Tuesday, October 28, 2008

Creeping acquisition allowed between 55-75%/increase through buyback exempt upto 5%

Vide a press release dated October 27, 2008, SEBI has announced its decision to allow upto 5% creeping acquisitions between 55%-75% holding. However, the creeping acquisition between this slab can be only by “open market purchases in the normal segment” and not through bulk/block/negotiated deals or through preferential allotment.

It is not clear whether a person holding between 50 and 55% and who needs to acquire another 5% will need to have two types to acquisitions – one upto 55% and another type thereafter.

It has also been decided that if the holding of the Promoters increases on account of buyback of shares by the company, an increase upto 5% per annum would also be automatically exempt. The question that arises is whether increase of the holding of the Promoters on account of buyback of shares did otherwise attract the Takeover Regulations? – readers’ views are solicited. SEBI though has stated that exemption for such increase “was required to be sought”. Thus, if one agrees to the view that such exemption is required to be sought then now there is a relief but only upto 5%. However, if one takes a view that such increase does not require such an exemption, then such a limit would not apply.

The exemption of 5% increase on account of buyback is apparently only to the Promoters though the wording is not wholly clear. It is also to be seen whether this 5% exemption is all throughout between 15-75% or even beyond.

The above are only decisions and the actual amendments have yet to be made. Let us discuss more when the amendment is announced.

Jayant Thakur, CA


Anonymous said...

what does "open market" mean? Does this mean by way of open offer?

Jayant Thakur, CA said...

"what does "open market" mean? Does this mean by way of open offer?"

Reply to comment:-
- While we would have final clarity only when the Regulations are actually amended, probably acquisitions through open offers are not intended to be covered in the words "open market". Of course, open offers and stock market purchases both give opportunity to all shareholders to sell their shares and if the intent of SEBI is to allow opportunity to all shareholders, then maybe SEBI should allow both form of purchases, though open offer may involve a longer procedure and time. Also, while the wording of the Press Release is ambiguously worded, SEBI has also used the words "open market purchases through the normal segment". These and other words (such as "market", "bulk", etc.) in the Press Release may be indicative that SEBI wants stock market purchases only - but let's see how the amendment is actually worded!

-Jayant Thakur

Umakanth V said...

Mr. Thakur. Thanks for your post. Surely, the new press release raises issues regarding buyback of shares. Going merely by an interpretation of the Takeover Regulations, an open offer obligation is triggered under Regs. 10 and 11 when an acquirer acquires shares or voting rights. So, the emphasis is on "acquisition". When there is a buyback, the shareholders (e.g. promoters) do not "acquire" any shares and their shareholding increases because the overall capital of the company shrinks relative to their percentage shares in the company due to the buyback. In that connection, it is perhaps difficult to demonstrate that the open offer obligations are triggered by a shareholder when that shareholder does not indulge in any act of acquisition. But, as you pointed out, the recent press release of SEBI seems to question this position even as it applies to past instances, although I am unsure as to whether SEBI's views arise out of any prior rulings or informal guidance.

Jayant Thakur said...

Thanks, Umakanth, you have identified and analysed rightly the provisions of the Regulations as contained in Regulation 10 and 11 in the context of buyback of shares. On your issue of precedents of SEBI, there are some orders of SEBI and that too of an interesting sort. Promoters of several companies have applied for exemption for increase in shareholding percentage that arises as a consequence of buyback. SEBI has, in all the orders that I have come across, consistently granted exemption. The companies include ICI India, Natco Pharma, etc. As you have also rightly pointed out, the Scheme and wording of the Takeover Regulations do not consider such increase as "acquisitions". However, perhaps out of caution, companies have applied for such exemption and SEBI has granted them. Thus, perhaps by practice rather than law, such a view is being gaining ground. In this light, probably already having taken a view, albeit indirectly, SEBI has now decided to give a general exemption to such increases arising out of buybacks. This exemption puts Promoters who wish to take the other view in an even more difficult position as regards taking a decision.

All in all, I think there is some basis in law to take the view counter to SEBI's views. I did not want to analyse this issue in more detail in my post on the recent Press Release. However, I had written an article on this issue earlier in Bombay Chartered Accountants' Journal.I am posting that article separately in this blog.

Thanks again!


Anonymous said...

can the fact that a buy back is promoter driven be construed as an 'act of acquisition' thereby ticking the requirements.

Jayant Thakur, CA said...

"anonymous said...

can the fact that a buy back is promoter driven be construed as an 'act of acquisition' thereby ticking the requirements."

I have discussed this issue in an article which I had published here - http://indiacorplaw.blogspot.com/2008/10/would-increase-in-percentage-holding.html - see paragraph 20.

- Jayant

shivshankar said...

For Buyback where promoter holding is above 55% and application made from exemption of takeover code regulation but sanction from SEBI awaited,what would be the treatment? Those applications would be disposed off automatically once the amendment comes through?

Jayant Thakur, CA said...

"shivshankar said...

For Buyback where promoter holding is above 55% and application made from exemption of takeover code regulation but sanction from SEBI awaited,what would be the treatment? Those applications would be disposed off automatically once the amendment comes through?"

Let's see the actual amendment to get a final answer but subject to that, it appears that pending applications would become redundant once the general exemption is granted.

- Jayant

- Jayant

Jayant Thakur, CA said...

A reader had raised a query by an email to this Indian Corporate Blog, the relevant portion of which is reproduced below and then answered below:-

"Jayant, In relation to the post below, request you to further analyse a situation in the event a promoter wants to acquire 10 % or more, and considering its present shareholding to be 48% in the existing share capital? can he still take advantage of the amended regulations? or please delibrate on the mechanism by which this may be worked out?

Further, the limit is for each financail year or ? The regulations are silent in this respect also.

Thanks in advance...


Thanks, Atit. Firstly, you have raised this query on my post on the Press Release. SEBI soon thereafter actuall notified the amendment and hence please see that amendment and also my article in this blog later. I think my article might answer both your queries but still, let me give a brief reply here.

Replying on limited facts and purely from the point of view the recent amendments, I think a promoter holding 48% cannot acquire further 10%. He can of course acquire another 5% this financial year and then, in next financial year, reach 55% and then take advantage of acquiring another 5%. I had dealt with this issue partially in para 9(b) of my article referred to above and so you can refer it for more details.

There is also some basis for taking a view that if the acquirer is at, say, 53%, then, under certain circumstances, he can acquire another 5% in a single shot under 11(2) and then acquire yet another 5% under the new 2nd proviso. See para 9(b) of my article for more details.

Also, finally, the new 5% creeping acquisition for 55-75% holders is not per financial year - this too is discussed in my article.

- Jayant

Anonymous said...

A sub account of a Foreign Institutional Investor (FII)holds about 5% stake in a listed company in India and there is a buyback scheme offered by the company. Subsequent to buyback the stake goes above 5%. Though the sub account does not sell its shares back to the company, is it required to offload some of its stake in order to comply with the 5% limit in the company.

Anonymous said...

Abc ltd is a listed co. Promoters holding is around 30%. Promoter holding comprises of mr a(m.d.)n his huf and his family 18% and a pvt ltd company holding balance 12%

In 2010-11 the promoters want to creep upto 5%. They intend to creep via pvt limited company which will buy the shares from open market.

Post acquisition pvt ltd company shall have~ 17% holding in the listed entity.
In light of regulation 10 of takeover regulations of sebi, is there any violation?
Regulation 10 requires an open offer when any 'acquirer' exceeds 15% in a listed entity. There is a opinion that regulation 10 is triggered as promoters are not excluded from acquirer definition

I personally feel that the only limit which will apply to promoter group is 5% creeping. Bone of contention is- There is a clear cut exemption for inter se transfer amongst promoter group but no explicit explanation to query referred above.