Under the SEBI (Substantial
Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Regulations”),
an acquirer must make a mandatory open offer to acquire the shares of the
remaining shareholders when the acquirer acquires shares (with voting rights)
beyond prescribed thresholds. Since the triggers are based on the acquisition
of shares with voting rights, questions could arise whether shares issued by a
company to an ESOP Trust under the SEBI (Share Based Employee Benefits)
Regulations, 2014 (“SBEB Regulations”) would be considered for purpose of
computing the triggers. This question came up in a request
for informal guidance made by Capital Trust Limited to the Securities and
Exchange Board of India (SEBI).
Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Regulations”),
an acquirer must make a mandatory open offer to acquire the shares of the
remaining shareholders when the acquirer acquires shares (with voting rights)
beyond prescribed thresholds. Since the triggers are based on the acquisition
of shares with voting rights, questions could arise whether shares issued by a
company to an ESOP Trust under the SEBI (Share Based Employee Benefits)
Regulations, 2014 (“SBEB Regulations”) would be considered for purpose of
computing the triggers. This question came up in a request
for informal guidance made by Capital Trust Limited to the Securities and
Exchange Board of India (SEBI).
One of the promoters of Capital
Trust holds 43.26% shares in the company. The company wishes to issue new
shares to its ESOP Trust (set up for the benefit of the employees) and
simultaneously wishes to convert certain pending warrants issued to the
promoter into equity shares. Taken on a post-diluted basis after considering
the issue of shares to the ESOP Trust, the increase in the promoter
shareholding will be 4.99%, i.e. within the 5% creeping limit that would
trigger the requirement for the promoter to make an open offer. The company
requested SEBI’s informal guidance on two counts: (i) whether the shares
allotted to the ESOP Trust would be taken as increase in share capital for the
purpose of calculation of the conversion of warrants into equity shares; and
(ii) whether the issue of shares to the promoter upon conversion of warrants is
below the creeping acquisition limits prescribed in regulations 3(2) and 3(3)
of the Takeover Regulations.
Trust holds 43.26% shares in the company. The company wishes to issue new
shares to its ESOP Trust (set up for the benefit of the employees) and
simultaneously wishes to convert certain pending warrants issued to the
promoter into equity shares. Taken on a post-diluted basis after considering
the issue of shares to the ESOP Trust, the increase in the promoter
shareholding will be 4.99%, i.e. within the 5% creeping limit that would
trigger the requirement for the promoter to make an open offer. The company
requested SEBI’s informal guidance on two counts: (i) whether the shares
allotted to the ESOP Trust would be taken as increase in share capital for the
purpose of calculation of the conversion of warrants into equity shares; and
(ii) whether the issue of shares to the promoter upon conversion of warrants is
below the creeping acquisition limits prescribed in regulations 3(2) and 3(3)
of the Takeover Regulations.
In response, SEBI issued an informal
guidance on December 22, 2016. On the first question, SEBI examined the
SBEB Regulations and found that under regulation 3(5) thereof the trustees of
an ESOP trust are prohibited from voting on shares held by them “so as to avoid
any misuse arising out of exercising such voting rights”. In other words,
shares held by an ESOP Trust would effectively be disenfranchised.
guidance on December 22, 2016. On the first question, SEBI examined the
SBEB Regulations and found that under regulation 3(5) thereof the trustees of
an ESOP trust are prohibited from voting on shares held by them “so as to avoid
any misuse arising out of exercising such voting rights”. In other words,
shares held by an ESOP Trust would effectively be disenfranchised.
This then leads to the answer to
the second question on whether the mandatory offer requirements under the
Takeover Regulations are triggered. Consequentially, SEBI found that the issue
of shares to the promoter would exceed 5% of the voting rights in the company,
and hence the promoter would be required to make an open offer to the other
shareholders by virtue of creeping acquisition.
the second question on whether the mandatory offer requirements under the
Takeover Regulations are triggered. Consequentially, SEBI found that the issue
of shares to the promoter would exceed 5% of the voting rights in the company,
and hence the promoter would be required to make an open offer to the other
shareholders by virtue of creeping acquisition.
Although SEBI’s informal guidance
is not explicit as to its reasoning, this outcome ensued because the shares
held by the ESOP Trust would not be counted towards the computation of voting
shares in the company. Since, in determining the open offer triggers, only the
shares with voting rights are considered both in the numerator and denominator,
the shares held by the ESOP Trust would be effectively disregarded for this
purpose. Hence, the percentage of voting shares issued to the promoter would be
computed without taking into account the shares issued to the ESOP Trust, and the
issuance of such shares will exceed 5% thereby extending beyond the creeping
acquisition limits and triggering and open offer.
is not explicit as to its reasoning, this outcome ensued because the shares
held by the ESOP Trust would not be counted towards the computation of voting
shares in the company. Since, in determining the open offer triggers, only the
shares with voting rights are considered both in the numerator and denominator,
the shares held by the ESOP Trust would be effectively disregarded for this
purpose. Hence, the percentage of voting shares issued to the promoter would be
computed without taking into account the shares issued to the ESOP Trust, and the
issuance of such shares will exceed 5% thereby extending beyond the creeping
acquisition limits and triggering and open offer.
In all, given that there is a
prohibition on voting by trustees of an ESOP Trust, it is not possible
circumvent creeping acquisition limits by structuring an issue of shares to the
ESOP Trust, as the present informal guidance from SEBI categorically establishes.
prohibition on voting by trustees of an ESOP Trust, it is not possible
circumvent creeping acquisition limits by structuring an issue of shares to the
ESOP Trust, as the present informal guidance from SEBI categorically establishes.