This series of articles introducing securities laws for listed companies to the lay reader continues …
1) SEBI has been busy in recent times and several revisions/amendments have been made, some of which are highlighted here.
2) SEBI rewrites and replaces the DIP Guidelines 2000 with ICDR Regulations 2009
a. While not comparable to the Direct Taxes Code which seeks to rewrite the direct taxes laws into what is hoped to be an easy to understand law, SEBI too has undertaken a comparable exercise and has replaced the almost one-decade old DIP Guidelines with a re-written (though not overhauled) Regulations – the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 or ‘the Regulations’.
b. Readers may recollect that the DIP Guidelines mainly regulate issue of securities to the public, shareholders and others. They regulate initial pubic offers, rights issues, preferential issues, etc. They provide for very detailed provisions which border on micro-regulation of every aspect of the process of such issues. These Guidelines are very frequently amended. For listed companies, their promoters and merchant bankers, these guidelines are literally like a Bible which they need to keep handy for regular reference.
c. As can be expected, frequent changes have made the Guidelines unwieldy and complex. Further, when one writes a set of clauses, one may have a central theme in mind. However, as new clauses and provisos and explanations are inserted and amended, the new set of clauses represent neither the original harmo-nious theme nor a new one but represent a hotch potch of ideas.
d. Another aspect of these Guidelines was that they were not, in my opinion and also as held in decisions, law in the strictest sense of the word. These guidelines were obviously not Parliament-made law nor could they be compared to Regulations and Rules which the Act provides for and which are also laid before Parliament later. Rather, they represented the provisions made by SEBI from time to time. While there is nothing wrong in SEBI prescribing such Guidelines – indeed this manner is inevitable and required in dealing with the dynamics of the capital market, a question often arises as to what their legal status is and what could be the penal consequences of their violations.
e. Thus, the replacement of the Guidelines with Regulations at least removes this concern over their legal status. Incidentally, though, the SEBI Act will now need to be amended to provide for specific punishment for violation of these Regulations since otherwise, the violation of these newly notified Regulations will fall under the residuary provisions and this mayor may not achieve the object that SEBI may have in mind. In fact, it may make sense if different provisions of these new Regulations are treated differently and thus separate punishment is provided for violations having differing intensity or seriousness. However, that would require a Bill to amend the SEBI Act itself.
f. In any case, to reiterate, the Guidelines are now replaced by Regulations whose violations can be punished with significant penalty and/or prosecution.
g. While it would be a mammoth exercise to compare the old Guidelines and the new Regulations and even to highlight the changes, suffice it to say that the intention has not been to completely rehaul the provisions. Future articles here may highlight some interesting implications particularly arising out of change in wording.
h. Further, the Regulations represent the DIP Guidelines rewritten but in most cases without any intention of changing the law. However, how well this intention of keeping the substantive law intact will be successful will be shown by time and experience in varying situation since the wording would often show up differently when one tries to apply and interpret them.
i. On first appearances, the substantive provisions and clauses have been trimmed and made more compact. However, part of the reason for the substantive clauses appearing more compact is also because the Regulations are now divided into substantive clauses and drafts of various precedents, forms, agreements, etc.
j. Consequential changes have been made in the SEBI ESOPs Guidelines and the Listing Agreement.
3) Ban on issue of shares with superior voting rights:
a. SEBI has issued a circular dated July 21, 2009, to make amendments to prohibit issue of shares with superior voting rights by listed companies. Earlier to this, SEBI had a Press Release announcing the decision to make such changes. Incidentally, the actual amendment covers all superior rights as to voting as well as dividends. The original decision as per the Press Release read that “No listed company can issue shares with superior voting rights.”.
b. The amendment is by way of insertion of a new clause 28A to the Listing Agreement. The amendment is to come into immediate effect though because of the peculiar status of Listing Agreement, one will also have to wait for amendment of the Listing Agreement by the respective stock exchanges.
4) The new clause is brief and is reproduced for ready reference:
“28A. The company agrees that it shall not issue shares in any manner which may confer on any person, superior rights as to voting or dividend vis-a-vis the rights on equity shares that are already listed.”
5) The following are some quick comments and concerns :
a) The prohibition is on issue of shares with ‘superior’ rights and not on ‘inferior’ rights.
b) A corollary from the earlier point, if a company issues shares with ‘inferior’ rights, those shares will then become the new benchmark. If one takes this further logically, then, thereafter, even ‘normal’ equity shares cannot be issued since these normal shares would have ‘superior’ rights as compared to the existing shares with ‘inferior rights’ assuming such latter shares are also listed !
c) Can the amendment affect issue of preference shares which have priority of dividends and at times even rights of sharing further dividends? Or can one say that the intention is to cover issue of equity shares only since the comparison is made to existing equity shares?
d) To bring the change into effect, the Listing Agreement is amended. This is curious. One would have thought the SEBIDIP Guidelines/ ICDR Regulations could have been a better place.
e) Would special rights given to certain investors/ promoters under the Articles of Association such as veto rights, special rights, etc. be deemed to be ‘superior rights as to voting’ ? Can it be said that the ban applies only where the superior rights are given to the ‘shares’ and not to the ‘persons’ holding such shares?
6) SEBI issues circular to formalise clarifications on 5% additional creeping acquisition
a) It may be recollected that late last year, SEBI had amended the Takeover Regulations to provide for a creeping acquisition window between 55-75%. These amendments permitted acquisition of further shares upto 5% for persons who held shares between 55-75%. A circular has been issued recently to clarify on some of the concerns expressed.
b) The circular is fairly self explanatory. A few quick comments though.
i) The clarifying circular is issued under Regulation 5 which permits SEBI to, inter alia, issue directions to remove difficulties in interpretation. S. 11 of SEBI Act is also relied on.
ii) It is seen that some of the interpretations so given go clearly beyond the plain wording and meaning. It is possible that in the future, a legal issue may come up whether such ‘clarification’ can go beyond the express and unambiguous wording of the Regulations.
iii) It is clarified that the 5% acquisition may be made in one or more tranches and also without any time limit.
iv) For calculating the 5% acquisitions, sales cannot be netted off. Thus, only gross purchases would be counted. For example, the acquirer cannot purchase 4%, then sell 3% and then acquire another 4% and claim that the net purchases are within the 5% limit.
v) The cumulative holding of the acquirer cannot exceed 75%. Thus, a person holding, say, 73% can acquire only a further 2%.
vi) The cumulative holding limit of 75% is irrespective of the minimum public share-holding that is required to be maintained under the Listing Agreement. Thus, e.g., in respect of a company having a 10% minimum public shareholding, the upper limit for this Regulation will still be 75% and not 90%.
7) SEBI clarifies on Insider Trading Regulations amendments of November 2008.
a) SEBI had amended the Insider Trading Regulations 1992 vide a Notification dated November 19, 2008. SEBI has now released a set of ‘Clarifications’ on 24th July 2009 on certain issues arising out of the amendments made.
b) Curiously, the ‘clarifications’ have no formal standing or reference. It is neither a circular, nor a notification, nor even a press release. It is neither signed nor dated. But it seeks to ‘clarify’ and give meaning to the Regulations that have legal standing and where such ‘meaning’ is quite contrary – as we will see to the plain reading of the text. Having said that, the ‘clarifications’ mostly relax the requirements and hence, being gift horses, one should not examine them in the mouth too closely!
C) Let us consider the clarifications given.
i. lt may be recollected that specified persons were banned from carrying out opposite transactions’ (banned transactions’) for six months of original buy/sale (‘original transactions’). The question was whether acquisition of shares under ESOP scheme and sale of such shares would be considered as transactions that trigger off such ban and whether these themselves are banned. It is clarified that exercise of ESOPs will neither be deemed to be ‘original transaction’ nor ‘banned transaction’. Thus, by acquiring shares under ESOPs, you don’t trigger a ban and if you are banned for six months, you can still exercise ESOPs. The reasoning given is that the ban is only on transactions in secondary market.
ii. Sale of shares acquired through ESOPs is covered but it will only be deemed to be an ‘original transaction’ and not a ‘banned transaction’. In other words, even if you are under a ban, you can still sell shares acquired under ESOPs but once you sell such shares, you have triggered a ban of six months. On this aspect, I do not understand the basis of clarifying that the sale of shares acquired under ESOPs scheme will not be an ‘original transaction’ – the logic of covering secondary market transactions should apply here also.
iii. Then, it is clarified that every later transaction triggers a fresh six month ban. A purchase on 1st February results in ban till 1st August. However, if there is a fresh purchase on 15th March, there is a ban now till 15th September. Effectively, this means that the ban period is from 2nd February till 15th September.
iv. What about transactions before this amendment – will the amendment create ban in respect of them too – this is an academic issue now at least as the six month period is now complete. It is clarified though that the transactions before the amendment are not to be considered. On a similar note, unwinding of positions in derivatives held on the date of this amendment is possible.
v. A crucial clarification is that the ban on ‘sale’ of shares for personal emergencies is permissible by waiver by the Compliance Officer. This is not evident from a plain reading of the provision. But SEBI thinks it is so evident and hence let us accept this gift without creating legal niceties! Note that this clarification applies only to sales and there can be no purchases within these six month ban period – obviously there cannot be any personal emergency to purchase shares !
vi. It is also clarified that tile ban on derivatives does not apply to NIFTY/SENSEX futures.
