Justice P.N.Bhagwati Committee Report

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PREFACE
1.Takeover of companies is a well accepted and established strategy for corporate growth. International experience of takeovers and mergers and amalgamations has been varied. Nonetheless, one of its important lessons is that, its appeal as an instrument of corporate growth has usually been the result of an admixture of corporate ethos of a country, shareholding pattern of companies, existence of cross holdings in companies, cultural conditions and the regulatory environment. 2.In India, however, "the market" for takeovers has not yet become significantly active, though following economic reforms, there is now a discernible trend among promoters and established corporate groups towards consolidation of market share, and diversification into new areas, albeit in a limited way through acquisition of companies, but in a more pronounced manner through mergers and amalgamations. The latter course is outside the purview of SEBI and constitutes a subject matter of the Companies Act, 1956, and the courts of law, and there are well laid down procedures for valuation of shares and protection of the rights of investors. This Report and the SEBI Regulations for Substantial Acquisition of Shares and Takeovers do not deal with the subject of mergers and amalgamations. 3.In common parlance, a takeover bid is generally understood to imply the acquisition of shares carrying voting rights in a company in a direct or indirect manner with a view to gaining control over the management of the company. Generally speaking, there cannot be a change in the control of a company simpliciter, unaccompanied by acquisition of shares, though there have been cases before SEBI where management control has changed from one group of persons to another without any overt acquisition of substantial quantities of shares. It would therefore be correct to state that, takeover or gaining control over a company, as opposed to pure investment, is the most common leitmotif for substantial acquisition of shares. Such takeovers could take place through a process of friendly negotiations or in a hostile manner in which, the existing management resists the change in control. It is for this reason that substantial acquisition of shares in a listed company and change in control o f a listed company have both been addressed in this Report. 4.In a market driven economy, where free competition should thrive without relying on the protective hand of bureaucratic intervention, it is important that such critical processes as substantial acquisition of shares and takeovers, which can significantly influence corporate growth and contribute to the wealth of the economy through rational allocation and optimal utilisation of resources, take place within the orderly framework of regulations and that such a framework should be one which comports with principles of fairness, transparency and equity, and above all with the need to protect the rights of the shareholders. 5.The first attempts at regulating takeovers were made in a limited way by incorporating a clause, viz. Clause 40, in the listing agreement which provided for making a public offer to the shareholders of a company by any person who sought to acquire 25% or more of the voting rights of the company. This allowed for the passive participation of shareholders of the company that is being taken over, in the takeover process. But the clause used to be easily circumvented and its basic purpose frustrated by the acquirers, simply by acquiring voting rights a little below the threshold limit of 25% for making a public offer. Besides it was also noted that it was possible to acquire control over a company in the Indian context with even holding 10% directly. There was therefore a case for lowering of the threshold from 25%. In 1990, even before SEBI became a statutory body, Government, in consultation with SEBI, amended Clause 40 by – olowering the threshold acquisition level for making a public offer by the...
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