Part 2
We saw in the immediately preceding
article in this column some highlights of the recently introduced SEBI
(Substantial Acquisition of Shares and Takeovers) Regulations, 2011
(‘Regulations’) which replaced the preceding Regulations of 1997. In
this second and concluding article, let us examine the newly notified
Regulations from a perspective of day-to-day applicability of the
Regulations. The first impression of the Regulations is that they apply
to takeovers including substantial acquisition of shares and control.
These are fairly rare or at least quite infrequent events. Also, the
procedure for open offers in such takeovers, etc. is quite elaborate and
hence their detailed study and analysis may not be worthwhile for most
Chartered Accountants including even those who are concerned with
compliance matters.
However, the reality is that the Regulations
apply to a far wider range of events and there are also certain
periodic compliances. These are required to be complied with even when
there is no substantial acquisition of shares or takeovers. In fact,
even if the shareholding is unchanged, there are some reporting
requirements. Acquisition of a relatively small quantity of shares can
also result in compliances and even an open offer. The problem also is
that innocuous transactions may also inadvertently lead to an open
offer. If one even casually reviews the SEBI orders where penalty or
other adverse action has been taken, a very significant number of orders
relate to non-compliance of the Regulations in situations where there
was no takeover or even substantial acquisition of shares.
The
other aspect is that even while carrying out other type of corporate
restructuring transactions, the Takeover Regulations have to be kept in
mind because they can affect the structure being worked out. A buyback
of shares, a merger of even group companies, significant borrowings and
even an innocuous rights issue could require compliance of the
Regulations.
Hence, some such situations and some regular compliances are explored in this article.
The
most common case of significant noncompliance of the earlier
Regulations of 1997 was that promoters and substantial holders of shares
did not report their holdings of shares in the manner required. A
person is required to report his acquisitions on acquiring a certain
number of shares and also, if he holds certain number of shares, then he
is required to regularly report the holding even if there is no change
in holding.
Acquisition of non-substantial quantity of shares
An
acquirer is required to report acquisition of shares when he crosses
certain specified limits. In fact, as we will see, under certain
circumstances, even the sales are to be reported. When an acquirer
[along with persons acting in concert (‘PAC’)] acquires more than 5% of
shares in a listed company, he is required to report such acquisition
within the specified time to the Company and the stock exchanges where
the shares of the Company are listed. The Company thereafter is required
to also report such acquisition to the stock exchanges. This is
obviously an early warning to shareholders of the Company (indeed even
the Promoters) that an acquirer is acquiring shares and could result in a
takeover. Arguably, this 5% limit can be viewed to be a little low to
serve as an early warning of an impending takeover. It made sense under
the 1997 Regulations when the trigger for open offer was 15%. Now the
trigger is 25%, but this trigger for disclosure of 5% remains unchanged.
Once the 5% limit is crossed, thereafter, every purchase and
sale of 2% is required to be reported. Thus, at any point of time, the
public knows what types of significant transactions are carried out by
persons holding significant quantity of shares.
Regular reporting of holdings
Even
where there is no acquisition of shares beyond the specified limit, a
person holding more than specified percentage of shares and certain
other persons are required to report their holdings periodically.
An
annual disclosure of holdings as of 31st March is required by persons
holding 25% or more shares. Similar disclosure is required by the
Promoters of the Company. This reporting is in addition to the reporting
required under other laws such as the listing agreement. Thus, the
shareholders and general public can keep track of the holdings of the
shares of such significant shareholders and stakeholders.
Encumbrances/pledges/liens
It
may sound curious why encumbrances are required to be disclosed and
that too under Regulations relating to takeovers and substantial
acquisition of shares. After all, there is no takeover or even
acquisition of shares. The issues sought to be addressed are dual.
Firstly, it is human ingenuity to find a way to avoid the law. Thus,
often, acquisitions/sales were sought to be disguised as encumbrances
and then ‘invoked’ only a little later and thus the spirit of the
Regulations of advance warning may be lost. Also, at times, certain
lenders have argued that pledges/ encumbrances in their favour, even
when they are invoked and underlying shares acquired, should not be
treated as acquisition of shares. SEBI had adopted an ad hoc approach in
this regard. Some types of encumbrances were treated not to be
acquisitions. Reporting of encumbrances were, till recently, not
required at all. Also, some part of the law was laid down by the
Securities Appellate Tribunal in appeal. Expectedly, there was still
some confusion in some areas and the recodification of the law was a
good time to make comprehensive provisions in this regard. The present
law now provides, to simplify a little, as follows.
Firstly,
encumbrances are treated similar with acquisitions in the sense of
making disclosures. Similarly, releases of encumbrances are also
required to be disclosed. However, unlike acquisitions/sales,
disclosures of encumbrances and their release is required to be made
without regard to the quantity of shares involved. However, of course,
encumbrances are not treated as acquisitions for the purposes of
triggering the open offer requirements unless the encumbrances result in
transfer of shares. What is encumbrance and what types of such
encumbrances are covered under the Regulations is a separate and
detailed subject, but suffice is here to state that the revised
definition is fairly wide.
Creeping acquisition of shares
In
the normal course, Regulations on takeovers should be attracted once
and only once — and that is in case of a takeover where the control of a
company changes from one group to another. Thus, acquisitions up to 25%
should not concern the Regulations and acquisitions beyond 25% shares
(or of control), after an open offer is made, should not concern the
Regulators. However, for several reasons, not necessarily wholly valid,
restrictions are specified even otherwise. It was argued in the early
stages of the introduction of the Takeover Regulations that Indian
Promoters did not have significant holding of shares and thus they
should be allowed to acquire further shares from time to time to
increase their holdings without requiring an open offer to be made.
Grudgingly, a certain percentage of shares (which kept changing by
amendments) was allowed to be acquired every financial year to allow
their holdings to increase slowly (and hence the term ‘creeping
acquisition’ of shares). If shares were acquired in a financial year
more than such permitted percentage, then the open offer requirements
got triggered.
Over a period of time, these requirements got fairly complicated since for every crisis in the markets or economy or for other reasons, amendments were made in the law. Thus, there were twists and turns and back-turns on the road from 15 to 75% holding (and even beyond).
The new law is now fairly simple at least in its basic structure. A person holding 25% or more shares in a company can increase his shareholding by 5% every financial year without the open offer requirements getting triggered. This he can continue doing till his holding reaches the maximum permitted to allow the minimum prescribed public holding to be maintained. Thus, for a company in which a minimum 25% holding is prescribed to be held by the public, acquisition of up to 5% per annum can be made till the maximum limit of 75% is reached.
Inter se transfer of shares
It is quite common for the promoters of a company to hold shares through various entities. The issue is: whether transfer between these entities and persons acting in concert would trigger public offer. In the normal course, since there is no increase in the total holding of an acquirer and persons acting in concert with him the open offer (or other) requirements are not attracted. However, by a slight reverse and even weird logic, since it is provided that inter se transfers are exempted subject to certain conditions, it is an accepted interpretation that inter se transfer is not exempt. Thus, if there is an acquisition even by way of inter se transfer of, say, more than 5% in a financial year, then the open offer requirements would be attracted unless certain conditions are met.
The Regulations thus provide that inter se transfer is exempted from the requirements of open offer if certain conditions are met. However, it is important to note that such acquisitions are altogether not counted as acquisitions even as ‘creeping acquisitions’. Thus, an acquirer is free to acquire further shares as ‘creeping acquisitions’ even if he has acquired shares as inter se transfer that are exempt under the Regulations.
The 1997 regulations provided for several types of inter se transfer and exempted such transfers under different conditions. In practice, some misuse of such inter se transfers was observed. The newly codified Regulations made significant modifications and while removing certain provisions that were misused, made detailed complex provisions. One common condition, for exempting inter se transfer amongst immediate relatives, is that the transferor and transferee should be disclosed as promoters/persons acting in concert, etc. for at least 3 years prior to such transfers. Further, the acquisition price for such inter se transfer should not be more than 25% of the price calculated as per prescribed formula. The intention seems to be that the acquirer should not pay more than 25% of the value of the shares that is calculated with reference to ruling market prices in the recent past or, if the shares are not frequently traded, then as per valuation of the shares in the manner prescribed.
Further, certain types of inter se transfers also need to be specially reported in the prescribed manner along with payment of prescribed fees.
Conclusion
It is seen that there are numerous requirements that would go without being complied with if one considers the Takeover Regulations to apply only to significant acquisition of shares/takeovers. Non-compliance of these requirements can result in significant adverse consequences in terms of theoretically huge penalties and open offer, apart from the taint of having violated the Regulations. A careful review of the Regulations is a must for all persons concerned with compliance of securities laws by listed companies, by their promoters and generally by large investors. Even persons concerned with restructuring of companies need to consider these requirements.
