The Securities and Exchange Board of India (SEBI) vide its press
release dated 30th November 2015 amended the SEBI (Substantial
Acquisition of Shares and Takeovers) Regulations, 2011 for
providing exemption from making an open offer for entities whose
shareholding in a listed company increases due to forfeiture of
The amendment was in line with the discussion paper issued by
SEBI in August 2015 for seeking public comments on the issue. SEBI
stated that Increase in voting rights of any shareholder as a
result of forfeiture of partly paid-up shares held by some
shareholders is passive in nature as the process is initiated due
to non-payment of call money by defaulting shareholders. Similarly,
accrual of voting rights to the remaining shareholders, computed on
pro rata basis, upon the expiry of call notice issued to the
shareholders holding partly paid-up shares is also passive in
As per SEBI's SAST regulations,
any entity having over 25 per cent stake in a listed firm can hike
the shareholding by up to 5 per cent in a financial year. If the
limit is breached in a financial year, then that entity would have
to make an open offer.
Currently, there is no provision for
exemptions under the Takeover Regulations in case of increase in
the voting rights of a shareholder due to the expiry of call notice
period and forfeiture of partly paid-up shares and an application
has to be filed with SEBI for seeking exemption from the open offer
obligations in this regard under regulation 11 of the SAST
If a member fails to pay any call, or
installment of a call, on the day appointed for payment
i. the Board may, at any time thereafter serve a notice on him
requiring payment of so much of the call or installment as is
unpaid, together with any interest which may have accrued.
ii. The board or committee thereof shall pass a resolution
authorizing the forfeiture of share and issue of notice for this
iii. If the call money is not paid in response to such notice
threatening forfeiture, the company may, at any time thereafter,
before the payment required by the notice has been made, forfeit
the shares by a resolution of the Board to that effect.
PASSIVE INCREASE IN VOTING RIGHTS
Any increase in voting right of a stakeholder due to unpaid dues
of another shareholder should be considered passive in nature. This
is because there is no effective increase in voting rights as
voting rights on partly paid-up shares are considered to be in
proportion to the actual amount paid for these shares and, under
current rules, no individual can exercise any voting right in
respect of any share on which any call or other sums are yet to be
Any increase in voting rights on the expiry of call notice
period may not be permanent and some shareholders may pay up the
calls even after the expiry of call notice period. The shares are
forfeited only after giving prior notice to the member on his
failure to pay on the day specified for payment. The member can pay
the call amount within the time period specified in the notice. The
increase in voting rights becomes permanent only on forfeiture of
shares but the same has also been exempted under the amendment.
Also, Increase in voting rights arising out of actions
undertaken by the companies under the Companies Act, 2013 such as
rights issues, buybacks and schemes of arrangement are exempt from
the open offer obligations under regulation 10 of the SAST
regulations. The aforementioned situations have the same impact on
voting rights as in case of forfeiture as there is no positive act
on the part of the acquirer with a view to gain control over the
voting rights. The percentage increase in their voting rights was
not by reason of any act of theirs but was incidental to the
forfeiture of shares of other shareholders by the company.
Consequently, the increase in voting rights may not always be
within the knowledge or control of the existing members and may
lead to increased liability and resultant confusion. Therefore it
is imperative that they be subjected to the same treatment and be
exempted from making an Open offer.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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