Takeover Regulations: Computing Creeping Acquisition Limits

SEBI has published its informal
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.
Aksh Optifibre Limited made an application
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.
The company’s question to SEBI
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).
After considering the provisions
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:
5. It
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. …
SEBI’s letter contains an
explanation through the workings of the acquisitions and dilutions during the
period that occurred with respect to the company.
SEBI’s interpretation is
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.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

3 comments

  • I understand that the 5% threshold is required to be calculated at each stage of acquisition and later cross-checked at the end of the financial year – per the informal guidance.

    If so, is my understanding correct that a company would not be able to proceed with a buy-back where the promoters do not intend to put forth their shares in case the 5% limit is met during the year without an open offer as the gross acquisition will result in 5% threshold being breached (while not so at the time of acquisition)?

    As a corollary, would the interpretation also suggest that in case of a buy-back (promoters do not offertheir shares) during a year (in which year the promoters do not acquire any shares) resulting in an increase of 5% in the shareholding of the promoter result in takeover code being triggered?

    Absurd if above is true. – bvm pr

  • @ bvm pr. The informal guidance seems to take into account increase in share capital on account of fresh issue of shares and not the reverse, i.e. a buyback of shares where the share capital is reduced.

    As regards your questions, a different scenario may play out in relation to a buyback as it is subject to specific exemptions from open offer under Reg. 10(4)(c) of the Takeover Regulations, provided certain conditions are satisfied.

    In case the conditions are not satisfied, however, and the buyback results in the acquirer's shareholding exceeding 5%, then the open offer requirements will be triggered.

    There could be another scenario where the buyback does not itself trigger the creeping acquisition limits because it does not increase the acquirer's holding by more than 5% during the financial year. In such a case, the question would arise as to how the remaining headroom for creeping acquisition must be computed. To that extent, the informal guidance of SEBI will come into effect in that while computing the remaining percentage available for creeping acquisition, it will have to be counted separately for each acquisition (in which scenario the headroom available for creeping post-buy back would be lesser in terms of number of shares compared to pre-buy back because the overall share capital would have reduced).

  • Truth is always absurd.

    I agree with SEBI's view, which is the position under the regulations. Also agree with Umakanth's views on the comment.

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