Monday, February 25, 2013

Takeover Regulations: Computing Creeping Acquisition Limits

SEBI has published its informal guidance on a matter that delves into the mechanics of computing the creeping acquisition limit of 5% per year in a company whose share capital may have undergone changes during the same period.

Aksh Optifibre Limited made an application on August 17, 2012 to SEBI to seek its informal guidance on the specifics of its case. The company’s promoters had made a series of acquisitions of shares and global depository receipts (GDRs) of the company during the period between April 1, 2012 and July 31, 2012. During that period, the share capital of the company underwent dilution due to certain conversion of foreign currency convertible bonds (FCCBs) into equity shares. While the promoters acquired shares/GDRs at three different points in time during the period, there were two occasions where the share capital was diluted.

The company’s question to SEBI was whether the 5% creeping acquisition limit under Reg. 3(2) of the SEBI Takeover Regulations of 2011 must be calculated with reference to the total number of shares outstanding at the beginning of the financial year (i.e. April, 2012) or those outstanding at the time of computation of the limit (i.e. post dilution due to conversion).

After considering the provisions of the Takeover Regulations, SEBI arrived at an altogether distinctive interpretation which is different from either of the situations suggested in the company’s query to SEBI. SEBI’s approach requires the company to consider each acquisition separately. Its reasoning is as follows:

5. It is clarified that the quantum of acquisition of voting rights for the purpose of regulation 3(2) of the Takeover Regulations, 2011, shall be computed separately for every acquisition of voting rights based on the paid-up share capital of the target company at the time of acquisition and aggregated for the financial year. …

SEBI’s letter contains an explanation through the workings of the acquisitions and dilutions during the period that occurred with respect to the company.

SEBI’s interpretation is consistent with the explanation (i) to reg. 3(2) which provides that “gross acquisitions alone shall be taken into account regardless of any intermittent fall in shareholding or voting rights … owing to … dilution of voting rights owing to fresh issue of shares by the target company”. Therefore, it would be necessary to add up the percentages of each acquisition separately without giving effect to each dilution so as to determine the aggregate acquisitions during the financial year.

Reasons for informal guidance: While on the question of informal guidance, the Securities Appellate Tribunal (SAT) has passed an order on an appeal by Gillette India Ltd., which requires SEBI to provide reasons while rejecting an application seeking an informal guidance regarding an interpretation of the provisions of the Securities Contracts (Regulation) Rules, 1957. Although this order has been passed by SAT at the admission stage and not on merits, SAT’s approach imposes an onus on SEBI to provide reasoning while issuing informal guidance. This might be particularly so if the informal guidance is contrary to the position sought by the company.


Anonymous said...

I understand that the 5% threshold is required to be calculated at each stage of acquisition and later cross-checked at the end of the financial year - per the informal guidance.

If so, is my understanding correct that a company would not be able to proceed with a buy-back where the promoters do not intend to put forth their shares in case the 5% limit is met during the year without an open offer as the gross acquisition will result in 5% threshold being breached (while not so at the time of acquisition)?

As a corollary, would the interpretation also suggest that in case of a buy-back (promoters do not offertheir shares) during a year (in which year the promoters do not acquire any shares) resulting in an increase of 5% in the shareholding of the promoter result in takeover code being triggered?

Absurd if above is true. - bvm pr

V. Umakanth said...

@ bvm pr. The informal guidance seems to take into account increase in share capital on account of fresh issue of shares and not the reverse, i.e. a buyback of shares where the share capital is reduced.

As regards your questions, a different scenario may play out in relation to a buyback as it is subject to specific exemptions from open offer under Reg. 10(4)(c) of the Takeover Regulations, provided certain conditions are satisfied.

In case the conditions are not satisfied, however, and the buyback results in the acquirer's shareholding exceeding 5%, then the open offer requirements will be triggered.

There could be another scenario where the buyback does not itself trigger the creeping acquisition limits because it does not increase the acquirer's holding by more than 5% during the financial year. In such a case, the question would arise as to how the remaining headroom for creeping acquisition must be computed. To that extent, the informal guidance of SEBI will come into effect in that while computing the remaining percentage available for creeping acquisition, it will have to be counted separately for each acquisition (in which scenario the headroom available for creeping post-buy back would be lesser in terms of number of shares compared to pre-buy back because the overall share capital would have reduced).

Anonymous said...

Truth is always absurd.

I agree with SEBI's view, which is the position under the regulations. Also agree with Umakanth's views on the comment.