Background For Discussion
Whether pledge of shares {encumbrance} by promoters of a listed public company with lenders of money by way of providing security for borrowing by the listed company from such lenders would tantamount to acquisition of shares, voting rights or control by the lenders and trigger making of an Open Offer as per Chapter II where the limit of trigger is reached or beyond in terms of SEBI {Substantial Acquisition of Shares and Takeovers} Regulations 2011. {In short Take Over Code}?
Discussion
Following can be the sequence of interpretations:
{A} In the definition of “acquisition” in terms of regulation 2{1} {b} of Take Over Code, there is no mention of the terms “encumbrance or pledge” of shares.
It lays down as follows in exact words: –
“{b}. acquisition” means, directly or indirectly, acquiring or agreeing to acquire shares or voting rights in, or control over, a target company;
Essentially, this has applicability in respect of Chapter II of the Take Over Code which is relates to substantial acquisition of shares, voting rights or control resulting in acquirer making an open offer through a public announcement for acquiring shares of the target company in accordance with the Code.
{B} However these terms- “encumbrance or pledge”- are mentioned in Chapter V of the Takeover Code in regulation 28 {3}.
Following is laid down in verbatim: –
28{3}. For the purposes of this Chapter, the term “encumbrance” shall include a pledge, lien or any such transaction, by whatever name called.
In the same Chapter V, regulation 29 {4} lays down as follows in exact words: –
29{4}. For the purposes of this regulation, shares taken by way of Encumbrance shall be treated as an acquisition, shares given upon release of encumbrance shall be treated as a disposal, and disclosures shall be made by such person accordingly in such form as may be specified……………………
In the same Chapter V, regulation 31 provides for disclosure by the promoter of a target company of the shares encumbered by the promoter/ persons acting in concert with him; any invocation of such shares; or release of such shares to the stock exchanges where the shares are of target company are listed and also to the target company.
{C} It is pertinent to note that the Chapter V of the Take Over Code only relates disclosures of shareholdings and control. In view of regulation 28{3} aforesaid, the provisions of encumbrance or pledge of shares do not apply to acquisition of shares, voting rights and control in terms of Chapter II of the Take Over Code which relates to Substantial Acquisition of Shares, Voting rights or Control.
{D}. Hence it cannot be interpreted that creation of encumbrance or pledge of shares will amount to acquisition of shares invoking Chapter II of the Take Over Code.
{E} However, since the definition of acquisition, as mentioned above, also means indirect acquiring or agreeing to acquire shares or voting rights or control over a target company, a related query may arise as to whether creation of encumbrance or pledge of shares will be taken as indirect acquisition.
This query can be clarified by reading regulation 10 {1} {b} {viii} of the Take Over Regulations relating to General Exemptions.
The provision reads as follows in verbatim:
10 {1}. The following acquisitions shall be exempt from the obligation to make an open offer under regulation 3 and regulation 4 subject to fulfillment of the conditions stipulated therefor:
……………………………………….
………………………………………..
{b} acquisition in the ordinary course of business by:
…………………………………………………
(viii) invocation of pledge by Scheduled Commercial Banks or Public Financial Institutions as a pledge.
This regulation gives an exemption from the rigors of the main provisions relating to substantial acquisition, providing that INVOCATION of pledge by Scheduled Commercial Banks etc. is exempt.
This means that all INVOCATIONS of pledged shares are covered under acquisitions except that by such Banks etc. It also means that CREATION of ENCUMBERANCE or PLEDGING of shares is not covered but only where the shares so encumbered or pledged are in INVOCATION that they are covered. Thus, creation of encumbrance or pledge of shares will not be taken as indirect acquisition.
CONCLUSION
In view of the above provisions of the SEBI Take Over Code, the conclusion can be drawn as follows:-
Pledge of shares {encumbrance} by promoters of a listed public company with lenders of money by way of providing security for borrowing by the listed company from such lenders would not tantamount to acquisition of shares and voting rights by the lenders and would not trigger making of Open Offer as per Chapter II where the limit of trigger is reached or beyond in terms of SEBI {Acquisition of Shares and Takeovers} Regulations 2011.
However, where the shares so pledged are in invocation, the Open Offer be triggered where limits are reached or beyond and there are no exemptions.
Necessary disclosures shall have to be made within prescribed time in terms of said Chapter V where there is creation of encumbrance or pledge or invocation or release of shares etc.
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