Takeover Regulations: Intention to Acquire

[The following post is
contributed by Yogesh Chande, who is a Consultant with Economic Laws Practice, Advocates &
Solicitors. Views of the author are personal]
In an order
passed by the SEBI, Adjudicating Officer in the context of the SEBI
(Substantial Acquisition of Shares and Takeovers) Regulations (SEBI
Takeover Regulations
), the Adjudicating Officer relying upon a decision
of the Securities Appellate Tribunal (SAT) has held that, mere intention to acquire shares without a definitive concluded
contract cannot be the basis for triggering the requirement of making an open
offer under the Takeover Regulations.
It may be noted that under the SEBI Takeover
Regulations, an acquirer is obliged to make a public announcement for an open
offer within four working days of – (a) agreement to acquire; or (b) deciding
to acquire the shares carrying voting rights.
The facts in the present case are quite
1. On 28 July 2011, the
acquirer was already holding 14.96% of the paid-up capital of the target
company. The requirement of making an open offer then, under the erstwhile SEBI
Takeover Regulations, was upon reaching 15% as against the present requirement
of 25%;
2. On 29 July 2011, the
acquirer placed an order through the stock broker for acquiring additional 2.1%
of the paid-up capital of the target company from the open market (on the floor
of the stock exchange);
3. On 29 July 2011, the stock
broker executed the trade and purchased the additional shares for the acquirer;
4. On 29 July 2011 itself,
the acquirer reversed the aforesaid purchase order and the delivery of shares
was squared off by the stock broker. Thus, no additional shares were acquired
by the acquirer and his shareholding in the target company remained at 14.96%.
The acquirer was not entitled to any net delivery on the settlement date, which
would have taken his shareholding at 15% or more in the target company.
In view of the above specific facts, the
Adjudicating Officer held that, since the acquirer on T+2 settlement date, did
not become the beneficial owner of the additional shares, which would have
increased his holding to 15% or more, the obligation to make an open offer was
not triggered. The proceedings against the acquirer were accordingly disposed
off by the Adjudicating Officer.
1. A T+2 settlement cycle means that the final
settlement of transactions done on T, i.e., trade day, by exchange of monies
and securities between the buyers and sellers respectively takes place on
second business day (excluding Saturdays, Sundays, bank and stock exchange
trading holidays) after the trade day. The transactions in securities of
companies which have made arrangements for dematerialization of their
securities are settled only in demat mode on T+2 on net basis, i.e., buy and
sell positions of a member-broker in the same scrip are netted and the net
quantity and value is required to be settled.
2. However, transactions in securities of
companies, which are in “Z” group or have been placed under
“trade-to-trade” by stock exchanges as a surveillance measure
(“T” group), are settled only on a gross basis and the facility of
netting of buy and sell transactions in such scrips is not available
3. In the present case, it is worth noting
that, the equity shares of the target company during the period [settlement
cycle of 29 July 2011] as it appears, were not trading on stock exchanges in
“Z” group i.e. trade-to-trade. This particular aspect, came to rescue [defence
before Adjudicating Officer] the acquirer, which enabled the acquirer to square
off his position on T day [29 July 2011] itself, as otherwise he would have
acquired additional voting rights over the target company which would have made
him the beneficial owner, resulting in triggering an open offer under the SEBI
Takeover Regulations.

– Yogesh Chande

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.

1 comment

  • I have two questions in respect of this judgement:
    1. Whether a person holding less than 25% shares can acquire and sell any number of shares (which otherwise cross 25%)without triggering reg.3 (1) and 3 (3)?

    2. Whether the contract in this case can not be held as 'concluded contract'?

    When Mr. Bhavook gave an order to purchase 2% shares and the shares were bought by broker at the same time the contract of acquisition is concluded. The sale of shares is a separate contract. If the order was given but not got executed due to some reasons, then one can say that the contract is not concluded.
    Further, consideration of gross acquisition only in case of creeping and not in this cases is also not justifiable.

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