NISM Series IX Merchant Banking: Chapter 7 – Mergers, Acquisitions & Takeovers (Short Notes)

Chapter 7 covers one of the most practical and widely applied aspects of merchant banking — advising on mergers, acquisitions, and takeovers. The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (also known as the Takeover Code) forms the heart of this chapter. Expect focused questions on open offer triggers, offer size, and offer price calculations in the exam.

Also Read: Chapter 6 – General Obligations of Merchant Bankers | NISM Series IX Free Mock Test Key Definitions: M&A Terminology

Merger: A combination of two or more companies to form a single entity. Either one or both companies lose their identity and a new company may be formed. Example: Company A + Company B = Company C (new entity).

Acquisition: The purchase of one business or company by another company or business entity. The acquired company may continue to exist as a subsidiary.

Consolidation: When two companies combine to form a completely new enterprise. Both original companies cease to exist independently.

Takeover: The acquisition of substantial shares or voting rights in a company for the purpose of gaining management control. If the target company's management refuses to negotiate, the buyer may make a direct bid to shareholders (hostile takeover).

Laws Governing M&A in India

Mergers and acquisitions in India are regulated under a multi-law framework:

The Companies Act, 2013
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
Foreign Exchange Management Act (FEMA), 1999
The Reserve Bank of India (RBI) and RBI Act, 1934
The Income Tax Act, 1961
The Competition Act, 2002
Master Circular SEBI dated November 23, 2021

Mergers, de-mergers, and acquisitions of business units are governed by the Companies Act, 2013. Acquisitions involving shares or control in listed Indian companies are regulated by the SEBI SAST Regulations, 2011 (the Takeover Code).

SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 Objectives of the Takeover Code

The SEBI SAST Regulations ensure:

Greater transparency and fairness in acquisitions
Equitable treatment to all investors including minority shareholders
Timely and accurate disclosure of information
Prevention of frivolous offers
Enforcement against violations

The major thrust is to ensure that when a large block of shares changes hands, minority shareholders also get the opportunity to sell their shares at a fair price.

Types of Acquisitions Covered

Change in Control of Management
Consolidation of Holdings
Substantial Acquisition of Shares or Voting Rights

Key Definitions Under SAST

Acquirer: Any person who, directly or indirectly, acquires or agrees to acquire — by himself or through/with persons acting in concert — shares, voting rights, or control over a target company.

Control: The right to appoint the majority of directors or to control management or policy decisions, exercisable directly or indirectly — through shareholding, management rights, shareholders' agreements, voting agreements, or any other manner.

Frequently Traded Shares: Shares of a target company in which the traded turnover on any stock exchange during the twelve calendar months preceding the public announcement month is at least 10% of the total number of shares of that class.

Offer Period: The period from the date of entering into an agreement (formal or informal) to acquire shares/control requiring a public announcement, or the date of the public announcement, until the date of payment of consideration to tendering shareholders or withdrawal of the open offer.

Trigger for Open Offer Substantial Acquisition Trigger

As per SEBI SAST Regulation, an acquirer shall not acquire shares or voting rights in a target company that would entitle them (the acquirer and persons acting in concert) to exercise 25% or more of the voting rights in the target company, unless they have made a public announcement of an open offer.

Creeping Acquisition Trigger

An acquirer already holding 25% or more (but less than the maximum permissible non-public shareholding) cannot acquire more than 5% of voting rights in any financial year without triggering an open offer obligation.

Change of Control Trigger

No acquirer shall acquire directly or indirectly control over a target company without making a public announcement of an open offer.

Voluntary Offer

An acquirer holding between 25% to the maximum permissible non-public shareholding may voluntarily make a public announcement of an open offer to acquire more shares. The post-offer holding must not exceed the maximum permissible non-public shareholding.

Open Offer – Size and Price Offer Size

The open offer must be made for at least 26% of the total shares of the target company (as on the 10th working day from the closure of the tendering period). It should allow the holder to exercise an additional 10% of voting rights in the target company.

Offer Price

The offer price must be the highest among the following benchmarks:

Highest negotiated price in the acquisition agreement
Volume-weighted average price (VWAP) paid/payable during the 52 weeks preceding the public announcement
Highest price paid by the acquirer/PAC during 26 weeks preceding the public announcement
VWAP of the target company's shares on the stock exchange during the 60 trading days preceding the public announcement
In case of infrequently traded shares: price determined using valuation methods

Hidden Premiums Must Be Included

Any control premiums, non-compete fees, or other hidden payments must be included in the offer price calculation regardless of how they are labeled in agreements.

Price Revision Rules

If shares are acquired at a higher price during the offer period, the offer price must be revised upward accordingly
If shares are acquired at a higher price within 26 weeks after the offer, the difference must be paid to shareholders who tendered shares

Process of Open Offer Step 1: Appoint Merchant Banker

Before making any public announcement, the acquirer must appoint a SEBI-registered merchant banker who is not an associate of the acquirer.

Step 2: Public Announcement

A public announcement (PA) is published in newspapers disclosing the acquirer's intention to acquire shares of the target company through an open offer. The PA must be made on the date of agreeing to acquire shares/voting rights/control. For voluntary offers, the PA is made on the same day the decision is taken.

Step 3: Filing Letter of Offer with SEBI

The letter of offer contains:

Disclosures about the acquirer and persons acting in concert (PAC)
Target company details and financials
Justification of the offer price
Number of shares to be acquired
Purpose of acquisition
Future plans for the target company
Change in control details
Procedure for shareholders to tender shares

Step 4: Dispatch to Shareholders

Once the draft letter of offer is filed with SEBI and sent to the target company and relevant exchanges, the final letter must be dispatched to shareholders within seven working days of receiving SEBI's comments or expiry of the comment period.

Step 5: Tendering Period

The tendering period opens within 12 working days of SEBI comments
Lasts for 10 working days
Shares are tendered and settled through the stock exchange system
A pre-offer advertisement must be published one day before tendering starts

Step 6: Payment

The acquirer must complete payment within 10 working days of closure of the tendering period. If delayed due to pending approvals, SEBI may grant an extension with interest payable.

Step 7: Post-Offer Advertisement

A post-offer advertisement must be published within five working days of the offer's conclusion.

Exemptions from Open Offer Obligation

SEBI SAST Regulations provide for exemptions from the obligation to make an open offer under Regulations 10 and 11. These include:

Acquisitions in the ordinary course of business (e.g., by market makers)
Transmission by inheritance or succession
Acquisitions under resolution plans (under the Insolvency and Bankruptcy Code)
Inter-se transfers among qualifying persons (close family members, holding-subsidiary companies)
Government-to-government transfers
Acquisitions under SEBI-approved rescue operations

Conditional Offer

An acquirer can make an open offer conditional on receiving a minimum level of acceptance. If the desired level is not received, the acquirer shall not acquire any shares under the open offer, and the underlying agreement that triggered the offer shall stand rescinded.

Key Numbers – Takeover Code

Provision	Key Threshold/Timeline
Trigger for mandatory open offer	25% or more voting rights
Minimum open offer size	26% of total shares
Letter of offer dispatch timeline	7 working days after SEBI comments
Tendering period opens	Within 12 working days of SEBI comments
Tendering period duration	10 working days
Payment deadline after closure	10 working days
Post-offer advertisement	Within 5 working days
Price revision if higher price paid (post-offer)	Within 26 weeks
Acquisitions during offer period to be reported	Within 24 hours
No trades allowed (before tendering)	Last 3 working days

Practice M&A Questions! Take our NISM Series IX Mock Test to test your knowledge of Takeover Code provisions. Also read Chapter 8 – Disinvestment and Buy-Back of Equity Shares.

Next Chapter: Chapter 8 – Disinvestment, Buyback of Equity Shares and Other Activities

NISM Series IX Merchant Banking: Chapter 8 – Disinvestment, Buyback of Equity Shares & Other Activities (Short Notes)

Chapter 8 covers several important merchant banking activities beyond IPOs and M&A — specifically disinvestment transactions, buyback of equity shares, delisting, debt securities issuance, employee benefit schemes, and the role of merchant bankers in Alternative Investment Funds (AIFs). This chapter is important for understanding the full scope of merchant banking services.

Also Read: Chapter 7 – Mergers, Acquisitions and Takeovers | NISM Series IX Free Mock Test Disinvestment – Role of Merchant Banker What is Disinvestment?

Disinvestment means the direct or indirect sale by the Central Government, State Government, or a government company of shares, voting rights, or control over a target company that is a Public Sector Undertaking (PSU).

Types of Disinvestment Transactions

Offer for Sale (OFS) through Prospectus: A combination of fresh issue and offer for sale; or OFS through the stock exchange mechanism
Strategic Sale: Direct sale to a specific successful bidder identified through a competitive bid process

Role of Merchant Banker in Disinvestment

The merchant banker's role in government disinvestment is similar to that in any IPO/FPO/OFS or strategic sale in the private sector. Key responsibilities include:

Advising on the bidding process and strategy
Valuation of the PSU and bid pricing
Conducting the bid process
Managing the proposed market transaction (OFS as per SEBI Regulations or strategic sale)

The concerned government department for disinvestment is the Department of Investment and Public Asset Management (DIPAM) within the Ministry of Finance.

When providing advisory services to government entities, the merchant banker must keep in mind the DPE (Department of Public Enterprises) guidelines.

Performance Review of PSUs

To review the performance of a PSU, a composite score based on performance over the last three years is calculated using 6 performance indicators chosen for their applicability across both manufacturing and services sector PSUs.

Buy-Back of Equity Shares – Role of Merchant Banker What is Buy-Back?

Buy-back is when a listed company repurchases its own shares from existing shareholders. It is governed by the SEBI (Buy-Back of Securities) Regulations, 2018.

Methods of Buy-Back

Tender Offer: Buy-back from existing shareholders on a proportionate basis
From the Open Market: Through book-building process or from the stock exchange

Maximum Limit of Buy-Back

The maximum buy-back limit is 25% or less of the aggregate of paid-up capital and free reserves of the company, based on standalone or consolidated financial statements — whichever sets out a lower amount.

Important restriction: A company cannot buy back its shares in a manner that delists its shares from the stock exchange. Buy-back is only permissible if the consequent reduction of share capital is affected.

Obligations of Merchant Banker in Buy-Back

Under the SEBI (Buy-Back of Securities) Regulations, 2018, the merchant banker must:

Ensure the company is capable of implementing the buyback offer
Verify that escrow arrangements and funding for the offer are in place
Ensure the public announcement and letter of offer comply with SEBI regulations
Ensure timely filing of both soft and physical copies of documents
Submit a due diligence certificate with the draft letter of offer
Confirm the accuracy and adequacy of all disclosures
Assist with price determination in the book building method
Ensure compliance with Companies Act and other applicable laws
Direct the release of escrow funds once offer obligations are met
Submit a final report to SEBI within 15 working days of the buyback period's end

Role of Merchant Banker in Delisting of Shares

SEBI (Delisting of Equity Shares) Regulations, 2021 apply to delisting of equity shares from recognised stock exchanges. These regulations do not apply to securities listed without making a public issue on the Innovators Growth Platform.

As per these regulations, before making the public announcement of delisting, the acquirer or promoter must appoint a SEBI-registered merchant banker. It is the joint responsibility of the promoter and merchant banker to ensure compliance with all SEBI delisting provisions.

Role of Merchant Banker in Issue and Listing of Debt Securities Governing Regulations

The issue of debt securities is regulated by:

SEBI (Issue and Listing of Debt Securities) Regulations, 2008
Various circulars issued by SEBI
Companies Act, 2013 and Rules thereunder
Listing (LODR) Regulations
RBI Rules and Regulations
SCRA and SCRR

Applicability

The SEBI (Issue and Listing of Debt Securities) Regulations, 2008 apply to:

Public issue of debt securities
Listing of debt securities issued through public issue or on private placement basis on a recognised stock exchange

Key Provisions for Debt Securities

Only certain issuers can file a shelf prospectus for debt securities
Minimum subscription required: 75% of the base issue size; if not met, all application money must be refunded
Secured debt securities must have security created within a set timeframe
A debenture redemption reserve is required (subject to exemptions)
Public issues of debt must have a base size of at least ₹100 crore
Issuers may retain oversubscription up to 100% of the base issue size

Role of Lead Merchant Banker in Debt Issues

Ensure SEBI's comments on the draft offer document are addressed before filing with RoC
Submit due diligence certificate with filing
Provide physical copies of offer documents on request
Pricing may be fixed or determined through book building in consultation with lead merchant banker

Role of Merchant Banker in Share-Based Employee Benefits

Share-based employee benefit schemes under the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 apply to companies listed on recognised stock exchanges. A registered merchant banker must be appointed to assist with implementing these schemes at least until in-principle approval is obtained from stock exchanges.

The merchant banker's role includes:

Advising on the structure and design of the scheme
Managing share issuance to employees
Ensuring regulatory compliance throughout
Assisting in share valuation
Structuring the plan effectively for the company's needs

Role of Merchant Banker in Dissenting Shareholder Exit

When a company proposes to change the objects or terms stated in the original prospectus, shareholders who voted against the change — called "dissenting shareholders" — must be given an opportunity to exit at a fair price.

Promoters or controlling shareholders must appoint a SEBI-registered merchant banker to determine the exit offer price. Within two working days of making payment, the issuer must disclose to stock exchanges:

Details of shares tendered and accepted
Payments made
Updated shareholding pattern
A merchant banker's report confirming payment to dissenting shareholders

Role of Merchant Banker in SME IPOs SME Exchange

An SME exchange is a trading platform of a recognised stock exchange for listing specified securities of small and medium enterprises, excluding the Main Board.

Due Diligence and Disclosures

Offer document must contain all material and accurate disclosures as per Companies Act, 2013 and Schedule VI
Lead managers must verify disclosures and confirm financial statements are not older than six months from issue opening
SEBI does not issue formal observations for SME IPOs but requires a due diligence certificate (Form A & G)

Underwriting Requirements for SME IPOs

The IPO must be 100% underwritten
Lead managers must underwrite at least 15% of the issue
If underwriters or investors fail to meet commitments, lead managers must fulfil them
All arrangements must be disclosed in the offer document

Market Making for SME IPOs

Compulsory market making must be ensured by the lead manager for at least 3 years from listing
Market makers must hold 5% inventory on allotment
Market makers must buy shares in one lot if the value is below the minimum contract size
Market makers cannot buy from promoters or promoter group during this period
Lead managers may be on the issuer's board if agreed upon

Role of Merchant Banker in Alternative Investment Funds (AIFs) What is an AIF?

An Alternative Investment Fund (AIF) is any fund established or incorporated in India that is a privately pooled investment vehicle collecting funds from sophisticated investors (Indian or foreign) and investing in accordance with a defined investment policy.

Merchant Banker's Role in AIF

Under the SEBI (Alternative Investment Funds) Regulations, 2012, a merchant banker must provide a due diligence certificate for the placement memorandum for each AIF scheme. SEBI, via its Circular dated October 21, 2021, provided the framework for the role and responsibilities of merchant bankers in issuing such certificates.

Key Numbers – Chapter 8 Summary

Provision	Key Number/Rule
Maximum buy-back limit	25% of paid-up capital + free reserves
Buy-back final report to SEBI	Within 15 working days of buyback period end
Debt issue minimum subscription	75% of base issue size
Debt public issue minimum base size	₹100 crore
Oversubscription retention (debt)	Up to 100% of base issue size
SME IPO underwriting requirement	100% underwritten; lead manager minimum 15%
SME market making period	At least 3 years from listing
SME market maker inventory	5% on allotment
AIF due diligence circular	SEBI Circular dated October 21, 2021

Frequently Asked Questions – Chapter 8 What is the maximum limit for buy-back of shares?

The maximum buy-back limit is 25% or less of the aggregate of paid-up capital and free reserves, based on whichever (standalone or consolidated financial statements) sets out the lower amount.

Can a company buy back shares to delist from a stock exchange?

No. A company cannot buy back its shares in a manner that results in the delisting of its securities from the stock exchange.

What is the minimum subscription for debt securities public issues?

The minimum subscription for debt securities is 75% of the base issue size. If not met, all application money must be refunded.

What is the market making period for SME IPOs?

The lead manager must ensure compulsory market making for at least 3 years from the date of listing of SME securities.

What is DIPAM?

DIPAM stands for the Department of Investment and Public Asset Management, which is the concerned government department within the Ministry of Finance for managing disinvestment transactions of Public Sector Undertakings (PSUs).

Almost There! You've now covered all 8 chapters of the NISM Series IX syllabus. Take our Complete NISM Merchant Banking Mock Test to consolidate your preparation. Check out our NISM Series IX Exam Tips and Strategy for last-minute guidance.