guidance on a matter that delves into the mechanics of computing the
creeping acquisition limit of 5% per year in a company whose share capital may
have undergone changes during the same period.
on August 17, 2012 to SEBI to seek its informal guidance on the specifics of
its case. The company’s promoters had made a series of acquisitions of shares
and global depository receipts (GDRs) of the company during the period between
April 1, 2012 and July 31, 2012. During that period, the share capital of the
company underwent dilution due to certain conversion of foreign currency
convertible bonds (FCCBs) into equity shares. While the promoters acquired
shares/GDRs at three different points in time during the period, there were two
occasions where the share capital was diluted.
was whether the 5% creeping acquisition limit under Reg. 3(2) of the SEBI
Takeover Regulations of 2011 must be calculated with reference to the total
number of shares outstanding at the beginning of the financial year (i.e.
April, 2012) or those outstanding at the time of computation of the limit (i.e.
post dilution due to conversion).
of the Takeover Regulations, SEBI arrived at an altogether distinctive
interpretation which is different from either of the situations suggested in
the company’s query to SEBI. SEBI’s approach requires the company to consider
each acquisition separately. Its reasoning is as follows:
is clarified that the quantum of acquisition of voting rights for the purpose
of regulation 3(2) of the Takeover Regulations, 2011, shall be computed
separately for every acquisition of voting rights based on the paid-up share
capital of the target company at the time of acquisition and aggregated for the
financial year. …
explanation through the workings of the acquisitions and dilutions during the
period that occurred with respect to the company.
consistent with the explanation (i) to reg. 3(2) which provides that “gross
acquisitions alone shall be taken into account regardless of any intermittent
fall in shareholding or voting rights … owing to … dilution of voting rights
owing to fresh issue of shares by the target company”. Therefore, it would be
necessary to add up the percentages of each acquisition separately without
giving effect to each dilution so as to determine the aggregate acquisitions
during the financial year.
Reasons for informal guidance: While on the question of
informal guidance, the Securities Appellate Tribunal (SAT) has passed an order
on an appeal by Gillette India Ltd., which requires SEBI to provide reasons
while rejecting an application seeking an informal guidance regarding an interpretation
of the provisions of the Securities Contracts (Regulation) Rules, 1957.
Although this order has been passed by SAT at the admission stage and not on
merits, SAT’s approach imposes an onus on SEBI to provide reasoning while issuing
informal guidance. This might be particularly so if the informal guidance is
contrary to the position sought by the company.