Analysis of ‘Bulk Deal’ under the SEBI Takeover Code

[Tanmay Purohit and Mayank Sen are 4^th year B.A., LL.B. (Hons.) students at School of Law, Raffles University, Neemrana (Rajasthan)]

The Securities Appellate Tribunal (“SAT”) on 28 May 2018, while deciding on appeals against several orders of the Securities and Exchange Board of India (“SEBI”) in Tarun Jiwarajka v. Securities and Exchange Board of India, undertook a comprehensive interpretation of the provisions of the erstwhile SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 (“Takeover Code”). The decision of the SAT concerned the application of regulation 11(2) of the Takeover Code wherein it addressed two significant questions of law.

The Takeover Code prohibits any acquisition of shares by a person who already holds between 55% and 75% shares of the target company, if such acquisition is being made without making a public announcement.[1] However, another saving clause provides for the acquisition of an additional 5% shares without public announcement provided that such acquisition is made through open market purchase on the stock exchanges.[2] Such an exemption is subject to two conditions. First, the additional acquisition of shares must not be made through ‘bulk-deal’ or ‘preferential allotment.’ Second, the acquirer’s aggregate shareholding post-acquisition must not exceed 75% in the target company.

The SAT adjudicated upon multiple appeals clubbed together against the SEBI orders in which SEBI had held the conduct of the appellants to violate the regulation 11(2) of the Takeover Code. SEBI found that the appellants, without making any public announcement, had acquired additional shares that entitled them to voting rights of more than 5% in the target company. Thus, such acquisitions of the shares were considered to be made by way of ‘bulk deal.’

The SAT, in its decision, dealt with the following two core issues –

(a) Whether the second proviso to egulation 11(2) of the Takeover Code permits the acquirer, without making a public announcement, to acquire additional 5% shares which entitles the acquirer to additional voting rights limited to 5% of the total voting rights in the company; and

(b) Whether the expression ‘bulk-deal’ in the second proviso to regulation 11(2) of the Takeover Code disentitles the acquirer from the acquisition of additional shares equivalent to 5% of voting rights without making an open offer being made by the acquirer.

In response to the first issue, the SAT held that under the second proviso to the regulation 11(2) of the Takeover Code an open offer is mandatorily required to be made when acquiring additional shares that entitle voting rights in the target company for more than 5%. However, it went on to hold that when the acquisition of shares is only up to 5% in the target company, such acquisition can be made without making an open offer.

According to the SAT interpretation, the exemption from making an open offer under the proviso to regulation 11(2) is not available if the additional shares are acquired under a ‘bulk-deal,’ i.e., when shares more than 0.5 percent are being acquired via transactions during one day.

The term ‘bulk-deal’ is not defined expressly in the Takeover Code. However, while the SEBI Circular dated 2 September 2005 defines the expression ‘bulk deals’, it is inadequate for its application to general purposes. Thus, the SAT opined that such circular was issued in a different context. 

In a series of issues related to regulation 11(2), the views of the SAT concerning the violation of that regulation have been quite firm. In Rajesh Toshniwal v. SEBI (2012), the SAT had purported the view that not making an open offer, in case of acquisition of shares that entitled the acquirer with up to 5% of the voting rights in the target company, amounted to a violation of the regulation 11(2) of the Takeover Code. A similar approach was adopted by the SAT in Ram Piari and others v. SEBI.

Thus, while rejecting the findings of SEBI, the SAT has supposedly put forward a precise interpretation of the second proviso to the regulation 11(2) of the Takeover Code. The far-reaching implications of this decision is that any acquirer who is covered under the regulation 11(2) of the Takeover Code can acquire, without making a public announcement, additional shares in the target company amounting to the voting rights of 0.5% of the total voting rights in one transaction, and up to a total of the 5% of the voting rights in the target company.

SEBI notified the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 which adheres to the principles of the Takeover Code, but makes significant amendments to the existing framework. In the amended regulation, any acquirer holding 25% or more shares of the target company can purchase additional shares of 5% without making a public announcement. However, such acquisition is subject to the condition that it must be made as a part of the bulk deal and the maximum limit of 75% shares in the target company must not be exceeded. Thus, in the amended regulation, the threshold for additional acquisition has been reduced to 25%. It is beneficial for both the investors and the promoters as it removes the requirement of making an open offer.

– Tanmay Purohit & Mayank Sen

[1] Regulation 11(2), SEBI (Substantial Acquisitions of Shares and Takeovers) Regulations, 1997.

[2] The second proviso to the Regulation 11(2), SEBI (Substantial Acquisitions of Shares and Takeovers) Regulations, 1997.