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Competition Act and SEBI

Competition Act and SEBI
The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 is the principal law governing acquisitions and takeovers in India. Under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, for ‘listed’ companies, the acquisition by control, shares or voting right or all of them, the acquisition may be without “control” by buying shares and voting rights etc. The acquisition may be through “market” or off market trade by way of negotiations, deals and understanding. The SEBI (Substantial Acquisition of Shares and Takeovers ) Regulations 1997 was amendment in 2005 do not require any examination of a proposal for acquisition or takeover covered by those regulation for the effect of the proposal on competition in the business of the enterprises involved in the transaction. The objective of the legislation (SEBI) is only to ensure that the acquisition of shares or voting rights in or control of a target company is done on an open manner, equitable to the shareholders and the public investors.

Regulation 10, 11 and 12, the key provisions, impose an obligation on those who may acquire shares, voting rights, control of a target company, in the manner and to the extent set out therein, to make a public announcement to acquire shares in accordance with the regulations. Whereas the Competition Act aims to protect the Consumers in general, which includes along with the investors and shareholders as intended to be protected by SEBI and Companies Act respectively. The provision of the competition Act regarding the time frame of approval will result in extra financial burden on the acquirer. Under the takeover code the acquirer is bound to pay the shareholders their due within 15 days of closure of offer. Regulation 22 (12) of the takeover code says that; “ the acquirer shall, within a period of fifteen days from the date of the closure of offer, completes all procedures relating to the offer including payment of consideration to the shareholders who have accepted the offer and for the purpose open a special account as provided under regulation 29”.

The code under the head of general obligations of the acquirer makes it mandatory for the acquirer to fulfill all the formalities including the payment of consideration to the shareholders within 15 days from the closure of offer. However, the provision also provides for the extension of time to the acquirer under certain conditions. The proviso clearly lays down the condition on which an extension could be granted to the acquirer. SEBI on its satisfaction that the applicants for statutory approvals were diligently pursued by the acquirer and that no neglect or default on the part of the acquirer led to non-receipt of required statutory approval may grant him an extension time subject to the fact that the acquirer is agreeing to pay interest to the shareholders. Furthermore, the Competition Act requires that all the acquisitions shall be notified to CCI as soon as any agreement or any other document for the said acquisition is executed. The Act further provides a turnaround time of 210 days to approve or reject application of an acquisition. Thus, legally, the Commission is entitled to use the complete 210 days to issue an order. This would invariably put the acquirer under the obligation to pay interest to the shareholders if both legislation are triggered simultaneously.

The CCI has provided in its draft regulation that it would form an opinion whether any combination is anti-competitive or not within 30 days (if the notice is filed in longer Form 1) or 60 days (if the notice is filed in shorter Form 2). Although it would be a welcome change but it still has its own lacunas. In case of the 210 days turnover time it is provided that the combination will be deemed to be approved if the CCI fails to pass on order within the stipulated 210 days but there is no deemed approval where the CCI fails to form a prima facie opinion within 30 or 60 days. Therefore, in practice, the CCI will take longer as there is no sanction to tie it the time limit. In addition to increasing the above mentioned financial burden, the turnaround time period of 210 days and also create a lot of uncertainties.

The uncertainties are created because the M&A s are left pending for a period of 210 days , this results in a very destabilizing effect on the business of the parties involved. Some of these uncertainties can result in serious implications such as; (a) Change in the price of the Combination due to fluctuations in the market, (b) Delay in the plans of expansion (c) Inability to make strategic and operational decisions; strategic and operational decisions could remain in a “limbo” (d) it could also lower down the market value of both the parties. Further, the draft regulations provides that the CCI can exempt certain acquisition from its review as not causing or likely to cause an adverse effect on the Indian market. Regulation 11(1) of the takeover code says;
“ No acquirer who, together with persons acting in concert with him, has acquired in accordance with the provisions of law, 15 per cent or more but less than 75 percent of the shares or voting rights in a company, shall acquire ,either by himself or through or with persons acting in concert with him, additional shares or voting rights entitling him to exercise more than 5% of the voting rights , in any financial year ended 31st March, unless such acquirer makes a public announcement to acquire shares in accordance with the Regulations.”

The above regulation is exempted by the CCI from its review whereas under the takeover code acquirer is bound to make public disclosure for such acquisition. Thus it can rightly be understood that, in Companies Act and SEBI Act though both are mutually exclusive yet aim to protect the interests of private individuals. Whereas, in the Competition Act, the impact of combinations directly affects the market and the players in the market including the consumers. We may, therefore, safely say that apart from the fact that all these legislations are mutually exclusive, the Companies Act and the SEBI Act are the sub-sets of Competition Act in so far as legal scrutiny of mergers are concerned.

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