Tuesday, November 22, 2011

Buyback of shares and consequent passive increase in % of holding - whether open offer arises? - issue resurfaces

Yesterday, the Securities Appellate Tribunal revived an old controversy which has implications not only on past acts and omissions under the now repealed SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997 but also to future acts under the new Regulations of 2011. 
It is a simple mathematical consequence that a buyback will result in increase in a shareholder's percentage holding if he does not participate in the buyback. His shareholding will now be calculated as a percentage of a lower capital base and thus such percentage would be higher. The issue is - if the consequent holding in percentage either crosses 25% (earlier 15%) which is the trigger percentage for an open offer or if the "increase" in holding is more than the permitted "creeping acquisition", will an open offer be required to be made?
The Takeover Code, while fairly comprehensive and detailed in other matters, does not expressly deem such increase to be "acquisition". I had argued earlier here that such increase does not amount to acquisition and hence an open offer should not result.
Of course, there are sound reasons for amending the law and including, under certain circumstances, such "increases" as acquisitions by explicit deeming provisions. 
Unfortunately, though SEBI was well aware of this issue it chose to take a practice-creates-law approach. It, for example, entertained applications for exemption from open offer to cases where such increase could have resulted consequent to a buyback. It also held that such increases did result in open offer. This showed that SEBI had implicitly interpreted that such "increases" did trigger an open offer. Further, not only it did not amend the 1997 Regulations to make such an express provision, it also did not include such express provisions even in the 2011 Regulations. In fact, it continued the policy by including exemptions to such increases on account of buybacks subject to certain conditions without expressly including such increase in the definition of acquisition.
The Hon'ble SAT  has now held otherwise and, in fairly strong and clear words, rejected this stand of SEBI. It has held that such passive increase in shareholding on account of buyback will not attract an open offer.
While I will submit here a more detailed article in a few days on this issue highlighting some important aspects  in this problem and certain counter views, the fact remains that this decision will create issues for past and future buybacks. Unless SEBI files and succeeds in appeal before the Supreme Court, even the newly notified Regulations of 2011 will have to be amended or else some of its provisions will be rendered otiose. 

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