
Public Offers
V.K. Unni
Professor
UNNI IIM CALCUTTA

FEMA & Foreign Investment
V.K. Unni
Professor
Unni IIM Calcutta 1

An Overview of FEMA
• In 2000, the once dreaded Foreign Exchange Regulation Act 1973

(FERA) was repealed and replaced with the Foreign Exchange
Management Act 1999 (FEMA)
• While FERA endeavoured to preserve the foreign exchange
resources, FEMA focuses upon facilitating external trade and
payments and on promoting the orderly maintenance of the foreign
exchange market in India.
FEMA applies to two types of persons mentioned below
1. Person Resident in India
2. Person Resident outside India
(the term person includes an individual, a company, firm, HUF etc and
any agency, office or branch owned or controlled by such person)
2
FEMA
Person Resident in India,

• A person who has been residing in India for more than 182 days,
in the last financial year.
• Thus if Mr. X has to be assessed, as to whether he is a person
resident in India, for any transaction that happened in June 2006,
then X should have resided in India for more than 182 days during
1st April 2005 to 31st March 2006
• However this comes with 2 exceptions
1. In the case of a person who has gone out of India or who stays
outside India,
I. for taking up employment abroad, or
II. for carrying on a business abroad or
III. for any other purpose, in such circumstances as would indicate
his intention to stay outside India for an uncertain period
Unni IIM Calcutta 3
FEMA
• In such cases he will be considered as a non-resident from the

date of leaving, irrespective of the fact that he was residing in
India for more than 182 days in the preceding financial year
2. In the case of a person who has come to India
i. for taking up employment in India, or
ii. for carrying on in India a business in India, or
iii. for any other purpose, in such circumstances as would indicate his
intention to stay in India for an uncertain period,
• In such cases he will be considered as a resident from the date of
arriving, irrespective of the fact that he was not residing in India for
more than 182 days in the preceding financial year
Unni IIM Calcutta 4

FEMA
• With respect to corporates Person Resident in India also includes

the following ,
• any person or body corporate registered or incorporated in India, or
• an office, branch or agency in India owned or controlled by a person
resident outside India, or
• An office, branch or agency outside India owned or controlled by a
person resident in India
• A "person resident outside India" means a person who is not
resident in India,
Unni IIM Calcutta 5

FEMA
FEMA applies to two types of transactions mentioned below
1. Capital account transaction
2. Current account transaction
• Capital account transactions are those dealings which alter
the assets or liabilities outside India of persons resident in
India or assets or liabilities in India of persons resident
outside India,
Unni IIM Calcutta 6

FEMA
Examples
❑ transfer or issue of any foreign security/shares by a person resident
in India;
❑ transfer or issue of any Indian security/shares by a person resident
outside India;
❑ transfer of immovable property outside India, other than a lease not
exceeding five years, by a person resident in India; etc
• This covers purchase or transfer of capital assets (like shares/land
etc) in a foreign country by persons residents in India and purchase
or transfer of capital assets (like shares/land etc) in India by persons
resident outside India
Unni IIM Calcutta 7
FEMA
• Current account transaction means a transaction other than a capital

account transaction and includes,-
1. payments due in connection with foreign trade,
2. short-term banking and credit facilities in the ordinary course of
business,
3. house rent, payments due as interest on loans,
4. expenses in connection with foreign travel, education and medical
care of parents, spouse and children
• In the case of current account transactions the FEMA adopts a liberal
approach
• It states that any person may undertake a current account transaction
through an authorized person (i.e., Bank, Forex dealer) without any
prior permission
Unni IIM Calcutta 8
An Overview of FEMA
Categorization and its consequences

• Provisions of FEMA, have different consequences on Person resident
in and outside India
• As regards a " Person Resident in India", he can acquire, hold, own,
possess or transfer any foreign exchange, foreign security or any
immovable property situated outside India, only according to FEMA
• Foreign security means any security, in the form of shares, bonds,
debentures or any other instrument denominated or expressed in
foreign currency
• Foreign exchange" means foreign currency and it also includes
deposits, credits and balances payable in any foreign currency, Drafts,
letters of credit or bills of exchange drawn in Indian currency but
payable in any foreign currency
Unni IIM Calcutta 9
An Overview of FEMA
• R.B.I may prohibit, restrict or regulate the following capital

account transactions conducted by a Person Resident in India
1. Transfer or issue of any foreign security by a person resident in
India
2. Any borrowing or lending in rupees in whatever form or by
whatever name called between a person resident in India and
a person resident outside India
3. Deposits between persons resident in India and person
resident outside India:
Unni IIM Calcutta 10

An Overview of FEMA
iv. Giving of a guarantee in respect of any debt, by a person

resident in India and owed to a person resident outside India.
v. Transfer of immovable property outside India, other than a
lease not, exceeding five years, by a person resident inside
India.
• However a person resident in India may hold, own transfer or
invest in foreign currency/security or any immovable property
situated outside India if it was acquired, held or owned by such
person when he was resident outside India or inherited from a
person who was resident outside India. (Sec 6(4) FEMA)

An Overview of FEMA
Person Resident Outside India

• Just as in the case of a Person Resident in India, FEMA has certain
consequences for a "Person Resident outside India“
• As regards a " Person Resident Outside India", he can acquire, hold,
own, possess or transfer any Indian currency, Indian security or any
immovable property situated inside India, only according to FEMA
• However a "person resident outside India" may hold, own, transfer
or invest in Indian security or any immovable property situated in
India if such security or property was acquired, held or owned by
such person when he was "resident in India" or inherited from a
person who was resident in India,)

An Overview of FEMA
• Furthermore the RBI may regulate the
establishment in India of a
branch/office/place of business by a person
resident outside India, for carrying on any
activity relating to such branch/ office

Liberalised Remittance Scheme
• This scheme is available to all resident individuals under which they

may freely remit up to US $ 2.5 lakhs per financial year or its
equivalent for any permissible current or capital account transaction or
a combination of both, outside India
• Initially when it was introduced in 2004 the amount was $ 25000/per
financial year, progressively it was increased to US $2 lakhs (from
2007) or its equivalent, currently it stands at US $2.5 lakhs or its
equivalent
• This facility is not available to Corporates, Partnership firms, HUF,
Trusts etc
• Under this resident individuals can acquire and hold shares or debt
instruments or any other assets outside India, without prior approval
RBI.
• They can also acquire immovable property outside India
Liberalised Remittance Scheme
• Resident individuals can also open, maintain and hold foreign

currency accounts with banks outside India, set up joint ventures or
fully owned subsidiaries outside India within this US $2.5 lakhs
However remittance facility under the Scheme is not available for any
purpose specifically prohibited
• like purchase of lottery etc
• remittances made to Bhutan, Nepal, Mauritius or Pakistan
• Remittances made to non co-operative countries and territories,
identified by the Financial Action Task Force, the countries are Cook
Islands, Egypt, Guatemala, Indonesia, Myanmar, Nauru, Nigeria,
Philippines and Ukraine
• Remittances made to those individuals and entities identified as
posing significant risk of committing acts of terrorism
FEMA
• In fact, the Notifications like FEMA 20 /2000-RB and FEMA 120 etc
are the sum and substance of the various mechanisms devised by
RBI to give effect to Sec 6(3) of the Act
• By allowing the RBI to regulate the "transfer or issue of any
security by a person resident outside India”, FEMA grants authority
to RBI to set guidelines to determine if and when persons resident
outside India may purchase shares of an Indian company.
• Thus FEMA 20 /2000-RB is an important notification dealing with
foreign investment in India and FEMA 120/2004-RB deals with
overseas investment made by persons resident in India (e.g. TATA’s
acquisition of CORUS)

FEMA
• For the purpose of the FEMA 20 /2000-RB , investment in India by
a non-resident has been divided into 6 categories and the regulations
applicable have been specified in respective schedules as
1. Investment under the Foreign Direct Investment Scheme (“FDI
Scheme")
2. Investment by Foreign Portfolio Investors (FPI)under the Portfolio
Investment Scheme (“PIS")
3. Investments by NRIs (Non-Resident Indians) under the Portfolio
Investment Scheme
4. Investment by NRIs on Non- repatriable basis
5. Investments made by Foreign Venture Capital Funds
6. Investments by FPIs/NRIs in instruments other than
shares/convertible debentures
17
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FEMA
• Non-Resident Indian (NRI)' means a person resident outside India
who is a citizen of India or is a Person of Indian Origin (PIO)
PIO means a citizen of any country other than Bangladesh or Pakistan
or Sri Lanka, if
a) he/she at any time held Indian passport; or
b) he/she or either of his/her parents/grand parents was a citizen of
India or
c) he/she is a spouse of an Indian citizen
• Amongst the earlier mentioned 6 categories, FDI Scheme is the
most important regulation involving foreign investment
• RBI Master Circular on Foreign Investment in India, contains
all the regulations dealing with foreign investment in India

FEMA
1) FDI Scheme - Eligibility for Investing in India
• A non-resident entity can invest in India, except in those sectors/activities
which are prohibited
• However, an entity of a country, which shares land border with India or
where the beneficial owner of an investment into India is situated in or is
a citizen of any such country, can invest only under the Government/
Approval Route
• A citizen of Pakistan or an entity incorporated in Pakistan can invest,
only under the Government route, in sectors/activities other than defence,
space, atomic energy and sectors/activities prohibited for foreign
investment.
Nature of Investments
• Indian companies have general permission to issue equity shares / fully
and mandatorily convertible debentures /fully and mandatorily
convertible preference shares subject to certain conditions on pricing and
valuation
FEMA
• Under the Foreign Direct Investments (FDI) Scheme, investments can
be made in shares/fully convertible debentures of an Indian company
by non-residents through two routes:
• Automatic Route: Under the Automatic Route, the foreign investor or
the Indian company does not require any approval from the Reserve
Bank or Government of India for the investment.
• Approval Route: Under the Government/FIPB/Approval Route, the
foreign investor or the Indian company should obtain prior approval
of the Government of India(Foreign Investment Promotion Board
(FIPB) for the investment.

FEMA
• FIPB is an inter-ministerial body within the Department of
Economic Affairs (Ministry of Finance) responsible for processing
FDI proposals and make recommendations to the finance minister.
• If the investment amount exceeded Rs. 5000 crores FIPB would
make its recommendations to the Cabinet Committee on Economic
Affairs (CCEA).
• In May 2017 the FIPB has been abolished by the Government of
India
• Henceforth individual departments of the central government have
been empowered to clear FDI proposals in consultation with
Department of Industrial Policy and Promotion (DIPP)which will
also issue the standard operating procedures for processing
applications.
FEMA
• Foreign investment in any form is prohibited in a company or a

LLP/partnership firm or a proprietary concern or any entity,
whether incorporated or not (such as, Trusts) which is engaged
in the following activities:
1. Business of chit fund, or
2. Nidhi company, or
3. Agricultural or plantation activities, or
4. Real estate business, or construction of farm houses, or
5. Trading in Transferable Development Rights (TDRs)
6. Lottery (online and traditional), casinos, gambling etc
FEMA
• Real estate business means dealing in land and immovable property with
a view to earning profit or earning income there from and does not
include development of townships, construction of residential /
commercial premises etc
• Limited Liability Partnership (LLP) formed and registered under the
Limited Liability Partnership Act, 2008 shall be eligible to accept
Foreign Direct Investment (FDI)
• FDI is permitted under the automatic route in LLPs operating in sectors /
activities where 100% FDI is allowed through the automatic route and
there are no FDI linked performance conditions,(sectors where 100%
FDI under automatic route is allowed for companies are mining, courier
services, greenfield airports, NBFCs in merchant banking, stock broking
etc)
• However citizens of Pakistan and Bangladesh or entities set up in these
two countries are not allowed to invest in LLP 23
Investments by FPIs under Portfolio Investment Scheme (PIS)
2) Investments by Foreign Portfolio Investors (FPIs) under PIS

• In order to streamline the various available routes for foreign
portfolio investment in India, SEBI introduced a new class of
foreign investors in India known as the Foreign Portfolio Investors
("FPIs"), which will governed under SEBI - FPI Regulations 2014
• This class of FPI is created by merging the existing classes of
investors through which portfolio investments were previously made
in India namely, the Foreign Institutional Investors ("FIIs"),
Qualified Foreign Investors ("QFIs") and sub-accounts of the FIIs
• While FIIs and their sub accounts were there from 1995, the
category of QFIs have been created in 2011-12
• Sub-accounts are defined as any person resident outside India on
whose behalf investments are made by FIIs in India and who is
registered as subaccount under these regulations

PIS
• As the name suggests foreign portfolio investment involves buying
of securities, traded in another country, which are highly liquid in
nature and, thus allow investors to make “quick money” through
their frequent buying and selling
• Registered FPIs are eligible to purchase shares issued by listed
Indian companies under the Portfolio Investment Scheme (PIS)
• An Individual FPI can invest up to a maximum of 10 % of the total
paid up capital of the Indian company
• Total holdings of all FPIs put together shall not exceed 24 % of the
paid-up capital
• This limit of 24 % can be increased to the sectoral cap as applicable
to the Indian company concerned, if its Director Board passes a
resolution which is followed by a special resolution of the company
PIS
• In April 2020 the FPI limits for all listed stocks on
Indian stock exchanges have been revised
• With this, FPI limit in some stocks has gone up to
100 percent, while in some stocks FPI limits have
been increased to their respective sectoral caps
• The Finance Ministry had earlier published a circular
to raise FPI limits for all Indian companies to sectoral
FDI limits after March 31, 2020, unless companies’
boards and shareholders passed resolutions to the
contrary.

FPI Regulations 2014
• FPI Regulations have been notified in January 2014
• Thus the erstwhile SEBI- FII Regulations 1995 and SEBI Circulars
on QFIs of 2011/12 are repealed
• The existing FIIs and QFIs are automatically deemed to be FPIs
under the said Regulations
Eligibility criteria for a FPI include the following:
• The applicant should be a person who is resident outside India,
however a Non Resident Indian (NRI) is not eligible to be
registered as a FPI.
• The person should be legally permitted to invest in securities
outside the country of its incorporation

FPI Regulations 2014
FPIs are classified into 3 categories

• Category I FPI- Foreign Government and Foreign Government related
investors such as central banks, Governmental agencies, sovereign
wealth funds and international or multilateral organizations or
Agencies
• Category II FPI- Regulated funds such as mutual funds, investment
trusts, insurance / reinsurance companies, banks, asset management
companies, university funds, venture capital funds, pension funds etc
• Category III FPI- all others not eligible under Category I and II FPIs
such as endowments, charitable societies, charitable trusts,
foundations, corporate bodies, trusts, individuals and family offices

Foreign investments by NRIs under Portfolio Investment Scheme
(PIS)
3) Investments by NRIs under PIS

• NRIs are allowed to invest in shares of listed Indian companies in
recognised Stock Exchanges under the PIS.
• NRIs can invest through designated Authorised Dealers (AD), on
repatriation basis under PIS route up to 5 % of the paid- up of listed
Indian companies.
• The aggregate paid-up value of purchased by all NRIs cannot exceed
10 % of the paid-up capital of the company
• This limit of 10 % can be increased to 24 % if its Director Board
passes a resolution which is followed by a special resolution of the
company

Foreign investments by NRIs on Non-
repatriation Basis
4 ) Purchase of shares or convertible debentures by NRI on Non

repatriation basis
• A NRI may purchase shares or convertible debentures of an
Indian company on non-repatriation basis without any limit
• The said shares may be issued by way of public issue/ private
placement/ rights issue
• The amount invested in shares and the capital appreciation
thereon shall not be allowed to be repatriated abroad
• In the case of investment on non-repatriation basis, the sale
proceeds shall be credited to NRO (Non Resident Ordinary
Rupee) account.

Investments by Foreign VC Funds
5) Investments made by Foreign Venture Capital Investors

• Foreign Venture Capital Investor (FVCI) registered with SEBI can
purchase equity /equity linked instruments/ debt instruments,
debentures of an Indian Venture Capital Undertaking (IVCU) or
of a Venture Capital Fund through initial public offer or private
placement in units of schemes / funds set up by a VCF.
• At the time of granting approval, RBI permits the FVCI to open a
foreign currency account or rupee account.
• The purchase / sale of shares, debentures and units can be at a
price that is mutually acceptable to the buyer and the seller

Investment in other Instruments
6) Investment in Instruments other than Shares and

Convertible Debentures
• FPIs can buy on repatriation basis dated Government
securities (G-Secs),listed non-convertible debentures /
bonds , issued by Indian companies and units of domestic
mutual funds
• NRIs can also, without any limit, purchase on repatriation
or non-repatriation basis Dated Government Securities,
Treasury Bills, units of domestic mutual funds etc
Thank You Very Much
V.K. Unni
Professor

FDI , Depository Receipts
Dr. V.K. Unni

Professor
Unni IIM Calcutta

Foreign Investment
A foreign company who wants to start its business operations in India
has the following ways
1. As an incorporated entity by incorporating a company under the
Companies Act, 1956 / 2013 through Joint Ventures; or Wholly
Owned Subsidiaries
2. As an office of a foreign entity through Liaison Office /
Representative Office, Project Office, Branch Office
◼ Foreign company can set up Liaison/Branch Offices in India after
obtaining approval from RBI, under Foreign Exchange Management
(Establishment in India of Branch Office or other place of business)
Regulations, 2000 .
◼ The role of Liaison office/ representative office is, limited to
collecting information about market opportunities and providing
information about the company to the prospective Indian customers.
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Foreign Investment
◼ The companies who want to open a liaison office has to apply to
Foreign Investment Division, Foreign Exchange Department, RBI,
Mumbai
◼ Foreign companies who are allotted projects in India by Indian entities
can open Project Office/s in India provided they have secured from an
Indian company, a contract to execute a project in India
◼ RBI also permits companies engaged in manufacturing and trading
activities abroad to set up Branch Offices in India to represent the
parent company/other foreign companies in various matters in India
e.g. acting as buying/selling agents in India, to conduct research work
in the area in which the parent company is engaged etc
◼ However a branch office is not allowed to carry out manufacturing,
processing activities/ retail trading directly/indirectly.
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Foreign Direct Investment
◼ Foreign Direct Investment (FDI), though with its own share

of problems, is now considered as an important driver of
economic growth
◼ Thus the Indian government is trying its best to attract and
facilitate FDI to complement and supplement domestic
investment
◼ There are 2 routes of FDI, the automatic route and the
Government approval route (earlier also known as the FIPB
Route)
◼ Under the automatic route FDI may be made by the foreign
investor without getting any permission from the government
◼ However under the approval route investment can be made
only after obtaining prior permission from the government
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◼ Government has notified sectors where prior approval is needed
◼ However the general rule is that FDI falls under the automatic route
unless specified by the government
FDI is prohibited under Automatic as well as Approval/ Government
Route for the following sectors:
◼ Atomic Energy
◼ Lottery Business
◼ Gambling and Betting
◼ Chit funds, Nidhi companies etc
◼ Trading in Transferable Development Rights -TDRs (TDRs are

certificates issued in respect of land acquired for public purposes by
the Government as a consideration of surrender of land by the owner
without monetary compensation)
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Automatic Route
◼ According to this route, Indian Companies can accept FDI without
obtaining prior approval from RBI or government
◼ However the companies are required to notify the concerned Regional
Office of the Reserve Bank of India of receipt of inward remittances
◼ A two-stage reporting procedure has been introduced for this purpose.
◼ Within 30 days of receipt of money from the non-resident investor,
the Indian company will report to the Regional Office of the
RBI, under whose jurisdiction its Registered Office is located (first
stage)
◼ Within 30 days from the date of issue of shares, relevant documents
should be filed with the concerned Regional Office of the RBI
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Approval/ Government Route
◼ FDI in activities not covered under the automatic route requires prior
Government approval and were considered by the Foreign
Investment Promotion Board (FIPB), Ministry of Finance
◼ In May 2017 the FIPB has been abolished by the Government of India,
henceforth individual departments of the central government have been
empowered to clear FDI proposals
◼ Certain areas notified by the government require prior approval from
Government, these areas include
All proposals falling outside the notified sectoral caps
◼ Foreign investment may occur through the automatic route or
Approval route
◼ Regardless of the 2 routes, there will be certain “sectoral caps” to
limit the foreign investment in a company engaged in a particular
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activity
◼ FDI caps for certain sectors are needed to address two main
concerns: (i) protection of national security interests (e.g.
broadcasting, defence), and (ii) protection of certain segments
of Indian industry (multi brand retail ).
◼ Sectoral caps were indeed effective as they kept foreign
ownership and control below certain levels.
◼ Presently there are about 4 FDI slabs — ranging from 100% to a
complete bar in certain sectors.
◼ The insurance sector has a 49% sectoral cap
◼ Presently some of the sectors which fall under Approval Route
are FM Radio, defence production, Multi brand retail etc
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◼ Sometimes the government may divide FDI into Brownfield FDI

(existing companies) and Greenfield FDI (new companies),
pharmaceutical sector is an example of this categorization
◼ In the case of pharmaceuticals the policy was changed in November
2011 wherein 100 % FDI would be allowed in the case of new
companies under the automatic route
◼ In the case of existing pharma companies 100 % FDI would be
allowed out of which 74% will be under the automatic route and the
rest under the approval/government route
◼ In the case of telecom even though 100% is allowed, any investment
above 49% is under the approval route
Unni IIM Calcutta

Press Notes
Relevance of Press Notes

◼ Various laws in India delegate power to government bodies like
Reserve Bank of India (RBI) or Department of Industrial Policy and
Promotion, (DIPP), Govt. of India, to frame certain regulations
◼ Such delegated entities may then make updates to laws pursuant to
circulars or Press Notes (PN).
◼ These press notes are binding under law and are drafted with a
number and the year in which they are issued
◼ DIPP has been issuing various press notes dealing with the sectoral
caps and modes of routing foreign investment since 1990’s
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Latest Developments: Foreign Indirect
Investments
◼ PN- 2/2009, tries to integrate the method of calculation of indirect
foreign investment in Indian companies that secure investments from
other Indian companies with foreign shareholding.
◼ Prior to 2009, FDI was calculated in three different ways
1. Proportionate method as stipulated under sectoral guidelines for
telecom, print media, private sector banking etc ,
2. Press Notes issued by DIPP on investing companies in services and
infrastructure as per PN 2/2000
3. Guidelines for calculation as provided in the regulations framed under
statute as in the case of insurance sector, IRDA (Registration of
Indian Insurance Companies) Regulations, 2000
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Latest Developments: Foreign Indirect
Investments
◼ What PN 2 stipulates is a uniform method of calculation of indirect
foreign investment for all sectors except insurance/print media etc
which is governed under separate regulations framed under relevant
statutes
◼ According to PN 2 , downstream investment by Indian companies
which are 'owned and controlled' by resident Indian citizens,
irrespective of their foreign shareholding, would not be considered as
indirect foreign investment
◼ An Indian company is considered to be "owned" by resident Indian
citizens if more than 50% of the equity shares in that company is held
by resident Indian citizens, and it is considered to be "controlled" by
resident Indian citizens if majority of the directors are
appointed/removed by resident Indian citizens
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Latest Developments
◼ Thus to avoid classification of downstream investment in the
subsequent company as indirect foreign investment, the investor
company should be owned and controlled by resident Indian
citizens
◼ In simple words, If the investing company is either owned or
controlled by a non resident, then its entire investment in the
Indian subsequent (investee) company is considered to be
foreign investment.
◼ Downstream investments by Indian investing companies either
owned or controlled by non-residents is deemed as indirect
foreign investments in the investee companies.
◼ In such cases, the entire investment made by the Indian investing
company in the downstream company will be treated as indirect
foreign investment.
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Latest Developments
◼ Illustration: ABC an Indian company owned or controlled by non-
residents, holds 49% in a downstream company XYZ. As per
PN2/2009 the indirect foreign investment in the XYZ will be
considered to be 49%
◼ Exception: if the investee Indian company is a wholly-owned
subsidiary of the investing Indian company, then the foreign
investment in the investee Indian company will be the same as the
foreign investment in the investing Indian company
◼ Illustration: If Company XYZ has foreign investment of 75% and
invests 100% in Company DEF (i.e. Company DEF is a wholly-
owned subsidiary), then the foreign investment in Company DEF will
be 75%
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Latest Developments
◼ Company Fairtel has foreign investment of 49%, and Mr. Bittal a
resident Indian citizen owns 51% and controls it. If Fairtel makes a
downstream investment of 40% in another company DOGOMO, the
entire 40% will be considered as investment by Indian residents. Prior
to PN/2009, the foreign investment was around 19.6% (i.e. 49% of
40)
◼ As per PN 2/2009, foreign investment includes investment by foreign
institutional investors (FIIs), NRIs investment in the form of
ADR/GDR, FCCBs, Convertible Debentures etc
◼ In addition to the general rules, PN 2/2009 also provides specific
conditions for foreign investment in certain sectors.
◼ In certain media businesses (such as FM radio, print media, news and
current affairs television channels) where the foreign investment cap
is "less than 49%", the relevant Indian company is required to be
owned and controlled by resident Indian citizens
Latest Developments
◼ if there is an agreement among shareholders of the relevant Indian

company which has an effect on the appointing directors/exercise of
voting rights/ creating voting rights disproportionate to shareholding,
such agreement shall be submitted to the approving authority
◼ Generally if a foreign investor holds up to a 49% equity stake in an
Indian company, it will have certain rights such as veto rights,
representation on the board of directors and transfer restrictions on the
majority shareholder etc
◼ The approving authority may determine in a specific case that a
particular shareholder has disproportionate rights and actually controls
the Indian company.
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Latest Developments
Investing Companies/ Operating Companies (PN4/2009, as amended
by DIPP-Master Circular 1of 2011)
◼ Foreign investment into an Indian company, engaged only in the
activity of investing in the capital of other Indian companies, will
require prior Government approval, regardless of the amount or extent
of foreign investment
◼ For infusion of foreign investment into an Indian company which does
not have any operations and also does not have any downstream
investments (something similar to Blank Check companies in USA),
Government approval would be required
◼ Downstream investment by an Indian company, which is owned or
controlled by non-resident entity, into another Indian company, would
be in accordance with the relevant sectoral conditions on entry route,
conditions and caps
Investing Companies/ Operating Companies
◼ PN 4 /2009 has to be read along with PN 2/2009

◼ This means that companies with minority foreign ownership may be
able to invest in sectors that are otherwise not open for foreign
investment, such as real estate
◼ PN 4/2009 repeals PN 9/1999 which mandated that all foreign owned
Indian companies to seek FIPB approval before making downstream
investment
◼ Unfortunately Press Note 9/1999 did not define "foreign owned
Indian company" and "downstream investment”
◼ The interpretation of these terms was extended by the erstwhile FIPB
to such an extent that virtually every instance of foreign investment in
India, irrespective of the amount, required prior governmental
approval
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Latest Developments
◼ This requirement was rather onerous, especially for operating

companies making downstream investments, which were otherwise
under the automatic route
◼ The best example is the case of JSW Energy, which by virtue of being
owned by foreign investors to the extent of 8.4 per cent and having its
own downstream investments was required to obtain FIPB approval
under Press Note 9/1999
◼ Thus PN4/2009 can be very helpful in the case of certain investors
like foreign private equity investors
◼ Illustration: XYZ is an IT company where a foreign PE investor
White-Stone has 60% stake and also controls the management ,
henceforth XYZ would not be required to obtain government approval
for making any downstream investments in other companies
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Latest Developments
◼ This is because XYZ is not engaged only in the activity of investing in
the capital of other Indian company, rather it is a company with some
business/operations in the field of IT
◼ However downstream investments by XYZ will be subject to sectoral
caps and other conditions like press note 2/2009
◼ Thus if XYZ acquires a 45% stake in a telecom company the entire
45% shall be treated as foreign investment because of PN2/2009
◼ PN 2/2009 has now made it very clear that the only factor in
reckoning FDI limits will be majority ownership and control, and not
the effective economic interest in Indian companies.
◼ PN 4/2009 makes it clear that FIPB approval requirement will no
longer be applicable to foreign-owned “operating and investing
companies”, even though the said approval is still needed for pure
investing companies with no other operations
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Latest Developments
Illustration
◼ XYZ is an Indian company which is engaged only in the activity of
investing in the capital of other Indian companies and has no other
operations/business. Rain &Co. a foreign PE fund wants to invest
10% in XYZ without any control. The other 90% is owned by Indian
residents who also control the company. Government approval is
required for such investment into XYZ even if it is only 10% as XYZ
is a pure investing company without any operations/business . Any
downstream investment made by XYZ will not have to get the
approval of Government as XYZ is owned and controlled by Indian
residents
◼ If XYZ makes an investment of 50 % in another company MNO the
entire 50% will be considered as investment by Indian residents as
XYZ is owned and controlled by Indian residents. The 10% invested
by Rain & Co. in XYZ will not be reflected in MNO
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Depository Receipts
◼ Depository receipts are certificates that help domestic investors of

a country to own shares in foreign companies
◼ Depository receipt issued in USA is called ADR and in other
places like Europe is called a GDR
◼ ADR/GDR are issued by non resident companies to residents of
another country through depositories located in the country from
which a company plans to raise funds through depository receipts
◼ Each unit of ADR/GDR denotes a specific number of a company’s
shares
◼ It can be traded freely as any other security in the capital market
◼ The role of depositories in ADR/GDR is very high, as they act as
custodians of the shares,
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Depository Receipts
◼ The Indian company issues its rupee denominated shares in the

name of the overseas depositories and such issued shares are kept in
the custody of the domestic custodian in India
◼ The ADR represent the local Indian shares held by the depository,
and can now be freely traded equity on the NYSE, NASDAQ etc .
◼ All ADR transactions of the Indian company will now take place in
U.S. dollars and are settled like a US transaction
◼ The ADR investor has privileges like those granted to shareholders
of ordinary shares, such as voting rights and dividends
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Classification of ADRs
◼ In USA, Depositary receipts can be “sponsored” or unsponsored”.

◼ All the ADRs trading today from India – belong to the former
category.
◼ Sponsored ADRs are issued by a depositary appointed by the
company under a Deposit Agreement, e.g. City Bank, Morgan
Stanley etc
◼ There are three distinct levels of sponsorship
◼ For a Level-I sponsored ADR, the issuing company does not have to
comply with the US accounting procedures or the disclosure
requirements mandated by the SEC.
◼ Such ADRs are tradable in the US over-the-counter (OTC) markets.
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Depository Receipts
◼ In order to be listed on an American stock exchange, Level-II

sponsorship is necessary
◼ Level-III sponsorship is required if the issuing company is
raising money in the US market.
◼ In simple words here the issuer floats a public offering of ADRs
on a U.S. exchange and thus they are able to raise capital and
gain substantial publicity in the U.S. financial markets
◼ ADRs can also be privately placed with Qualified Institutional
Buyers in the USA under the “Rule 144A
◼ Consequently, these cannot be bought on the public exchanges
or over the counter.
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Depository Receipts
◼ An unsponsored ADR is created by a U.S. investment bank or

brokerage firm that buys the shares in the country where the
shares are sold, deposits them in a local bank—the custodian
bank, which may be the branch of a U.S. bank, called the
depositary bank.
◼ The depositary bank will then issue DRs that represent an
interest in the stocks and handles most of the transactions with
the American investors, serving both as transfer agent and
registrar for the ADR.
◼ Unsponsored ADRs are becoming extinct as they cannot be
listed on the major American stock exchanges because they
are not registered with the SEC
◼ Generally the company will sponsor the creation of its own
ADR, in which case it is termed as a sponsored ADR
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Depository Receipts
Guidelines for ADR/GDR issues by the Indian Companies
◼ Scheme for issue of Foreign Currency Convertible
Bonds and Ordinary Shares (Through Depository
Receipts Mechanism) was notified by the Ministry of
Finance, Government of India in November, 1993.
◼ ADR/GDR are considered as part of Foreign Direct
Investment (FDI).
◼ Accordingly, such issues would need to conform to the
existing FDI Policy
◼ Indian companies do not have any restriction on the
number or monetary limit of GDR / ADR / FCCB that can
be floated in a financial year.
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Depository Receipts
◼ Under the 1993 Scheme, permission from Ministry of Finance was

needed before the issuance of ADR/GDR
◼ In 2000, it was relaxed and Indian companies raising money through
ADRs/GDRs through registered exchanges were allowed to access
the ADR/GDR markets through an automatic route without the prior
approval of the Ministry of Finance (F.No.15/7/99-NRI, dated
20/1/2000)
◼ Private placement of ADRs/GDRs would also be eligible for
automatic approval if the issue is lead managed by an investment
banker
◼ Automatic route for ADR/GDR issue would also cover issue of
Employee Stock Options by Indian Software /IT companies
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Depository Receipts
◼ Issue of ADRs/GDRs arising out of business

reorganistion/merger/demerger would also be governed by
Automatic route
◼ In all cases of automatic approval, mandatory approval
requirement under FDI policy, approvals under the Companies
Act, approvals for overseas investments/business acquisition
etc. would need to be obtained by the company
◼ The issue of ADRs/GDRs would be only against expansion of
the existing capital base through issuance of fresh equity
shares as underlying shares for ADRs/GDRs (this explains the
reason why all the Indian ADRs listed in USA are Sponsored
Level III category)
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Depository Receipts
◼ While no detailed end uses are specified, the existing bar on
investments in stock markets and real estate would continue to be
operative
◼ After completing the transactions, the companies would be required to
furnish full particulars to the Ministry of Finance, and the RBI within
30 days of completion of such transactions
◼ A company can issue ADRs/GDRs if it is eligible to issue shares to
persons resident outside India under the FDI Policy.
◼ However, an Indian listed company, which is not eligible to raise
funds from the Indian Capital Market including a company which has
been restrained from accessing the securities market by the SEBI will
not be eligible to issue ADRs/GDRs
◼ Unlisted companies shall be allowed to raise capital abroad without
the requirement of prior or subsequent listing in India initially for a
period of two years from October 2013, however such listing shall be
done only in exchanges which are IOSCO compliant
(IOSCO - International Oragnisation of Securities Commissions)
Indian Depository Receipt (IDR)
◼ An Indian Depository Receipt (IDR) is an instrument denominated in
Indian Rupees in the form of a depository receipt issued by a domestic
depository created against the underlying equity of the foreign issuing
company
◼ The IDRs are listed on Indian stock exchanges.
◼ This helps the foreign companies to raise funds from the Indian
markets
◼ Eligible companies resident outside India are allowed to issue IDRs
through a Domestic Depository
◼ The Central Government and SEBI guidelines permit only those
companies listed in their home country with a good track record of
regulatory compliance
◼ IDRs need to comply with SEBI’s ICDR Regulations

(Chapter X) as well as RBI’s approval under FEMA
Notification 20
◼ No resident Indian individual can hold more than $250000
worth of foreign securities purchased per year as per
Indian foreign exchange regulations (Liberalised
Remittance Scheme)
◼ The Issue size shall not be less than Rs. 50 crores
◼ At least 50% to be allotted to QIBs
◼ The balance 50% to be allotted to non-institutional investors

◼ Within the non-institutional category 30% to be allotted to retail
individual investors
◼ The minimum application size shall be Rs.20,000.
◼ IDRs shall not be redeemable into underlying equity shares before the
expiry of one year period from the date of IDRs listing
◼ In May 2010 Standard Chartered Plc became the first entity to come
out with an IDR issue
◼ Issue size of Standard Chartered Plc was around $ 500 million
through the issue of 220 million IDRs
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Thank You Very Much
Dr. V.K. Unni

Professor
Unni IIM Calcutta

The Insolvency and Bankruptcy Code: Dr. V.K. Unni Professor IIM Calcutta E-Mail: Unniv@iimcal - Ac.in

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The Insolvency and Bankruptcy Code

Dr. V.K. Unni

Bhushan Steel Limited 63.5 252.88

Monnet Ispat & Energy Limited 26.26 123.35

Amtek Auto Limited 34.38 106.2

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Distributes the majority of

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It will lead to a different shareholding pattern in

One of the shareholders of Parent Company will

Two or more separate companies emerge while the

Shareholders of the parent company get shares of the new

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 Reliance Infratel will offer 10 per cent equity under the

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 First Tata Sons hived off TCS into a subsidiary under

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• Merger in general sense means the union of two or more commercial

• Merger/ Amalgamation is also covered under the Income

Valuation: Due diligence done

Merger Negotiation: negotiations between the merging entities

• Nicholas • PLSL has issued and • approved by

DEMERGER CONSIDERATION COURT APPROVAL

• Wipro Consumer • its shareholders had • approved by the

Shares are allotted to the first company’s shareholders and

Take Over/ Acquisitions

Scheme of Merger : Court/ NCLT’s Role

Approval of the draft scheme by the

Application to the High Court /

Convening the meetings as directed

Filing a petition before the High

• The petition for sanction of scheme shall be made by both the

• On 7/11/2016, Govt. of India issued a notification for enforcement

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LG may take over ACC may buy Airtel taking over

Jet taking over Sahara

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To be made when the acquirer

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• Indirect acquisition not based

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• Regulation 3 of the Takeover Code deals with

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