Tuesday, February 2, 2010

Buyback and Takeover Regulations - Yet another development

See my earlier post on a recent decision of SEBI on whether increase in percentage holding consequent to buyback of shares would amount to "acquisition" under the Takeover Regulations. If that and earlier posts are reviewed, one would note that SEBI has taken a fairly consistent stand that such increase does amount to acquisition.

Now, in a recent order granting exemption under the Takeover Regulations, SEBI has taken the matter even further and made its stand even more consistent.

Let's quickly review the background first.

SEBI, with the help of the Takeover Panel, considers applications for exemption from the relevant provisions of the Takeover Regulations. SEBI has granted in several earlier cases such exemption when the percentage holding of the Promoters increases on account of buyback of shares. However, till now, at least in the cases I have read and recollect, the exemption was total. For example, if the holding of the Promoters increased because of this from, say, 60% to 68%, SEBI would exempt the whole of such increase. Thus, the acquisition of shares upto 5% under the creeping acquisition limits (where available - see further comments later) was additionally available.

Now, SEBI, in a recent exemption order, has tightened this further and has stated that only the increase beyond the 5% creeping acquisition would be granted and thus, effectively, the creeping acquisition limit would not be additionally available. Thus, where, in this case, the holding of the Promoters was to increase from 66.82% to 73.92, i.e., an increase of 7.10%, the exemption was granted to the increase of 2.10% only.

SEBI has observed that an increase upto 5% on account of buyback (amongst other ways) was available and hence such limit should be exhausted first and exemption be granted to the 2.10% beyond such 5%. The Promoters thus would not be entitled to use that creeping acquisition.

Such exemption orders are of course granted on a case to case basis and one does not know whether this order reflects a change in policy and whether in all future cases, the creeping acquisition limits would be allowed to be used up first. Nonetheless, this order makes the stand of SEBI even more consistent with its views on the matter.

Let us watch this issue for further developments which may be possible. As discussed earlier, while there are some difficulties in law, considering that SEBI has taken such a consistent stand, no person - Promoters in particular - may want to take SEBI head-on on this issue and risk such an increase without exemption and hence the issue may be deemed to be closed for practical purposes for future buybacks.

- Jayant Thakur

2 comments:

sunny said...

In my view the introduction of the concept of french auction in FPO's was not a good idea. If at all this concept should have been applied to IPO's. The rationale of introducing the auction based system rather than a book building was to enable better price discovery of the shares of the issuer. Now in an FPO where similiar shares of the issuer have already been issued, price discovery would not be done as the prices of the shares are already determined by market forces on the stock exchanges.

The french auction route is however presently only available for the institutional investors, but their participation in these issues has an overall impact on the manner in which retail and non institutional investors bid for their portions at the floor price.

Now I dont know whether this decision of french auctions was introduced keeping in mind the huge fiscal deficit that the center is presently dealing with. As the divestment committee have on a fast track basis decided to come up with several FPO's of several PSU in order to mop up as much funds as possible thereby reducing government stakes in such undertakings, they have failed in their objective of streamlining the divestment procedure.

Jayant Thakur, CA said...

Hi Sunny,

Your comments relates to another post on this blog and if you could kindly cut/paste it and put it there, it would come to the attention of the author of that post for his consideration.

Thanks!

- Jayant