Yesterday's decision of SEBI revives the discussion on whether an increase in shareholding on account of a buyback could result in an open offer. The issue can be explained mathematically as follows. A company, has, say, Rs. 100 of share capital. It carries out a buyback of Rs. 20 shares in which some shareholders do not participate fully. Since the share capital reduces to Rs. 80, the holding of such shareholders as percentage of the reduced capital increases. Will an open offer be required to be made if one of the cut-off points triggering such an open offer is crossed?
This issue could arise under several situations such as:-
- When a shareholder holding less than 15% finds his holding increased to 15% or more.
- When a substantial shareholder holding 15% or more finds his shareholding increased by more than 5%.
Actually, the issue has even broader implications. An increase in shareholding, e.g., may even trigger off immediate disclosure requirements. Thus, a person holding less than 5% shares and who finds his holding increased to more than 5% would be required to make certain timely disclosures.
This issue has been the subject of discussion in this blog (see, e.g., my article here, and this post and several other posts.
To some extent, this issue was academic since SEBI had amended the law relating to creeping acquisitions in such a way as if the law was very clear (at least to SEBI - ;)) that increase in shareholding on account of buyback would attract creeping acquisition requirements. See my post here where I had discussed, inter alia, this issue. See also earlier posts referred to therein.
SEBI has now held in the decision referred to above that an increase of 12.44% from 62.56% to 75% arising solely out of buyback of shares would result in open offer being required to be made.
I repeat that this is consistent with SEBI's stand all through. Firstly, while making the amendment relating to creeping acquisitions as referred to above, it assumed that open offer is required. Secondly, it has considered several exemption application of cases where holding increases on account of buyback. This implies that it believes open offer is required.
This decision is in a sense an interim decision though certain issues are decided. It, firstly, holds that there is a violation in not making an open offer. Secondly, it does not direct that an open offer should be made since the price of the shares has increased substantially thereafter. However, it directs that adjudication proceedings for levying penalty be commenced. To have a complete view, one would have to also see what penalty is levied and with what reasoning. Hence this article is also an interim one - :)
There are several interesting issues though.
A strong argument for holding a view that open offer should result to Promoters if their holding crosses the trigger on account of buyback is that Promoters cannot claim that the increase was entirely involuntary. They were the persons who would have proposed such a buyback and knowingly avoided participating in it. Such argument could also be made in the present case where the group's holding increased from 62.56% to 75%. Strangely, this was not the ground on which it was held that there was an "acquisition".
SEBI holds that "...it is not the mode of acquisition that matters. On the other hand, it is the right that which accrues to such acquirer to exercise such increased voting rights (more than 5%), acquired by whatever means... The said acquisition can be direct or consequential".
An incidental issue raised was whether the word "or" in the words "acquisition of shares or voting rights" should be read as "and" so as to mean that the increase in voting rights should be the result of acquisition of shares. SEBI negated this argument.
Though the issue is academic for Promoters, the present decision has wider implications as discussed above. SEBI has not applied the reasoning that a person holding 62.56% cannot plead that there was "no acquisition". It has not restricted the applicability of this decision to such large shareholders only (though of course one could argue on general principles that this decision should apply to the unique facts of the case).
In such a case, the decision could create issues for several other persons. As discussed, a person holding 14% and whose shareholding would increase to, say, 16% on account of the buyback would also be required to make an open offer. Of course, the person could avoid the open offer simply by offering his shares too for buyback.
While I have stated that this issue is academic, the debate may continue if the order is appealed against. It is possible that the Promoters may appeal since there is a finding of violation of law. Though the Order says that the Adjudicating Officer should consider the matter on merits and not be influenced by the observations of this Order, one wonders whether the Adjudicating Officer would hold to the opposite. In several earlier SEBI decisions, a hefty penalty, related to the open offer amount involved has been levied and hence the stakes could be high. If an appeal is made, one could expect a decision that is clearer and more comprehensive than this one.
- Jayant Thakur