India: SEBI Plugs Loopholes In Takeover Code

Considering the ambiguities in the interpretation of certain provisions of the Securities and Exchange Board of India ("SEBI") (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the "Takeover Code"), SEBI recently introduced certain important amendments to the Takeover Code. We have discussed herein below some of the important amendments.

MARKET PURCHASE KEPT AT PAR WITH NEGOTIATED PURCHASE

One of the important amendments is insertion of new Regulation 22(2A) to the Takeover Code. This amendment seems to have been introduced to plug the loophole with respect to the issue dealt in SEBI's informal guidance issued to R Systems International Limited ("Target Company") on July 09, 2012 and the Securities Appellate Tribunal ("SAT") order dated September 07, 2012.

In the aforesaid matter, Mr. Bhavook Tripathi had acquired shares of the Target Company through market purchases without complying with provisions of Regulations 22(1) and 22(2). In this respect, SEBI vide its informal guidance clarified that Regulation 22(1)1 of the Takeover Code is applicable only to acquisition of shares pursuant to an agreement and not to market purchase. We had analyzed the aforesaid informal guidance issued to Target Company in our hotline "SEBI distinguishes a market purchase from a negotiated purchase under the Takeover Code" dated August 09, 2012.

Considering certain complaints against Mr. Bhavook Tripathi from Target Company and others especially with respect to certain pre-understanding between him and certain sellers regarding purchase of shares of Target Company and also allegation regarding violation of certain provisions of the Takeover Code, SEBI directed Mr. Bhavook Tripathi to comply with Regulations 22(1) and 22(2)2 of the Takeover Code. Against this direction, Mr. Bhavook filed an appeal before SAT.

SAT in its order dated September 07, 2012, inter alia directed SEBI to provide the relevant information/documents in connection with certain pre-understanding with a seller. Post the SAT order, Mr. Bhavook through formal communication refuted all the allegations and also without accepting the existence of pre-understanding with a seller agreed to deposit in the escrow account 100% of the open offer consideration. Based on this undertaking, SEBI responded that it may not initiate any actions against Mr. Bhavook with respect to violation of Regulations 22(1) and 22(2) of the Takeover Code.

Analysis: Prior to this amendment and referring to the informal guidance, earlier SEBI was distinguishing between market purchase and negotiated purchase. However, based on the observations made and the issues analyzed in the above case SEBI realized that market purchase could be pre-negotiated without a written agreement and thereby acquirer could avoid the compliance of Regulations 22(1) and 22(2). In order to plug this loophole, SEBI has now imposed certain restrictions in case of acquisition of shares through market purchases and in this regard has inserted a new Regulation 22(2A) in the Takeover Code as follows:

"An acquirer may acquire shares either through preferential issue or stock exchange settlement process other than bulk or block deal subject to fulfillment of the following:

Such shares are kept in an escrow account;

(b) The acquirer not exercising any voting rights over such shares kept in the escrow account.

Provided that such shares may be transferred to the account of the acquirer, subject to the acquirer complying with requirements specified in Regulation 22(2)."

With the insertion of sub-regulation (2A), acquirers can now acquire the shares via preferential issue or stock exchange settlement process subject to the compliance of the conditions mentioned therein.

TIMING FOR MAKING A PUBLIC ANNOUNCEMENT

Regulation 13 of the Takeover Code provides for the timing of making a public announcement for different modes of acquisition of shares of a target company. SEBI has made certain changes in respect of timing of making a public announcement in case of

(a) preferential allotment of shares; and

(b) acquisition of shares of a target company by more than one mode of acquisition of shares.

Preferential allotment of shares

In case acquisition of shares is under preferential issue which triggers an open offer requirement an acquirer is required to make a public announcement on the date on which a special resolution is passed by the target company under Section 81(1A) of the Companies Act, 1956 for the acquisition of shares or voting rights in or control over the target company.3

Amendment has been made to Regulation 13(2) pursuant to which an acquirer is required to make a public announcement on the date when the board of directors of the target company authorizes such preferential allotment of shares as opposed to the earlier case wherein the announcement was to be made on date on which a special resolution is passed.

Analysis: The rationale for this amendment is that the day Board approves the preferential allotment, the market comes to know about the same and the share price becomes volatile on account of the knowledge about the preferential allotment in spite of the fact that the shareholders have not approved the preferential allotment. To plug this loophole resulting in volatility in share price, SEBI has changed the date for making a public announcement from date of passing of shareholders resolution to date of passing of Board resolution.

More than one mode of acquisition of shares

Currently, Takeover Codes provides for the timing of making a public announcement for the different modes of acquisition of shares. However, Takeover Code is silent about timing of making a public announcement in case an acquirer intends to acquire shares of a target company by way of more than one mode of acquisition of shares as provided under Regulation 13 of the Takeover Code.

In order to address the aforesaid issue, a new Regulation 13(2A) has been inserted4 . With this amendment, in case of more than one mode of acquisition of shares either by way of an agreement and the one or more modes of acquisition of shares as provided under Regulation 13(2) of the Takeover Code or only through one or more modes of acquisition as provided under Regulation 13(2) of the Takeover Code, an acquirer is required to make a public announcement on the date of first such acquisition giving the details of the proposed subsequent acquisition.

Analysis: The above change is welcome since there was always an ambiguity on the timing for making a public announcement in a situation where the acquirer was proposing to acquire the shares through a combination of purchase from an existing shareholder and purchase through preferential allotment since the timing for making a public announcement was different in case of secondary purchase and preferential allotment, This change will bring the much needed clarity with respect to such cases where more than one mode of acquisition is used by the acquirer to purchase the shares of the target company.

WITHDRAWAL OF OPEN OFFER NOT ALLOWED IN CASE OF UNSUCCESSFUL PREFERENTIAL ISSUE

As per the Takeover Code, an open offer cannot be withdrawn once the public announcement is made except in certain cases specified in Regulation 23. One of such cases is when any condition stipulated under the agreement triggering the open offer for effecting such agreement has not been met for reasons outside the control of the acquirer provided such conditions were specifically disclosed in the letter of offer and detailed public statement5.

SEBI has now clarified by adding a proviso to clause (C) to sub-regulation (1) of Regulation 23 of the Takeover Code that an acquirer shall not be permitted to withdraw an open offer made pursuant to the public announcement made as per Regulation 13(2)(g) even if the proposed acquisition through a preferential issue is unsuccessful.

Analysis: The above amendment has been introduced to address the issue of share price volatility between the date of Board resolution and date of shareholders resolution as discussed earlier. Post this amendment, the acquirer will have to be doubly sure about the success of the shareholders' special resolution for approving the preferential issue failing which the acquirer will be obligated to make an open offer even in absence of any preferential allotment of shares by the target company.

SCOPE OF DISCLOSURE NORMS WIDENED

As per the provisions of the Takeover Code, an acquirer who along with persons acting in concert ("PAC") holds shares or voting rights entitling them to five per cent or more of the shares or voting rights in a target company, shall disclose every acquisition or disposal of shares of such target company representing two per cent or more of the shares or voting rights in such target company in such form as may be specified (Regulation 29 (2)).

SEBI has now replaced the present Regulation 29(2) with the new sub-regulation which is more clarificatory in nature and also the same as provided in Regulation 13(3) of the SEBI (Prohibition of Insider Trading) Regulations, 1992. As per the new Regulation 29(2), an acquirer along with PAC if he holds shares or voting rights entitling them to five per cent or more of the shares or voting rights in a target company shall disclose the number of shares or voting rights held and change in shareholding or voting rights, even if such change results in shareholding falling below five per cent, if there has been change in such holdings from the last disclosure and such change exceeds two per cent of total shareholding or voting rights in the target company.

Analysis: Some of the acquirers holding more than 5% were taking benefit of the ambiguity under erstwhile Regulation 29(2) and not making disclosures in cases where the shareholding fell below 5% after the sale and such sale did not warrant disclosures under Regulation 29(2). On account of the same, it became difficult to track the cases where disclosure was made under Regulation 29(1) and the shareholding fell below 5% on account of sale being less than 2%. Post amendment it has been clarified that even if the change makes the acquirer's holding fall below 5%, he is obligated to make the disclosure if such change is of 2% or more from the last disclosed shareholding.

CALCULATION OF TIME LIMIT FOR DISPOSAL OF SHARES IN CASE OF BUY-BACK OF SHARES

As per Regulation 10(3) of the Takeover Code, a shareholder is not required to make an open offer in case his voting rights in a company increases beyond the threshold limit pursuant to buy-back of shares provided such shareholder reduces his shareholding such that his voting rights fall to below the threshold within ninety days from the date on which the voting rights so increase.

With this amendment, time limit of ninety days to reduce the shareholding is calculated from the date of closure of the buy-back offer rather than the date on which the voting rights so increase as provided in sub-regulation (3) of Regulation 10 of the Takeover Code.

Analysis: The intent behind introducing this change seems to be in line with the basic principle of Takeover Code for trigger of open offer i.e. at the time of acquisition of shares or agreeing to acquire the shares, whichever is earlier. The date of closure of buy-back offer precedes the date of increase in voting rights post buy-back since post the date of closure of buy-back offer, payment of buy-back consideration is required to be made and the shares tendered are required to be bought back. The date of closure of buy-back is the date by when the event of crossing the threshold for trigger of open offer becomes certain and hence the timeline of 90 days post this amendment will happen from the date of closure of the buy-back offer instead of date of increase in voting rights.

CONCLUSION

Any new law always brings along with it new set of ambiguities. With the Takeover Code being more than 18 months old, SEBIs had to come out with these changes based on the feedback from market participants and lessons from the open offers already made. It's important that SEBI continues to introduce such amendments so that the stakeholders are able to plan their actions beforehand rather than get bogged down by the ambiguities in interpreting the Takeover Code.

Footnotes

1. Regulation 22(1) of the Takeover Code
The acquirer shall not complete the acquisition of shares or voting rights in, or control over, the target company, whether by way of subscription to shares or a purchase of shares attracting the obligation to make an open offer for acquiring shares, until the expiry of the offer period:

2. Regulation 22(2) of the Takeover Code: Notwithstanding anything contained in sub-regulation (1), subject to the acquirer depositing in the escrow account under regulation 17, cash of an amount equal to one hundred per cent of the consideration payable under the open offer assuming full acceptance of the open offer, the parties to such agreement may after the expiry of twenty-one working days from the date of detailed public statement, act upon the agreement and the acquirer may complete the acquisition of shares or voting rights in, or control over the target company as contemplated.

3. Regulation 13(2)

4. (2A) Notwithstanding anything contained in sub-regulation (2), a public announcement referred to in regulation 3 and regulation 4 for a proposed acquisition of shares or voting rights in or control over the target company through a combination of,- (i) an agreement and any one or more modes of acquisition referred to in sub-regulation (2) of regulation 13, or (ii) any one or more modes of acquisition referred in clause (a) to (i) of sub-regulation (2) of regulation 13, shall be made on the date of first such acquisition, provided the acquirer discloses in the public announcement the details of the proposed subsequent acquisition.

5. Regulation 23(1) (c)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.