Other Obligations
CHAPTER IV - Other Obligations
Regulation 24. Directors of the target company.
24(1).
During the offer period of an open offer:
The appointments to the board of directors of the target company are restricted.
No person representing the acquirer is allowed to be appointed as a director.
No person representing persons acting in concert with the acquirer is allowed to be appointed either.
The restriction covers all types of director appointments.
It includes appointment as an additional director.
It also includes appointment to fill a casual vacancy.
This means the acquirer cannot gain board control while the offer is still ongoing.
Exception to Board Appointment Restriction
This is an exception to the restriction on board appointments during the offer period.
It allows appointment of acquirer’s representatives on the board, but only after certain conditions are met.
First, a minimum waiting period of 15 working days from the date of the detailed public statement must pass.
Before this period, no such appointment is allowed at all.
After the 15-day period, appointment becomes permissible only if a key condition is satisfied.
The acquirer must deposit the entire consideration payable under the open offer.
This deposit must be made in cash.
It must be placed in the escrow account as required under Regulation 17 of the SEBI (SAST) Regulations, 2011.
Only after fulfilling this funding obligation can the acquirer appoint its representatives to the board.
Further Restriction Where Offer is Conditional
Where the acquirer has made the open offer subject to certain conditions under Regulation 23(1)(c) then:
There are certain conditions that apply related to approvals, thresholds, or other specified events.
In such cases, a stricter restriction is imposed on board appointments.
No director representing the acquirer can be appointed during the offer period.
This restriction continues as long as the conditions remain pending.
The acquirer cannot gain board representation while the outcome of the offer is still uncertain.
Appointment becomes permissible only after the conditions are either:
Waived by the acquirer, or
Successfully fulfilled (attained).
Even after waiver or fulfilment, one more requirement must be satisfied.
The acquirer must deposit the required cash consideration in the escrow account.
Only after both steps are completed can the acquirer appoint its representatives to the board.
24(2).
Absolute Restriction in Case of Minimum Acceptance Condition
Where the open offer is conditional upon achieving a minimum level of acceptances then:
There is a complete bar on board appointments during the offer period.
The acquirer is not allowed to appoint any director to the board of the target company.
This restriction also applies to persons acting in concert with the acquirer.
The prohibition applies throughout the entire offer period.
It operates notwithstanding anything else in the regulations, meaning it overrides other provisions.
The restriction applies regardless of the amount deposited in the escrow account.
Even if the acquirer deposits the entire consideration in cash, appointment is still not allowed.
This creates a stricter rule compared to other situations where appointment is allowed after escrow funding.
The rationale is that the success of the offer is still uncertain due to the minimum acceptance condition.
Therefore, the acquirer cannot be given any level of control until the condition is satisfied.
24(3).
Restriction on Board Changes During Competing Offers
During the pendency of competing open offers:
There is a complete freeze on changes to the board of directors of the target company.
No new director can be inducted onto the board during this period.
This prohibition applies irrespective of who is proposing the appointment.
The restriction operates notwithstanding anything else in the regulations, meaning it overrides other provisions.
It applies even if the acquirer or persons acting in concert have deposited cash in the escrow account.
The size or sufficiency of the escrow deposit is irrelevant for this restriction.
Therefore, even full funding of the offer does not permit board changes.
The purpose is to maintain complete neutrality of the board while multiple offers are competing.
It prevents any acquirer from gaining an advantage through board influence.
Exception for Vacancy Due to Death or Incapacitation
If a vacancy arises due to death or incapacitation of an existing director then:
In such cases, the vacancy may be filled by appointing another person.
This ensures that the board is able to continue functioning effectively.
However, the appointment is not automatic or unrestricted.
It must be approved by the shareholders of the target company.
The approval must be obtained specifically through a postal ballot.
This ensures transparency and wider participation of shareholders in the decision.
The objective is to balances two concerns:
It allows necessary board continuity, and
It prevents misuse of the situation to influence control during competing offers.
24(4).
Where the acquirer or persons acting in concert already have a representative on the board of the target company then:
This fact becomes relevant during matters relating to the open offer.
Such a director is not allowed to participate in board discussions concerning the open offer.
The restriction covers all deliberations of the board relating to the offer.
The director is also not allowed to vote on any matter connected with the open offer.
This creates a clear separation between the acquirer and the decision-making of the target company’s board.
The purpose is to avoid conflict of interest.
It ensures that board decisions regarding the open offer remain independent and unbiased.
It protects shareholders by preventing the acquirer from influencing board decisions from within.
Regulation 25. Obligations of the acquirer.
25(1).
Before making the public announcement of an open offer the acquirer has the following obligations:
The acquirer must ensure that firm financial arrangements are already in place.
These arrangements must be sufficient to meet the full payment obligations under the open offer.
It means the acquirer should have secured funds, not just planned or intended to arrange them.
The acquirer must also ensure that it is capable of actually implementing the open offer.
This includes both financial readiness and practical ability to complete the transaction.
The only exception relates to statutory approvals, if any are required.
The open offer can remain subject to such approvals, but not to funding uncertainty.
25(2).
Under circumstances , the acquirer has not disclosed any intention to alienate material assets then:
The non-disclosure must be in both the detailed public statement and the letter of offer.
It covers alienation of material assets of the target company or its subsidiaries.
Alienation includes actions such as sale, lease, encumbrance, or any similar disposal.
The restriction applies only to transactions outside the ordinary course of business.
If the acquirer acquires control over the target company, this restriction becomes operative.
In such a case, the acquirer is prohibited from causing such alienation.
The prohibition continues for a period of two years after the offer period.
Exception to Restriction on Alienation of Material Assets
Under circumstances where the acquirer had not originally disclosed any intention to alienate assets then:
If, despite such non-disclosure, the target company or its subsidiaries need to alienate assets, the law permits it subject to conditions.
The necessity for such alienation must be genuine and not arbitrary.
The alienation can be carried out only after obtaining approval of shareholders.
Such approval must be by way of a special resolution.
The special resolution must be passed specifically through a postal ballot.
This ensures wider shareholder participation and transparency.
The notice sent for the postal ballot must clearly state the reasons for the proposed alienation.
It must explain why such alienation is necessary, despite no prior disclosure.
25(3).
The acquirer has the obligation to provide true information with respect to all key offer documents issued by the acquirer.
These include the public announcement, detailed public statement, letter of offer, and post-offer advertisement.
The acquirer must ensure that all contents are true in all material aspects.
The information must also be fair and adequate, meaning it should not be incomplete or one-sided.
The disclosures must not be misleading in any material particular.
This includes avoiding both false statements and omission of important facts.
All statements must be based on reliable sources.
The acquirer cannot rely on unverified or speculative information.
Wherever necessary, the source of information must be clearly stated.
25(4).
During the offer period of an open offer m both the acquirer and persons acting in concert (PACs) are:
Not allowed to sell any shares of the target company held by them.
The restriction applies to all shares already held, whether acquired before or during the offer.
This creates a complete prohibition on disposal of shareholding during this period.
25(5).
The acquirer and persons acting in concert (PACs) are joint and several liability on all of them.
This means they are collectively responsible for complying with all obligations under the regulations.
At the same time, each person is individually responsible for the entire obligation.
A failure by one person does not excuse the others from liability.
Regulators can proceed against any one or all of them for non-compliance.
The responsibility covers all obligations under the takeover regulations.
This includes payment obligations, disclosures, procedural compliance, and other requirements.
Regulation 26. Obligations of the target company
26(1).
Once a public announcement of an open offer is made, then:
A responsibility is placed on the board of directors of the target company.
The obligation/responsibility continues throughout the offer period.
The board must ensure that the business of the company is conducted in the ordinary course.
This means routine operations should continue as usual.
The conduct of business must be consistent with past practice.
The company should not undertake unusual or extraordinary actions.
The board is not allowed to deviate significantly from normal business activities.
It must avoid decisions that could materially affect the company’s position.
26(2).
(a) Restriction on Alienation of Material Assets During Offer Period
During the offer period, the board of directors of the target company or its subsidiaries is not allowed to deal with material assets freely.
If the board wants to sell, lease, create a charge on, or otherwise dispose of any material assets, it cannot do so as a matter of routine.
Even entering into an agreement for such a transaction is restricted.
This restriction applies specifically to actions outside the ordinary course of business, meaning unusual or significant transactions.
However, the board is not completely barred from acting.
It can proceed with such alienation only if it first obtains approval from shareholders.
Such approval must be given by way of a special resolution, and it must be passed through a postal ballot.
During the offer period, the board of directors of the target company and its subsidiaries cannot freely raise significant borrowings.
If the board intends to take on material borrowings, it cannot do so as part of extraordinary or non-routine actions.
The restriction applies specifically to borrowings outside the ordinary course of business, meaning unusual or substantial financing decisions.
The board is not completely barred from borrowing, but such action requires prior approval of shareholders.
This approval must be obtained through a special resolution passed by postal ballot.
Without such approval, the board is prohibited from proceeding with the borrowing.
(c).Restriction on Issue or Allotment of Voting Securities During Offer Period
During the offer period, the board of directors of the target company or its subsidiaries cannot freely issue new securities.
This restriction applies specifically to authorised but unissued securities that carry voting rights.
If the board intends to issue or allot such securities, it cannot do so as a routine decision.
The concern is that issuing voting securities can change the control or voting structure of the company.
Therefore, such issuance is not allowed unless prior approval of shareholders is obtained.
The approval must be by way of a special resolution passed through a postal ballot.
Without such approval, the board is completely prohibited from issuing or allotting such securities.
(i) Exception for Conversion of Pre-existing Convertible Securities
During the offer period, there is generally a restriction on issuing new voting securities.
However, this clause creates a specific exception to that restriction.
The target company or its subsidiaries are allowed to issue or allot shares upon conversion of convertible securities.
This applies only to convertible securities that were issued before the public announcement of the open offer.
The conversion must take place strictly in accordance with the pre-determined terms of those securities.
This means the company cannot alter or renegotiate the conversion terms during the offer period.
The rationale is that such conversions are pre-existing contractual obligations, not fresh decisions by the board.
Therefore, they are treated as part of the ordinary and expected course of events.
(ii) Exception for Public Issue Already Initiated
During the offer period, there is a general restriction on issuing new shares.
This clause provides an exception where a public issue process has already begun.
The target company or its subsidiaries are allowed to issue or allot shares pursuant to a public issue.
This is permitted only if the red herring prospectus was filed with the Registrar of Companies before the public announcement of the open offer.
The filing of the red herring prospectus shows that the public issue was already in motion prior to the takeover process.
Therefore, the company is allowed to continue and complete that process.
The company cannot initiate a fresh public issue during the offer period under this exception.
It can only proceed with an issue that was genuinely underway beforehand.
The rationale is to avoid disrupting legitimate capital-raising activities that were already planned.
At the same time, it prevents misuse by stopping companies from launching new issues to alter control or dilute shareholding during the offer period.
(iii) Exception for Rights Issue Already Announced
During the offer period, issuance of new shares is generally restricted.
This clause creates an exception for a rights issue that was already announced earlier.
The target company or its subsidiaries are allowed to issue or allot shares pursuant to a rights issue.
This is permitted only if the record date for the rights issue was announced before the public announcement of the open offer.
The announcement of the record date indicates that the rights issue was already initiated and committed prior to the takeover process.
Therefore, the company is allowed to proceed with and complete the rights issue.
It cannot start a new rights issue during the offer period under this exception.
The rationale is to ensure that pre-existing shareholder rights are honoured.
At the same time, it prevents misuse by stopping companies from launching new rights issues to alter shareholding or control during the offer period.
(d).
(d) Restriction on Buy-back and Changes to Capital Structure
During the offer period, the board of directors of the target company and its subsidiaries cannot freely alter the company’s capital structure.
If the board intends to implement a buy-back of shares, it cannot proceed as a routine decision.
The restriction also extends to any other change in the capital structure, not just buy-backs.
This includes actions that may affect share capital, voting rights, or ownership patterns.
Such actions are not permitted unless prior approval of shareholders is obtained.
The approval must be through a special resolution passed by postal ballot.
Without this approval, the board is completely barred from proceeding with such changes.
The rationale is to prevent the board from altering ownership or financial structure during the offer period.
(e).
(e) Restriction on Material Contracts During Offer Period
During the offer period, the board of directors of the target company and its subsidiaries cannot freely deal with important contracts.
If the board intends to enter into, amend, or terminate any material contract, it cannot do so as a routine decision.
This restriction applies specifically to actions outside the ordinary course of business, meaning unusual or significant contractual changes.
The rule covers all types of material contracts.
It applies whether the contract is with a related party (as per applicable accounting principles) or with any other person.
The board is not completely barred from taking such actions.
It can proceed only after obtaining prior approval of shareholders.
Such approval must be given by way of a special resolution passed through a postal ballot.
Without this approval, the board is prohibited from entering into, modifying, or terminating such contracts.
(f).
(f) Restriction on Accelerating Vesting of Rights During Offer Period
During the offer period, the board of directors of the target company and its subsidiaries cannot alter existing rights in an unusual manner.
If the company has obligations that give any person a right to acquire shares, those rights must follow their original vesting schedule.
The board is not allowed to accelerate the vesting of such rights.
This means it cannot make those rights exercisable earlier than originally agreed.
This restriction applies to all such rights, including employee stock options or similar arrangements.
The board can take such action only if it obtains prior approval of shareholders.
The approval must be through a special resolution passed by postal ballot.
Without this approval, any acceleration of vesting is strictly prohibited.
The rationale is to prevent the board from artificially changing the shareholding pattern during the offer period.
26(3).
Voting Consistency in Subsidiary General Meetings
This rule applies where a subsidiary of the target company holds a general meeting.
It specifically relates to matters covered under sub-regulation (2) (like assets, borrowings, capital changes, etc.).
In such cases, the target company and its subsidiaries (if any) may have voting rights in that subsidiary.
They are required to exercise their voting rights in a specific manner.
Their vote must be consistent with the special resolution passed by shareholders of the target company.
This means the decision taken by shareholders at the target company level binds how votes are cast at the subsidiary level.
The entities cannot vote independently or contrary to the shareholders’ decision.
It prevents bypassing shareholder approval by taking actions indirectly through subsidiaries.
26(4).
Restriction on Fixing Record Date During Tendering Period
This rule applies to the target company during the offer process.
It specifically deals with fixing a record date for any corporate action (like dividend, bonus, rights issue, etc.).
The company is prohibited from fixing any record date during a specified restricted window.
The restriction starts from the third working day prior to the commencement of the tendering period.
It continues until the expiry of the tendering period.
This means no record date can be fixed just before or during the tendering period.
The purpose is to ensure that shareholders are not confused or influenced by corporate actions while deciding to tender their shares.
It prevents manipulation of share value or entitlements during the critical offer phase.
26(5).
Obligation to Provide Shareholder Information to Acquirer
This rule applies to the target company after the identified date.
The target company must provide certain information within 2 working days from this date.
It must furnish to the acquirer a list of shareholders based on its register of members.
This list must include key details such as:
Names of shareholders
Addresses
Shareholding
Folio numbers
The information must be provided in electronic form wherever available.
In addition, the company must also provide a separate list of persons whose transfer applications are pending.
These are cases where shares are in the process of being transferred but are not yet registered.
Reimbursement of Costs for Providing Shareholder Information
This provision applies when the target company is required to furnish shareholder information to the acquirer.
In the process of compiling and providing such data, the target company may incur costs involving external agencies.
These may include expenses for registrars, transfer agents, or other service providers.
The law ensures that the financial burden of such compliance does not fall on the target company.
Therefore, the acquirer is required to reimburse these costs.
The reimbursement is limited to reasonable costs only, not excessive or arbitrary expenses.
26(6).
Constitution of Independent Directors’ Committee and Recommendation
This rule applies once the target company receives the detailed public statement.
The board of directors of the target company must constitute a committee of independent directors.
This committee must consist only of independent directors, ensuring neutrality.
The role of this committee is to evaluate the open offer objectively.
It must provide reasoned recommendations on the open offer.
These recommendations must not be arbitrary.
They should be based on analysis, rationale, and relevant factors affecting shareholders.
The target company is then required to publish these recommendations.
Right of Independent Directors’ Committee to Seek External Advice
This provision applies to the committee of independent directors formed to evaluate the open offer.
The committee is given the right to seek external professional advice.
This may include advice from legal experts, financial advisors, merchant bankers, or valuers.
Such advice can be taken whenever the committee feels it is necessary for proper evaluation of the open offer.
The cost of obtaining this advice is borne by the target company.
The committee is not required to bear the expense personally.
Disclosure of Voting Pattern by Independent Directors’ Committee
This provision applies when the committee of independent directors gives its reasoned recommendations on the open offer.
While giving such recommendations, the committee must also disclose how the members voted.
This means the voting pattern of the meeting in which the open offer was discussed must be clearly stated.
It should indicate who voted in favour, who voted against, and any abstentions.
26(7).
Timing and Manner of Independent Directors’ Recommendations
The committee of independent directors must prepare written, reasoned recommendations on the open offer.
These recommendations must be provided to the shareholders of the target company.
The recommendations must be published in the prescribed form.
They must be published in the same newspapers where the public announcement appeared.
The publication must be made at least 2 working days before the commencement of the tendering period.
Simultaneously, copies of the recommendations must be sent to specified parties:
(i) To the Board (SEBI):
The recommendations must be submitted to the regulatory authority for oversight.(ii) To all stock exchanges where shares are listed:
The stock exchanges are required to immediately disseminate the information to the public.(iii) To the manager to the open offer:
The recommendations must also be sent to the manager handling the open offer.
In case of competing offers, they must also be sent to the manager of each competing offer.
26(8).
Facilitation of Share Verification by Target Company’s Board
This rule applies during the process of tendering shares in an open offer.
The board of directors of the target company has a positive obligation to assist the acquirer.
It must facilitate the verification of shares that are tendered by shareholders.
This includes ensuring that the shares tendered are valid, genuine, and properly recorded.
The board may assist through its registrars, transfer agents, and internal records.
The obligation is not passive; the board must actively cooperate and provide necessary support
26(9).
Equal Treatment of Competing Acquirers
This rule applies where there are competing open offers for the same target company.
The board of directors of the target company has a duty to act fairly and neutrally between all acquirers.
If the board provides any information or cooperation to one acquirer, it cannot keep it exclusive.
The same information and level of cooperation must be extended to all other competing acquirers.
This ensures that no acquirer gets an unfair advantage over others.
The obligation covers all forms of assistance, including data access, clarifications, and operational support.
The purpose is to maintain a level playing field among competing bidders.
26(10).
Regulation 27. Obligations of the manager to the open offer.
27(1).
Duties of Manager to the Open Offer Before Public Announcement
This rule applies before the public announcement of the open offer is made.
It places responsibility on the manager to the open offer to carry out due diligence.
The manager must ensure the following:
(a) The acquirer is able to implement the open offer:
The manager must verify that the acquirer has the capacity and readiness to actually carry out the open offer.
This includes ensuring that the offer is practical, executable, and not merely speculative.(b) Firm arrangements for funds have been made:
The manager must ensure that the acquirer has made concrete and reliable financial arrangements.
These arrangements must be through verifiable means, such as confirmed funding sources.
The funds must be sufficient to meet all payment obligations under the open offer.
27(2).
Duty of Manager to Ensure Accurate and Compliant Disclosures
This obligation applies to the manager to the open offer in relation to all key offer documents.
It covers the public announcement, detailed public statement, letter of offer, and post-offer advertisement.
The manager must ensure that the contents of these documents are true in all material aspects.
The information must also be fair and adequate, meaning it should not be incomplete or biased.
The disclosures must not be misleading in any material particular.
This includes avoiding both incorrect statements and omission of important facts.
All information must be based on reliable sources.
Wherever necessary, the source of such information must be clearly stated.
Additionally, the manager must ensure that all disclosures are in full compliance with the requirements of the regulations.
27(3).
(3) Submission of Due Diligence Certificate by Manager
This rule applies to the manager to the open offer at the stage of filing documents.
The manager is required to furnish a due diligence certificate to the Board (SEBI).
This certificate must be submitted along with the draft letter of offer.
The filing is done under Regulation 16.
The due diligence certificate confirms that the manager has properly verified all aspects of the offer.
It indicates that necessary checks regarding disclosures, funding, and compliance have been carried out.
It serves as a formal assurance to SEBI about the correctness and reliability of the offer documents.
27(4).
(4) Ensuring Registration of Market Intermediaries
This rule applies to the manager to the open offer when engaging intermediaries.
The manager must ensure that all market intermediaries involved in the open offer are properly appointed.
Such intermediaries must be registered with the Board (SEBI).
These intermediaries may include entities like brokers, registrars, merchant bankers, or other service providers.
The manager cannot engage any intermediary that is unregistered or not authorized by SEBI.
27(5).
(5) Duty of Diligence, Care and Professional Judgment
This rule imposes a general standard of conduct on the manager to the open offer.
The manager must act with diligence, meaning careful and thorough attention to all aspects of the offer.
The manager must exercise due care, ensuring that actions are taken responsibly and without negligence.
The manager must apply professional judgment, using expertise and experience in decision-making.
This duty applies to all functions and responsibilities of the manager under the regulations.
27(6).
(6) Prohibition on Trading by Manager During Offer Period
This rule applies to the manager to the open offer during the offer period.
The manager is prohibited from dealing in shares of the target company on its own account.
This means the manager cannot buy or sell shares for itself during this period.
The restriction ensures that the manager does not use insider knowledge or confidential information.
It prevents any conflict of interest between the manager’s role and personal gain.
The manager must remain neutral and independent while handling the open offer.
27(7).
(7) Post-Offer Reporting by Manager
This rule applies after the tendering period has expired.
The manager to the open offer is required to file a report with the Board (SEBI).
This report must be filed within 15 working days from the expiry of the tendering period.
The report must be submitted in the prescribed form as specified under the regulations.
It must confirm the status of completion of various open offer requirements.
