[Chandragupt is a 5th year B.A.,LL.B.(Hons.) student and Varnika Pasricha is a 5th year B.B.A.,LL.B.(Hons.) student, both at the Jindal Global Law School]
The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 2011 [“SAST Regulations”] envisage two types of offers – mandatory open offers and voluntary open offers. While mandatory open offers are traditionally understood to be governed under regulation 3, voluntary open offers are dealt with under regulation 6. Regulation 6, which is explicitly titled “Voluntary Open Offer”, unlike the case under regulation 3 which is titled “Substantial acquisition of shares or voting rights”, stipulates, inter alia, that an acquirer holding at least 25% shares in a target company can make a voluntary open offer under the SAST Regulations through a public announcement. Regulation 6 also contains provisions stipulating that (i) the acquirer must not have acquired any shares of the target during the 52 weeks prior to such public announcement; (ii) during the offer period, such acquirer will not be entitled to acquire any shares otherwise than under the open offer; and (iii) after making such public announcement, the acquirer cannot acquire any shares of the target company for a period of six months after completion of the open offer (except pursuant to another voluntary open offer). Further, regulation 7 sets out the condition that an open offer under regulation 6 must be made for a minimum of 10% of the shares of the target company. It is pertinent to note that similar stringent requirements have not been laid down under regulation 3.
A question arises as to whether a voluntary open offer can be made by an acquirer (along with the persons acting in concert) holding less than 25% shares without having to comply with the rigour of Regulation 6. This question becomes relevant because the high incidence of promoter shareholding in Indian companies coupled with the effect of the conditions stipulated under the regulation operates to thwart hostile takeovers in the Indian context. Interestingly, as has been previously discussed here, on examining the report of the Takeover Regulations Advisory Committee, which is the source of the SAST Regulations, it can be seen that placing barricades in front of hostile acquirers in the form of these conditions was never the legislative intent. It has also been previously discussed (here and here) that the SAST Regulations themselves do not prohibit hostile takeovers. Nevertheless, the operation of the regulation 6 conditions makes a traditional hostile takeover in India practically impossible. Thus, the permissibility of a voluntary offer that can be made without the operation of the stringent conditions under regulation 6 would come as a relief to hostile raiders.
However, the common notion seems to be that voluntary offers under the SAST Regulations are governed entirely by regulation 6, while regulations 3 and 4 pertain to mandatory (or triggered) open offers, thus making it inevitable for hostile raiders to comply with the rigour of regulation 6. Nevertheless, an alternative approach can be taken that the conditions stipulated under regulation 6 become applicable only when a voluntary offer seeks to avail of the lower offer size of 10%, but not otherwise (as has been discussed here). It can be argued that the mechanism under regulation 6 is merely one of the alternatives that can be opted for by acquirers, and there is no prohibition from making a voluntary offer under regulations 3(1), 3(2), or 4 as the case may be, for all the shares of a target company or for the general minimum offer size as mandated under regulations 3 and 4, i.e., 26% of the shares. It is also imperative to note that the phraseology of regulations 3 and 4 does not seem to restrict their application to mandatory open offers alone.
This approach has been affirmed by the regulator in its FAQs (specifically FAQs 17 and 18) wherein it has been clarified that an acquirer holding less than 25% shares of the target company is eligible to make a voluntary offer provided the total offer size is not less than 26%. It further categorized voluntary offers into two: (i) offers by persons holding more than 25% and; (ii) offers by persons holding less than 25%, and has laid down different conditions for both categories. For instance, while offers of the first category are mandated to have a minimum offer size of 10%, offers of the second category are mandated to have an offer size of a minimum of 26%. similarly, while the offer size cannot exceed the maximum permissible non-public shareholding (75%) for the first category, the offer size can be for the entire share capital of the target company for the second category.
It is worth mentioning that the introductory paragraph to the SEBI FAQs offers a disclaimer that they are merely a “simplistic explanation/clarification of terms/ concepts …[and] …should not be regarded as an interpretation of law nor be treated as a binding opinion/guidance from the Securities and Exchange Board of India”. However, in the order dated 30 October 2014 in the matter of the Open Offer made by Lorgan Lifestyle Limited to acquire SVC Resources Limited wherein SEBI was faced with the argument that FAQs do not have the force of regulations and hence, must not be considered, the regulator opined thus:
“The question before me is whether SEBI can interpret its own regulations, which it has done in the form of FAQs. I am of the opinion that it can and it should, otherwise doubts raised about the effect of regulations would bring the entire business to a halt. I am of the opinion that such interpretations are valid so long as these are transparent and applied consistently without discrimination.”
Moreover, in the Supreme Court case of Prakash Gupta v SEBI dated 23 July 2021 where the matter pertained to compounding of offences, it was recognised that it is imperative to seek the opinion of SEBI as envisaged in its FAQs, since SEBI is an expert body.
Hence, even though the FAQs cannot be said to have the force of law, they serve to indicate the regulator’s approach to concepts under the SAST Regulations and must be considered as long as they are non-arbitrary and consistent with the law in force. Since the language of regulations 3(1), 3(2) and 4 does not explicitly employ the term ‘mandatory offers’, it can be inferred that the regulation is capable of accommodating voluntary offers. Therefore, SEBI FAQs permitting voluntary offers by acquirers holding less than 25 percent of the shares of the target company seem valid as there is no contradiction between the provisions and the interpretation provided in the FAQs when such an offer is understood to be made under regulations 3(1), 3(2) or 4.
Interestingly, the SEBI order in the matter of SVC Resources further strengthens this approach as it dealt with a voluntary offer made under regulations 3(1) and 4 by an acquirer holding less than 25% of the target company’s shares. SEBI permitted the offer by holding that in cases where the pre-offer holding is less than 25%, regulation 6 of the SAST Regulations remains inapplicable and the acquirer is free to make the offer under regulations 3(1), 3(2), or 4, as the case may be. It was observed that:
“Regulation 3 and 4 mandate open offer by an acquirer if he breaches the limits mentioned therein and if control is acquired. However, there could be situations where proposed acquirers could make an open offer as they intend to consolidate/increase their shareholding in a target company when such post-offer shareholding is expected to be in excess of the percentages mentioned under regulation 3 and/or regulation 4.”
In addition to the aforementioned matter, there have also been the following instances where acquirers have made voluntary offers under regulations 3(1), 3(2), or 4 when their pre-offer holding was less than 25%:
- Pre-offer shareholding of the acquirer (and PACs) making a voluntary open offer for the acquisition of 26% of the shares of Lykis Limited was 24.81%. (Public Announcement [“PA”]: February 27, 2015)
- Pre-offer shareholding of the acquirer (and PACs) making a voluntary open offer for the acquisition of 26% of the shares of IIFL Holdings Limited was 8.87%. (PA: July 14, 2015)
- Pre-offer shareholding of the acquirer (and PACs) making a voluntary open offer for the acquisition of 51.63% of the shares of Pioneer Agro Extracts Limited was 17.09%. (PA: February 3, 2017)
- Pre-offer shareholding of the acquirer (and PACs) making a voluntary open offer for the acquisition of 54.50% of the shares of Authum Investment and Infrastructure Limited was 20.33%. (PA: December 12, 2018)
On a review of the aforementioned instances, it is apparent that voluntary offers for an offer size of 26% or more have been permitted to be made by acquirers holding less than 25% of the shares of the target company. The interpretation that such offers can be made under regulations 3(1), 3(2), or 4 without the application of the stringent conditions under regulation 6 has held sway with the regulator. Even though SEBI practices in this regard seem consistent, there is a need to accommodate the interpretation within the language of the SAST Regulations themselves to mitigate uncertainty and to take a step towards the elimination of another grey area in the hostile takeovers landscape.
– Chandragupt & Varnika Pasricha