(a) Firstly, can he acquire 2% in any form of purchases under creeping acquisition Regulation 11(1), and secondly, acquire additional shares under the new 2nd proviso only through the restricted route of open market purchases/buybacks ? On balance, he should be able to acquire 2% under 11(1) to reach 55% and purchase additional shares only under the new 2nd proviso to 11(2). However, I must admit that strictly and technically, there is scope for holding the other view, particularly if the purchase is through one lot that increases the holding, for example, increase in holding at one shot by 5% through preferential allotment.
(b) Will such person, after having acquired 2% (or even 5% under another interpretation and circumstances) under Regulation 11(1) be restricted to a further acquisition only 3% (0%) or can he acquire yet another 5% under the new 2nd proviso ? The answer seems to be that he can acquire another 5%. In fact, this would allow a person to acquire about 10% in a single financial year — 5% under 11(1) and another 5% under new proviso to 11(2). Thus, a person holding 50% can increase his holding to 60% in a single financial year.
(10) Now let us consider the amendment made by the 2nd Proviso permitting creeping acquisition also through buyback of shares, Let us first examine what the amendment is, and then consider the earlier controversy surrounding it and what is the change, if any.
(a) The amendment permits an acquirer to ‘acquire additional shares or voting rights’ …. (provided)
…. the acquisition is :
• made through open market …. or
• the increase in the shareholding or voting rights is pursuant to a buyback of shares. (emphasis supplied).
ii) Thus, if a person holds, say, 55%, his holding, post-buyback can increase up to 60% under the 2nd Proviso.
iii) However, this is not as simple as it may sound because of peculiar mathematics. Let me explain as follows. The holding has to be between 55-75%. The buyback would affect differently, different holdings. To give an example, if a person holds 55%, a mere 8% buyback would result in increase in his holding by 5% (55/92% is 59.78%, i.e., there would be a 4.78% increase). A promoter holding 60% would find his holding increased by 5% at 7% buyback and for one holding 70%, 5% increase happens at just 6% buy-back. This problem would effectively limit the buyback that a company could carry out to 8% only, as compared to the maximum legal 25%. Of course, the simple solution is that the promoters should also sell their shares in a ,lmyback at the appropriate level to ensure that the net increase is only 5%. This may defeat the purpose of really giving retail investors a chance to sell their shares through this amendment. Also, in case of open market buyback, there is the issue of Promoter not being permitted to offer their shares in a ‘buyback’.
(b) I had written an article in the August 2008 issue of the BCAJ as to whether increase in percentage holding arising solely out of buyback of shares would amount to acquisition under the Takeover Regulations and thereby trigger an open offer or be counted as part of creeping acquisitions, etc. My view was that, on balance, even considering the fact that buybacks are initiated by the promoter, the ‘buy-back’ does not result in triggering ‘open offer’. This may be an anomaly and even an unfair loophole, but I had suggested that to remove this, the law needs to be specifically amended.
(c)To recollect further, in essence, the argument is that Regulations 10, 11 and others require a specific acquisition of shares or voting rights. If there is no acquisition, these Regulations do not get attracted. A buyback of shares results in an increase in percentage holding without any acquisition. While the promoters cannot shrug off the issue by saying that the increase is on account of the company’s decision when they are in control of the company, the fact remains that the express provisions of law do not cover ‘buyback’. SEBI,however, apparently required or permitted a practice by companies to seek an exemption for such increase and then wors-ened it by assuming in the recent amendment that this is also the law without amending 10, 11 and other Regulations. So where does this new amendment leave the view that increase in holding through buyback should not be counted for Regulations 10, 11, etc. ?
(d) Let us consider here the exact wording of the 2nd proviso. It permits an acquirer to “acquire additional shares or voting rights (provided) …. the acquisition is made through open market …. or the increase in the shareholding or voting rights of the acquirer is pursuant to a buyback of shares by the target company” (emphasis provided). Clearly, even this amendment is self-contradictory when it permits an acquirer to acquire additional shares and then clarifies that increase through buyback is also covered. Further, a strict view can be that even if increase through buyback is to be covered, it would be solely for the purposes of this clause only. One cannot, thus, require a person holding 14.99% shares, whose holding increases to, say, 15% on account of buyback to make an open offer. Again can law force a person holding 25% and whose holding increases to 30.1% on account of buyback, to make an open offer.
e) However, while we could debate endlessly, the reality is that companies/promoters have already been making applications for seeking exemption for increase on account of buyback. SEBI has also been expressly and publicly granting such exemptions on a case-to-case basis discussing the merits. SEBI has issued a Press Release indirectly stating that it considers increase through buyback as ‘creeping acquisition’. The recent amendment further supports this view. Consider also this in the background that in reality it is the promoter who pushes the buyback and it is the promoter who does not participate-in the buyback which results in the increase in promoter’s holding. All of this still cannot change the express provision of law. But, surely, a Judge interpreting this law, which requires a purposive interpretation, would want to inquire of the promoter how he can ignore the fact that his (promoter’s) holding has increased and hold that the amendment is effectively redundant?
11) SEBI has also made what seems to be a consequential amendment to 11(2A). Consistent with Regulation 11(2),Regulation 11(2A)provided that if a person holding between 55-75/90% seeks to acquire, he can do so only through an open offer. Now, the word ‘only’ has been dropped, apparently to suggest that one can acquire up to 5% under the 2nd Proviso but one could also go through the open offer route. This seems to be the intention, though the wording could have been better.
12) There is yet another interesting amendment to Regulation 11(2). Regulation 11(2) prohibits acquisition of ‘additional shares’. These words are amended and now read’ additional shares entitling him to exercise voting rights’. I confess I do not understand this amendment and its intent. The Take-over Regulations define shares as shares carrying voting rights including securities that entitle the holder to receive shares with voting rights, but excluding preference shares. The amendment now says that the additional shares should be such that should entitle the acquirer to exercise voting rights. Numerous questions arise of which I do not have answer and seek readers’ views:
a) Does this mean that, for acquisitions under 11(2), only shares presently carrying voting rights are covered? Does this mean, therefore, that, for example, fully convertible debentures can be acquired? But then, what would happen at the time of ‘conversion’ ?
b) The 2nd Proviso obviously is intended to be an exception to 11(2) and in such case, how can it have broader scope than 11(2) itself? Of course, under the 2nd Proviso one has to acquire ‘shares or voting rights’ through open market operations on the stock exchange and hence this issue may be academic.
c) Why has 11(1)not been so amended? Does this mean that creeping acquisition up to 55% may be of any type of ‘shares’ but thereafter, only by acquisitions of additional shares with such voting rights?
(13) To conclude, it is likely that this is just one of the many tweaking amendments that have been made to Regulations to try to revive stock markets. The law of course gets only more complex in the process! But who bothers.
