Disclosures Of Shareholding & Control Under SEBI Regulations

CS D Hem Senthil Raj

Disclosures of Shareholding and Control under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011

Overview:

The intent behind the disclosure regime is not only to ensure that the target company is not taken by surprise but also to ensure that the price discovery in the market for the shares of the target company takes place in an informed manner, where the very fact of an interested acquirer increasing his holding would contribute to the emergence of price at which sellers would be willing to sell their shares in the market. Also, such price discovery has implications for the computation of the minimum offer price in the look back period. While it is very clear what percentage of the equity shares of a company are held by parties exceeding the thresholds, it is not clear what that party’s effective economic interest in the company actually is, since it includes instruments which while presently not entitling the holder to voting rights, may, in future, lead to accrual of shares/voting rights.

Important Definitions:

Acquirer:

Acquirer means any person who, directly or indirectly, acquires or agrees to acquire whether by himself, or through, or with persons acting in concert with him, shares or voting rights in, or control over a target company.

Acquisition:

Acquisition means, directly or indirectly, acquiring or agreeing to acquire shares or voting rights in, or control over a target company.

Persons acting in concert (PAC’s):

A person with a common objective or purpose of acquisition of shares or voting rights in, or exercising control over a target company, pursuant to an agreement or understanding, formal or informal, directly or indirectly co-operate for acquisition of shares or voting rights in, or exercise of control over the target company.

Deemed PAC’s:

i)         A company, its holding company, subsidiary company and any company under the same management or control

ii)       A company its directors and any person entrusted with the management of the company

iii)     Directors of companies referred to in items (i) & (ii) above and associates of such directors.

iv)      Promoters and members of the promoter group

v)        Immediate relatives

vi)      A mutual fund, its sponsor, trustees, trustee company and asset management company

vii)    A collective investment scheme and its collective investment management company, trustees and trustee company.

viii)     A venture capital fund and its sponsor, trustees, trustee company and asset management company

ix)      A foreign Institutional investor and its sub accounts

x)        A merchant banker and its client, who is an acquirer

xi)      A portfolio manager and its client, who is an acquirer

xii)       Banks, financial advisors and stock brokers of the acquirer or of any company which is a holding or subsidiary of the acquirer, and where the acquirer is an individual, of the immediate relative of such individual.

xiii)     An investment company or fund and any person who has an interest in such investment company or fund as a shareholder or unit holder having not less than 10%
of the paid up share capital of the investment company or unit capital of the fund, and any other investment company or fund in which such person or his associate holders not less than 10% of the paid up share capital of that investment company or unit capital of the fund.

Broader Definition of Shares as per SEBI (SAST):

As per Regulation 31(2) the following shall be regarded as shares:

1)    Equity Shares

2)    Convertible Debentures

3)    Convertible Warrants

Types of Disclosures:

1)    Disclosure of Acquisition and Disposal                  – Regulation 29

2)    Continual Disclosures                                            – Regulation 30

3)    Disclosure of Encumbered Shares                          – Regulation 31

Persons who are obliged to make such disclosures:

Regulation 28 of SEBI (SAST) states that the following persons are obliged to make such disclosures as mentioned above:

1)    Any Acquirer of the Target Company.

2)    Promoter of the Target Company.

3)    Persons Acting in Concert (PAC’s) of the Target Company.

Disclosure of acquisition and disposal (Regulation 29): [Event Based]

Note:

1)    Shares taken by way of encumbrance shall be treated as an “acquisition”.

2)    Shares given upon release of encumbrance shall be treated as a “disposal”.

The requirement as listed above shall not apply to a scheduled commercial bank or public financial institution as pledgee in connection with a pledge of shares for securing indebtness in the ordinary course of business.

Continual Disclosures of aggregate shareholding (Regulation 30):

 Disclosure of Encumbered Shares (Regulation 31(1)):

Trigger Limits for the above disclosures:

The word “shares” for disclosure purposes include convertible securities also. Hence for computation of trigger limits for disclosures given above, percentage w.r.t shares shall be computed taking in to account total number of equity shares and convertibles and the percentage w.r.t voting rights shall be computed after considering voting rights on equity shares and other securities (like GDRs, if such GDRs carry voting rights)

Penal Provisions/Conclusion:

The above disclosures are mandatory under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011. In case of any non-compliance with the provisions of the regulations, SEBI has the power under Section 15A read with Regulation 7 of the SEBI (SAST) Regulations 2011 to impose penalties including the following:

a)      directing the divestment of shares acquired;

b)      directing the transfer of the shares / proceeds of a directed sale of shares to the investor protection fund;

c)       directing the target company / any depository not to give effect to any transfer of shares;

d)      directing the acquirer not to exercise any voting or other rights attached to shares acquired;

e)      debarring person(s) from accessing the capital market or dealing in securities;

f)       directing the acquirer to make an open offer at an offer price determined by SEBI in accordance with the Regulations;

g)      directing the acquirer not to cause, and the target company not to effect,

h)      any disposal of assets of the target company or any of its subsidiaries unless mentioned in the letter of offer;  directing the acquirer to make an offer and pay interest on the offer price for having failed to make an offer or has delayed an open offer;

i)        directing the acquirer not to make an open offer or enter into a transaction that would trigger an open offer, if the acquirer has failed to make payment of the open offer consideration;

j)        directing the acquirer to pay interest of for delayed payment of the open offer consideration;

k)      directing any person to cease and desist from exercising control acquired over any target company;

l)        directing divestiture of such number of shares as would result in the shareholding of an acquirer and persons acting in concert with him being limited to the maximum permissible non-public shareholding limit or below.

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