Thursday, August 6, 2009

SEBI issues circular to formalise clarifications on 5% additional creeping acquisition

I had briefly written in an earlier post of a report in CNBC/ of certain "clarifications" in respect of the amendments to Regulation 11(2) of the SEBI Takeover Regulations. As may be recollected, the amendments permitted acquisition of further shares upto 5% for persons who held shares between 55-75%. This press report has now been formalised by a clarifying circular dated August 6, 2009.

The circular is fairly self explanatory and is on the lines of the press report referred to earlier. A few quick comments though.

- The clarifying circular is issued under Regulation 5 which permits SEBI to, inter alia, issue directions to remove difficulties in interpretation. Section 11 of SEBI Act is also relied on.
- It is seen that some of the interpretation so given go clearly beyond the plain wording and meaning. It is possible that in the future, a legal issue may come up whether such "clarification" can go beyond the express and unambiguous wording of the Regulations.
- It is clarified that the 5% acquisition may be made in one or more tranches and also without any time limit.
- For calculating the 5% acquisitions, sales cannot be netted off. Thus, only gross purchases would be counted. For example, the acquirer cannot purchase 4%, then sell 3% and then acquire another 4% and claim that the net purchases is within the 5% limit.
- The cumulative holding of the acquirer cannot exceed 75%. Thus, a person holding, say, 73% can acquire only a further 2%.
- The cumulative holding limit of 75% is irrespective of the minimum public shareholding that is required to maintained under the Listing Agreement. Thus, e.g., in respect of a company having a 10% minimum public shareholding, the upper limit for this Regulation will still be 75% and not 90%.

- Jayant Thakur


Anonymous said...

Dear Mr. Thakur,

In view of this SEBI circular can you please react to the following:

1. Securities Appellate Tribunal (SAT), in the matter of Eider e-Commerce Limited v. SEBI (Appeal no. 176 of 2007, date of decision: August 20, 2008) had held that (in connection with erstwhile regulation 11(2) of takeover regulations):

“once the acquirer together with persons acting in concert with him holds more than 75% in a company and were to acquire additional shares, there is no requirement in the takeover code that he has to make any public announcement. Regulation 11 is not attracted in such a situation”.

2. Further Justice P N Bhagwati Committee Report on Takeovers states as under:

"The Committee also felt that it would be desirable to clarify that the provisions of these Regulations will not be applicable to any person who holds 75% or more at the time of notification of these Regulations and also to any acquirer who has reached the level of 75% without any breach of the provisions of the Regulations in force from time to time."


a. if in view of yesterday's circular, an acquirer cannot acquire additional shares beyond 75%. Whether this circular therefore effectively nullifies the decision of SAT mentioned above.

b. whether the circular is consistent with what was recommended by the committee mentioned above.

Can we have your views please?

Thanks and regards,
Yogesh Chande

Lawman said...

Dear Jayant:

Thanks a zillion to you (and your co-contributors) for keeping us updated with corporate law developments. Awesome work!!

Coming to the topic in hand, if a promoter converts any warrant previously allotted to him, will that be recknoned for this 5% limit purpose?

In any case, should'nt the regulator take back this provision as this was introduced when the markets were in pretty bad shape. Now, twith the markets gaining ground and trading steadily, is there still any argument for this provision?

Kind Regards,

Jayant Thakur, CA said...

Hi Yogesh,

Thanks for your observations and query.

The decision of Eider e-Commerce as well as the Justice Bhagwati Report referred to by you relate to a period before the Takeover Regulations and other provisions of law were amended.

The Eider decision relates to acquisitions made in 2000, and after this year, the Regulations have been amended. Further, the Justice Bhagwati Report referred to by you is the earlier and original report of 1997 but since then the Justice Bhagwati Report of 2002 was released. More specifically, this 2002 report observed and suggested on the very issue raised by you in paragraph 3.4 as follows:-

“The Committee recommends that any acquisition by acquirers holding 75% and above should be in a transparent manner through open offers for minimum 20% and accordingly proviso to Regulation 21(1) may be deleted.” (read the whole paragraph 3.4 for more details).

The SAT in Eider decision also relied on the above Regulation 21(1) provision to arrive at the conclusion observed by you. Bhagwati Committee recommended that this Regulation be dropped and since then it has actually been dropped (substituted, actually) in 2002.

The SAT decision thus would have to be seen in the light of the amendments made in 2002.

Having said that, I am not too sure, with due respect to the SAT order and the Justice Bhagwati Committee Report, whether dropping of Regulation 21(1) achieved the object of clarifying that a holder beyond 75% cannot acquire more shares. A specific provision in Regulation 11 would have been preferable.

However, SEBI appears to have taken such a view, with of course the backing of the 2002 Justice Bhagwati Committee Report, that the amended provisions now do not permit acquisitions beyond 75% and the “clarifying” circular appears to reflect this view. However, I think 2 views are still possible though the other view now has to contend with this “clarifying” circular also.

In any case, one would have to see the provisions of Regulation 11 alongwith clause 40A of the Listing Agreement (which incidentally has also been amended since the original SAT decision and original Justice Bhagwati Committee Report). The objective is that the Takeover Regulations and the Listing Agreement should work together. The Takeover Regulations would regulate acquisitions upto 75/90% and Clause 40A would consider the status beyond such percentage. Clause 40A of the Listing Agreement has more holes than a sieve and the scheme of provisions of Regulation 11 is better but far from perfect.

The result is that, despite the amendments, there indeed are ambiguities. It has been repeatedly reported that the law relating to public shareholding would be amended and matters clarified but that is not happening. Till that time, one will have to live with such ambiguities.


- Jayant Thakur

Jayant Thakur, CA said...

Hi Lawman,

It appears that since the permitted acquisition routes are specified open market purchases and buybacks and since more specifically acquisition through preferential allotment are not permitted, acquisition through conversion of share warrants would not be permitted under these amendments.

As regards timing, yes,I agree with you!


- Jayant

Aashu said...

Dear Sir:
I must say that it is a very informative piece of writing. I had some issue with this “Interpretive Circular”. While reading the same with the provisions of the Takeover Code, I am not able to understand the rationale behind this interpretation of not allowing the netting of sales and buying when computing the threshold limit of 5 %. Furthermore, I am also not clear whether or not this netting off provision is applicable when we are computing the 5 % limit as per Regulation 11 (1) (share holding between 15-55 %). Further, is this yet again a case of bad drafting or an intentional scope for suitable future interpretation?
I would request you to help me get some more conceptual clarity on these provisions.