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Takeover rules for unlisted companies decoded: What will be its impact on M&As

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Takeover rules for unlisted companies decoded: What will be its impact on M&As

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The Ministry of Corporate Affairs has notified rules for the takeover of unlisted companies. This was long due since the reference was provided in section 230 (11) of the Companies Act, 2013.

Takeover rules for unlisted companies decoded: What will be its impact on M&As
The Ministry of Corporate Affairs (MCA) has notified rules for the takeover of unlisted companies (Takeover Rules). This was long due since the reference was provided in section 230 (11) of the Companies Act, 2013 (the Act).
Takeover regulations (the Takeover Code) for listed companies are laid down by the Securities and Exchange Board of India (Sebi) in Sebi (Substantial Acquisition and Takeover Regulations) 2011. As per the code, anybody can make an offer to the shareholders of a listed company to acquire the company’s shares at any point of time. Such an offer could be hostile wherein the person may or may not own any shares of the listed company and makes an offer to the public shareholders for the first time to gain control over the company or offer could be made after acquiring controlling stake from the existing shareholders.
Takeover Rules which are now laid down for unlisted companies provide that majority shareholder/s (the Acquirer) holding at least 75 percent of the shares in the unlisted company may make an application to National Company Law Tribunal (NCLT) to acquire any part of the remaining shares of the company. Such an application must be accompanied by a valuation report obtained from the registered valuer in accordance with criteria laid out in the Takeover Rules. This is to ensure that the price paid to the remaining shareholder is fair and reasonable.
Takeover Rules, apart from equity shares, also cover other securities carrying voting rights. As per the company law provisions, if the dividend is not paid on the preference shares for more than two years, then such preference shareholders shall have the right to vote on all the resolution.  Further, there may be other securities like compulsorily convertible debentures or compulsorily convertible preference shares which derive voting rights contractually. Takeover Rules cover such securities such as preference shares as well as debentures also.  However, these Takeover Rules provide for an exception where the shares were transferred pursuant to contract, arrangement, succession or through statutory or regulatory requirement.
An onerous condition
One onerous condition provided in Takeover Rules is that the Acquirer making an application should deposit at least 50 percent of the total consideration to be payable pursuant to takeover offer at the time of making an application to the NCLT. Generally, NCLT takes a while to pass an order or approve any such arrangement and therefore, the money would get blocked till the time NCLT approves such takeover arrangement.
So, in a nutshell, with Takeover Rules in place, any Acquirer owning at least 75 percent of the unlisted company and wishing to acquire remaining shares, may make an offer to the minority through NLCT for acquiring their shares. The existing section 236 of the Act also provides for acquiring the shares from the minority shareholders subject to the condition that the Acquirer must hold at least 90 percent of the issued equity share capital of the company. However, practically the Acquirers are not going for such minority squeeze-out as complete minority squeeze-out may not be achieved. Further, under section 66 of the Act, complete minority squeeze-out is possible subject to the passing of the special resolution. Therefore, many unlisted companies which were listed earlier prefer the capital reduction route as per section 66 of the Act by making an application to NCLT for cancelling the remaining shares held by the minority shareholder which requires a special resolution from the members and creditors. An important point to note here is that any compromise or arrangement under section 230 requires approval from three-fourth of the members present and voting in meeting and the same should apply to the Takeover Rules also.
Going forward it remains to be seen whether the Acquirer will explore section 236 route or section 230 route for acquiring remaining shares.  It is not very clear under the Takeover Rules as to whether those shareholders who have not voted, or voted against, are mandatorily required to give up their shares. If it is not mandatory, whether the Takeover Rules serve any purpose, since the existing provisions do provide a mechanism to acquire shares from the minority shareholders under section 236 through a private arrangement, without going through the NCLT route, which may be a preferred approach.
Hiren Bhatt is Partner – M&A and Private Equity, Tax at KPMG in India.
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