SEBI Consultation: Forfeiture of Shares and Impact on Takeover Regulations

SEBI has issued a Discussion
Paper on “Review of policy relating to forfeiture of partly paid-up shares –
Amendments to SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011”
. The paper opens with references to partly-paid shares
and forfeiture of unpaid capital as provided under the Companies Act, 2013.
Essentially, in case of partly paid shares, the holder can exercise voting
rights only proportionate to the amount paid up (section 47(1)(b)). Moreover, in
case of non-payment of calls, the company may prevent the exercise of voting
rights on such shares if the articles so provide (section 106(1)). In any
event, the company has the ability to forfeit the shares in accordance with the
provisions of the articles. Since the prevention of exercise of voting rights
and forfeiture of shares will result in the remaining shareholders’ percentage
holding in the company increasing, a question arises as to whether that would
trigger the mandatory offer requirements under the Takeover Regulations.
Currently, the regulations are silent on this aspect, and hence SEBI seeks to
clarify the same.
In the discussion
paper, SEBI proposes to include a new exemption whereby any increase in a
shareholders’ percentage on account of forfeiture of shares or unavailability of
voting rights of other shareholders will not trigger a mandatory offer. While
this is understandable and welcome, SEBI’s broader rationale and philosophy for
this change is of greater interest. In suggesting this amendment, SEBI has
reiterated the principle that “passive” increases in shareholding ought not to
be brought within the mandatory offer requirement. It has cited other
exemptions such as buyback of shares, rights issues, schemes of arrangement and
increase in voting rights of preference shareholders on account of non-payment
of dividend. The present effort is to include a specific type of passive
increase in the form of non-payment of calls and forfeiture of shares. In case
there are other situations of passive increases not specifically covered by the
exemptions, this principle should enable parties in those circumstances to
approach SEBI for a specific exemption.

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.

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