Part 1 SEBI has notified the substantially rewritten Takeover Regulations — the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (‘the Regulations’) — to come into effect from 22nd October 2011.
Takeover Regulations hit the front pages of newspapers for wrong reasons. Takeover of companies in India is relatively lesser in number but takeovers have a glamour attached to them, hence changes to law relating to takeovers get disproportionate attention. At the same time, the manner in which the Regulations are framed ensure that not only the listed company and its promoters are affected but even the shareholders are affected. Promoters and other specified persons have to carry out certain regular or ad hoc compliances, reporting, etc., though even at that stage there is no takeover involved. Non-compliance of these requirements can result in stiff penalties and even an open offer. Further, many corporate restructuring transactions are structured keeping these Regulations in mind.
Now that SEBI has notified the long-awaited revised Regulations last month, listed companies, their promoters and those concerned with legal aspects of corporate laws relating to listed companies need to examine them closely.
In this article, some important changes are highlighted. It must be emphasised though that the Regulations are substantially rewritten and hence it is not as if there is a list of specified amendments that can be identified and discussed. And though the outline of the Regulations remains the same, there have been changes, major and minor, at several places. To begin with, it is worth reviewing generally what the Regulations are concerned with. The Regulations essentially intend that if there is a change of control of a listed company, whether through acquisition of controlling interest or otherwise or even a substantial acquisition of its shares, the public shareholders should be given an option to exit. This usually happens when a new promoter acquires the controlling stake from the existing promoter(s). However, the acquirer may simply acquire substantial shares in the company. The public shareholders are required to be paid a minimum price which is not less than what the outgoing promoters get, but the price for public shareholders can be higher. There are requirements of disclosure when a person acquires substantial quantity of shares and generally many other related requirements to ensure that this basic intent is achieved.
The Takeover Regulations were originally issued in 1994 and then revised in 1997. Several amendments were made from time to time and, recently, a committee was set up to recommend draft new Regulations under the leadership of Late Shri C. A. Achuthan who gave a detailed and elaborate report (‘the Committee Report’) but, sadly, left the world soon thereafter.
The new Regulations should be seen in the light of this Report. However, care should be taken since some of the recommendations have not been accepted or accepted only partially.
The most significant change is that the minimum threshold for making an open offer has been increased from 15 to 25%. The link of 25% with the percentage required to block a special resolution is obvious. Taking into account the fact that, in most Indian companies, the Promoters hold much more than 25%, even this 25% limit may sound low. For strategic investors, this higher limit would help and thus this increase would help the Company, its Promoters and shareholders since the Company can accept higher strategic investments without such investors having to make an open offer.
The other major change is that the minimum open offer percentage has been increased from 20 to 26%. Again this 26% can be logically understood as if we add 25 and 26%, we get a majority holding of 51%, though one could have argued that 1 share above 50% is sufficient to have a majority. Public shareholders would be rightly disappointed as the Committee Report recommending making an open offer for 100% of the public holding has not been accepted. This, in my view, is unfair as while the whole of the holding of the Promoters is usually acquired, only partial acquisition of public holdings is made. The argument made is that this would make the open offers unduly expensive for an acquirer. However, this can not be a sufficient reason to deprive public shareholder of getting a price that the Promoters receive. If an acquirer seeks to acquire, say, 51%, he can simply acquire such percentage from all shareholders including the Promoters by offering to acquire 51% of each person’s holdings. It is sad that the main purpose of these Regulations of protecting the interest of the public shareholders has been sidelined.
Certain regular and ad hoc compliances are required to be made under the Regulations. They mainly serve the basic objective of protecting shareholders’ interests in case of significant change in shareholding. Thus, an early intimation system provides that if a person acquires more than 5% shares, he should inform the Company and the stock exchanges immediately. Such person should thereafter keep informing if his holding changes by 2% in either direction. This provision has been substantially maintained. However, it is now made explicit — which was otherwise confirmed by court decisions under the 1997 Regulations — that it is the holding of the acquirer along with persons acting in concert as a whole that would be counted and not just the separate holding of an individual acquirer.
Creeping acquisition is a popular term, though not a legal one, to refer to the slow and gradual increase in holding allowed by law to a substantial holder of shares without being required to make an open offer. A substantial shareholder consolidates its holding by acquiring more shares and the law believes that such consolidation should also require an open offer under certain situations. The 1997 Regulations allowed 5% increase per financial year for acquirers who held more than 15% shares provided that the cumulative holding is not more than 55%. Beyond 55%, an additional 5% can be acquired in specified manner but no further without an open offer. The amended law allows creeping acquisition of the same 5% every financial year but all the way up to the maximum holding they can hold without reducing the minimum public holding required under law. Thus, for example, where minimum public holding is prescribed to be 25%, an acquirer can make creeping acquisitions up to 75% by acquiring 5% each financial year.
There was a minor controversy as to whether the 5% incremental acquisition was allowed as a net or gross increment. For example, if an acquirer acquires 7% in a year but sells 3%, has he acquired 4% or 7% ? The Regulations now specifically clarify that it will be the gross acquisition and not net and thus in the above example, the acquisition will be considered as 7% and thus beyond the 5% limit.
It is also clarified that in case of acquisition by issue of fresh shares (e.g., preferential allotment) where the capital of the Company also expands, the percentage in the expanded capital will be considered.
This leaves one group of existing promoters in a strange situation. There are Promoters, albeit small in number, who hold between 15% and 25%. As explained above, the 1997 Regulations allowed creeping acquisition of 5%. However, as the minimum threshold of 15% has been raised to 25%, such Promoters now would have to make an open offer if they cross 25% even if they are holding, say, 23% and acquire another 3%. Under the 1997 Regulations, they would not have been so required. Of course, the other side is that a person holding, say, 14% can acquire another about 11% without being required to make an open offer.
An important concept of Takeover Regulations is of ‘persons acting in concert’. This concept is a part of the Regulations to ensure that if a group of persons acquires shares with a common understanding or agreement, all such acquisitions are counted together to check whether the Regulations are attracted or not. Further, reporting of shareholding is also to be made of the total holding of such group. The question then is whether transfers within such group should be allowed or should such inter se transfers be considered as acquisitions. Logically, a transfer within the group is a zero sum transaction if the group as a whole is considered. Even the wording — of the 1997 Regulations as well as the 2011 Regulations — on the face of it should not apply since the holding of the acquirer along with persons acting in concert does not increase in such a case. However, SEBI has, by curious reasoning, which is upheld in appeal, taken a view that since inter se transfers are exempt under certain circumstances, then it must be held that inter se transfers otherwise amount to acquisition ! This reasoning is likely to continue even under the new Regulations though it would have been more elegant in law if the Regulations had expressly provided for this. However, what has been now changed is that inter se transfers, to qualify for exemption, need to comply with stricter conditions. For example, inter se transfers between persons acting in concert or Promoters will require that both parties should have been declared in relevant filings as such for at least three years. The exemption to inter se transfers within the ‘group’ has been dropped.
Earlier, there was an exemption from open offer for acquisition of control, without the minimum acquisition of shares, of a company if such acquisition was approved by the shareholders by a special resolution. Now this exemption is dropped. Perhaps this was necessary as the threshold limit has been increased from 15 to 25%.
A change worthy of appreciation is that non-compete fees are now to be counted as part of the acquisition price paid by an acquirer to the existing promoters. Earlier, the law allowed an acquirer to pay up to 25% of the acquisition price as non-compete fees to existing promoters and such amount was not to be counted as part of the acquisition price. To give an example, say, an acquirer pays Rs.100 as price for acquisition of shares and Rs.25 as non-compete fees to the Promoters. The law, which otherwise requires that the open offer should be made at a price that is at least the price paid to the Promoters, allows in such a case the open offer to be made at Rs.100. This resulted in cases where on the face of it, an exact non -compete fee of 25% was paid and was excluded from the open offer price. The new Regulations have rightly dropped this exemption to non-compete fees.
A major new feature is the voluntary open offer that is allowed. Normally, an acquirer is required to make a minimum open offer of 26% if he crosses the specified threshold limit or creeping acquisition. However, if a person, who is already having 25% shares and desires to increase his holding by more than 5% a year can now make a voluntary open offer of at least 10% to all the shareholders. This also ensures that all shareholders are able to participate and not just a selected few.
Then there is an infrequent but interesting situation that arises which earlier SEBI handled it a little arbitrarily. This is a situation where a Company carries out a buyback of shares. Simple mathematical calculation will show that if a Company carries out buyback of shares, the shareholding of a person who did not participate in the buyback increases though he has not acquired a single share. For example, if the Company’s share capital is Rs.10 crore and a person is holding Rs.2.40 crore. If the Company carries out a buyback of 20% with such person not participating, his new percentage holding would be higher at 30% (Rs.2.40 crore as a % of Rs.8 crore) without he having acquired a single share. SEBI took a view that open offer was required to be made by such person. This was of course absurd and even if SEBI intended that an open offer should be required, it should have provided for it. The new Regulations now provide that such an increase will not result in open offer provided certain conditions are satisfied failing which the differential percentage of shares should be sold within 90 days.
