Wednesday, October 2, 2013

Takeover Regulations: Intention to Acquire

[The following post is contributed by Yogesh Chande, who is a Consultant with Economic Laws Practice, Advocates & Solicitors. Views of the author are personal]

In an order passed by the SEBI, Adjudicating Officer in the context of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations (SEBI Takeover Regulations), the Adjudicating Officer relying upon a decision of the Securities Appellate Tribunal (SAT) has held that, mere intention to acquire shares without a definitive concluded contract cannot be the basis for triggering the requirement of making an open offer under the Takeover Regulations.

It may be noted that under the SEBI Takeover Regulations, an acquirer is obliged to make a public announcement for an open offer within four working days of – (a) agreement to acquire; or (b) deciding to acquire the shares carrying voting rights.

The facts in the present case are quite interesting:

1. On 28 July 2011, the acquirer was already holding 14.96% of the paid-up capital of the target company. The requirement of making an open offer then, under the erstwhile SEBI Takeover Regulations, was upon reaching 15% as against the present requirement of 25%;

2. On 29 July 2011, the acquirer placed an order through the stock broker for acquiring additional 2.1% of the paid-up capital of the target company from the open market (on the floor of the stock exchange);

3. On 29 July 2011, the stock broker executed the trade and purchased the additional shares for the acquirer;

4. On 29 July 2011 itself, the acquirer reversed the aforesaid purchase order and the delivery of shares was squared off by the stock broker. Thus, no additional shares were acquired by the acquirer and his shareholding in the target company remained at 14.96%. The acquirer was not entitled to any net delivery on the settlement date, which would have taken his shareholding at 15% or more in the target company.

In view of the above specific facts, the Adjudicating Officer held that, since the acquirer on T+2 settlement date, did not become the beneficial owner of the additional shares, which would have increased his holding to 15% or more, the obligation to make an open offer was not triggered. The proceedings against the acquirer were accordingly disposed off by the Adjudicating Officer.


1. A T+2 settlement cycle means that the final settlement of transactions done on T, i.e., trade day, by exchange of monies and securities between the buyers and sellers respectively takes place on second business day (excluding Saturdays, Sundays, bank and stock exchange trading holidays) after the trade day. The transactions in securities of companies which have made arrangements for dematerialization of their securities are settled only in demat mode on T+2 on net basis, i.e., buy and sell positions of a member-broker in the same scrip are netted and the net quantity and value is required to be settled.

2. However, transactions in securities of companies, which are in "Z" group or have been placed under "trade-to-trade" by stock exchanges as a surveillance measure ("T" group), are settled only on a gross basis and the facility of netting of buy and sell transactions in such scrips is not available.

3. In the present case, it is worth noting that, the equity shares of the target company during the period [settlement cycle of 29 July 2011] as it appears, were not trading on stock exchanges in “Z” group i.e. trade-to-trade. This particular aspect, came to rescue [defence before Adjudicating Officer] the acquirer, which enabled the acquirer to square off his position on T day [29 July 2011] itself, as otherwise he would have acquired additional voting rights over the target company which would have made him the beneficial owner, resulting in triggering an open offer under the SEBI Takeover Regulations.

- Yogesh Chande

1 comment:

Anonymous said...

I have two questions in respect of this judgement:
1. Whether a person holding less than 25% shares can acquire and sell any number of shares (which otherwise cross 25%)without triggering reg.3 (1) and 3 (3)?

2. Whether the contract in this case can not be held as 'concluded contract'?

When Mr. Bhavook gave an order to purchase 2% shares and the shares were bought by broker at the same time the contract of acquisition is concluded. The sale of shares is a separate contract. If the order was given but not got executed due to some reasons, then one can say that the contract is not concluded.
Further, consideration of gross acquisition only in case of creeping and not in this cases is also not justifiable.