Sunday, March 30, 2014

Guest Post: Regulations by SEBI under the Companies Act, 2013 for Promoter Acquisitions

[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 terms of section 13(8) of the Companies Act, 2013 (Act), a company, which has raised money from public through prospectus and has any unutilised amount out of the money so raised, is not permitted to change its objects for which it raised the money through prospectus unless a special resolution is passed by the company and the dissenting shareholders are given an opportunity to exit by the promoters and shareholders having control in accordance with regulation to be specified by Securities and Exchange Board of India (SEBI).

Similarly, in terms of section 27 of the Act, a company is not permitted, at any time, to vary the terms of a contract referred to in the prospectus or objects for which the prospectus was issued, except subject to the approval of, or except subject to an authority given by the company in general meeting by way of special resolution and the dissenting shareholders have been given an opportunity to exit by the promoters or the controlling shareholders at such exit price, and in such manner and conditions as may be prescribed by SEBI by making regulations in this behalf.

Acquisition by the promoters of the nature mentioned above is likely to have an impact on the existing shareholding of such promoters and therefore subject to the quantum of shares being purchased by them, will have repercussions under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (SEBI Takeover Regulations).

So far, SEBI has not issued any regulations for such acquisitions and such purchases by the promoters are currently not exempted under Regulation 10 of the SEBI Takeover Regulations. Assuming SEBI does not amend the SEBI Takeover Regulations governing such acquisitions, any such purchases exceeding 5% in a financial year[1] will trigger an obligation on the promoters to make an open offer. An open offer in such a situation may sound paradoxical, since the promoter will have to make an open offer to the public shareholders of the target company as a consequence of promoter purchasing another set of public shareholders of the target company who are desirous of exiting the target company.

It will be possible for the promoters to seek specific exemption of SEBI under Regulation 11 of the SEBI Takeover Regulations for such acquisitions, prior to them making an offer to the dissenting shareholders for acquiring their shares in terms of the Act.

In view of the above, it is fair to expect that SEBI will issue regulations in this regard as envisaged under the Act, including making necessary amendments to the SEBI Takeover Regulations.

Before concluding, it is pertinent to mention that acquisitions by the promoters of the nature mentioned above may also lead to an increase in the maximum permissible non-public shareholding [i.e. promoter shareholding crossing 75%], thus the amendments to the SEBI Takeover Regulations will have to, amongst other things, also take into consideration such a scenario and clarify whether the same shall be permissible, and its likely impact on the continuous listing requirement of maintaining the minimum public shareholding of at least 25% in a listed company.

Yogesh Chande

[1] Regulation 3(2) of the SEBI Takeover Regulations

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