Applicability Of Regulation 10 And Regulation 11 of SEBI (Substantial Acquisition Of Shares And Takeovers) Regulations 1997
Regulation 3(3) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 provides that acquisition of shares by any person, such that the individual shareholding of such person acquiring shares exceeds the stipulated thresholds, shall also be attracting the obligation to make an open offer for acquiring shares of the target company irrespective of whether there is a change in the aggregate shareholding with persons acting in concert.
However this provision was not provided for in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997 (“Takeover Regulations 1997”). Hence the question arises as to whether the acquirer, who is part of the promoter group and has acquired shares through preferential placement such that the overall acquisition is within the threshold limit of 5% as per the Regulation 11 of Takeover Regulations 1997, but the acquirer’s individual shareholding in the Company has increased beyond the threshold limit of 15% triggers Regulation 10 of SEBI of the Takeover Regulations 1997.
Our submission with regard to the aforesaid query is as follows:
- As per Regulation 2(1)(b) of the Takeover Regulations an acquirer is defined as “any person who, directly or indirectly, acquires or agrees to acquire shares or voting rights in the target company, or acquires or agrees to acquire control over the target company, either by himself or with any person acting in concert with the acquirer”.
- From the definition it is clear that acquirer includes persons acting in concert. Therefore, the acquisition by the acquirer and by all those who act in concert with the acquirer will also be considered as acquisition by the acquirer.
- All the persons/entities belonging to the promoter Group as declared at the time of the IPO or in the last shareholding pattern disclosed to the stock exchange have to be considered as “persons acting in concert” and are therefore to be treated as one unit.
- If the shareholding of the promoters as a group is above 15% and less than 55% any fresh acquisitions by any of the constituents of the promoter Group would be squarely covered by Regulation 11(1) and not Regulation 10 of the Takeover Regulations
- The triggering or otherwise of Takeover Regulations is to be examined on the basis of aggregate shareholding/voting rights of all persons acting in concert with the acquirer and not with reference to share holding/voting rights held by a person who is a constituent of ‘persons acting in concert’
- The acquirer was and is a person acting in concert with other person/ entities belonging to the promoters Group and in view thereof is covered by Regulation 11(1) of Takeover Regulations, since the shareholding of the promoters group is within the band specified in Regulation 11(1) of Takeover Regulations.
- On a proper reading of regulation 11(1), it is clear that the benefit of consolidation of shares / voting rights to the extent of 5% in a financial year is not relatable to each person separately i.e. the acquirer and each individual acting in concert with the acquirer but to a group and persons acting in concert. The shareholding/voting rights of a group /all persons acting in concert as a whole is the criteria and the determining factor to decide on the triggering or otherwise of the Takeover Regulations and not the individual shareholding . If as a result of fresh acquisition the individual holding of a person forming part of persons acting in concert goes beyond 15% Regulation 10 cannot and will not come into operation in view of the fact that the shareholding of the Persons acting in Concert is not within the band specified in Regulation 10 .
- If a particular group of persons/ entities have themselves declared in the past that they are persons acting in concert and have also made disclosures to this effect and such persons / entities continue to maintain that they are persons acting in concert , then their shareholding cannot be truncated in order to ascertain triggering of Regulations 10 & 11, by testing the individual shareholding of the persons/ entities on standalone basis against the threshold limits prescribed under Regulations 10 & 11.
- For ascertaining whether or not Regulation 10 has been triggered by an acquirer, the fresh acquisitions of shares/ voting rights made by the acquirer have to be added to the existing shareholding/ voting rights held by not only the acquirer but also by the persons acting in concert with the acquirer. If the acquirer alongwith persons acting in concert is already holding shares/ voting rights , then in that case there is no scope for interpreting Regulation 10 to mean that fresh acquisition / voting rights made by the acquirer will have to be added only to the existing shareholding / voting rights of the acquirer on standalone basis to the exclusion of the shareholding/ voting rights of the persons acting in concert.
- In this context, in a similar matter of acquisition of shares of Wimco Ltd, SEBI had taken a stand that though individually the Acquirer had acquired 21.89% shares ( i.e. exceeding 15% shares in Wimco) , but since the acquirer alongwith persons acting in concert was already holding 52.11 % prior to the acquisition by the Acquirer and post acquisition by the Acquirer the shareholding of Acquirer with persons acting in concert increased to 74% shares , the acquisition by the Acquirer would be covered by Regulation 11(1) of the Takeover Regulations and not by Regulation 10.
- In the matter of Jamnalal Sons Pvt Ltd.,the Adjudicating Officer SEBI vide his Order dated August 28, 2008 has, while interpreting the provisions of Takeover Regulations, has held that the acquisition by the acquirer means the acquisition by the acquirer alongwith persons acting in concert and for determining the triggering provisions of Takeover Regulations , the acquisitions made by the acquirer alongwith the persons acting in concert has to be taken into account.
- In this context we also draw your attention to the Informal Guidance given by SEBI in the matter of Kanishk Steel Industries Ltd (No CFD/DCR/AK/IG/ /2004 dated December 3, 2004) & Nagreeka Exports Limited (No CFD/DCR/AK/IG/60950/2006 dated February 22, 2006). Interpretive letters issued by SEBI in the aforesaid matters also support our submission that Regulation 10 & Regulation 11 are mutually exclusive and if the promoters acting in concert are already holding more than 15% shares in a target company , then in that case Regulation 10 has no applicability to additional acquisition of shares by such promoters and the additional acquisitions of such promoters will be covered by Regulation 11.
- The untenability of the interpretation sought to be placed on the provisions of Regulation 10 can also be illustrated with the help of following examples:
- A & B are disclosed as persons acting in concert and are holding 13% and 1% shares/ voting rights respectively in a Target Company and together both A & B are in total holding 14% shares/ voting rights ( i.e. below 15% ) in the Target Company. Thus, the fresh acquisitions by A & B would be covered by Regulation 10 of Takeover Regulations .
- B makes a fresh acquisition of 2% shares , resulting in individual shareholding of B increasing from 1% to 3% and the combined shareholding of A & B ( both persons acting in concert ) to 16% shares/ voting rights ( i.e. above 15% ) in the Target Company .Since the shareholding/voting rights of A & B ( both persons acting in concert) consequent to fresh acquisition of 2% shares/ voting rights has breached 15% threshold limit, both A & B would be required to make public announcement in terms of Regulation 10 .
- Post making of the open offer of 20% shares/ voting rights to the public shareholders of the Target Company, B’s shares/ voting rights increase to 23% (on the assumption that shares in the open offer are acquired by B in its name and no shares are acquired by A in its name) and the shareholding/ voting rights of A remains constant at 13%.Since the shareholding/ voting rights of A & B are to the tune of 36% i.e. between 15% and 55% , fresh acquisitions by A & B would have to be tested under Regulation 11(1) . In terms of Regulation 11 (1), both A & B would be entitled to consolidate their shareholding/ voting rights to the extent of 5% in a particular financial year .
- Now if in a financial year, B makes a fresh acquisition of 2 % shares/ voting rights ( resulting in increase in B’s individual shareholding from 23% to 25%) and , subsequently , A makes a fresh acquisition of 3 % shares/ voting rights ( resulting in increase in A’s individual shareholding from 13% to 16%) , then the said fresh acquisitions totalling to 5% ( i.e. shareholding changing from 36% o 41%) would be within the permissible limit as prescribed in Regulation 11(1) .
- In such a situation, it would be incorrect to suggest that though the combined fresh acquisitions by A & B ( who are persons acting in concert) are within the permissible limits under Regulation 11(1) , but A’s individual fresh acquisition has increased A’s individual shareholding/ voting rights from 13% to 16 % (i.e. beyond 15 % ) for the first time, thus A is obligated to again make the open offer for breaching the threshold limit of 15% under Regulation 10 .
- Definitely, in the facts of the example, A cannot be held to have breached limit of 15 % twice, first acting in concert with B and secondly on standalone basis . If A has breached 15% limit earlier, there is no scope for A again breaching the 15 % limit again .
- In the same example , if A makes fresh acquisition of 4% instead of 3%) then in that case both A & B acting in concert would be triggering Regulation 11(1) since their combined shareholding would increase by 6% (from 36% to 42% i.e. in excess of 5%) and for the same acquisition of 4% , A individually ,would be triggering Regulation 10 , as on standalone basis his shareholding would increase from 13% to 17% (i.e. in excess of 15%).
- Therefore, A would also be liable for making another open offer under Regulation 11 (1) alongwith B ( the person acting in concert) where the liability of both A & B would be joint and several and B would not be entitled to tender the shares in the open offer.
Further, A would be solely liable for making the open offer under Regulation 10, for increase in its shareholding on stand alone basis to the exclusion of B’s shareholding , despite the fact that both A & B are persons acting in concert and have made disclosures to this effect. In the said open offer to be made by A, B (who is otherwise person acting in concert with A) can also tender its shares, since B’s shareholding is not the cause of trigger and is not included in A’s shareholding. Same would be totally incorrect and contrary to the provisions of Takeover Regulations.
Thus in view of the facts given above we are of the opinion that Regulation 10 of the Takeover Regulations 1997 is not triggered in this instance, however henceforth under the new Takeover Regulations 2011 any individual acquiring more than the threshold limit irrespective whether acting in concert or otherwise is required to make an open offer.
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