SEBI’s Regulation 5A under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
Introduction
In a landmark development for corporate acquisitions and delisting in India, the Securities and Exchange Board of India (SEBI) has introduced Regulation 5A under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (SAST). This new regulation, initially introduced in March 2015 through the SEBI (Substantial Acquisition of Shares and Takeovers) (Amendment) Regulations, 2015 and recently amended in December 2021 through the SEBI (Substantial Acquisition of Shares and Takeovers) (Third Amendment) Regulations, 2021, represents a significant shift in the regulatory landscape by allowing acquirers to not only acquire a controlling stake in a target company but also facilitate its delisting under a streamlined process. Specifically, this regulation permits an acquirer to make an open offer for the acquisition of shares while concurrently indicating an intention to delist the target company, thereby combining two major corporate actions into a unified procedural framework.
The strategic advantage of this regulation is evident in its ability to circumvent the traditional restrictions associated with delisting regulations. By consolidating the acquisition and delisting processes, the regulation affords acquirers a more efficient and cohesive mechanism for executing their corporate strategies, thus reducing procedural complexities and regulatory hurdles.
Recent Application of Regulation 5A
One of the most notable recent applications of Regulation 5A is the case of Blackstone Inc., a prominent American alternative investment management firm renowned for its extensive involvement in leveraged buyouts over the past three decades. Approximately two years ago, Blackstone made an open offer to acquire a controlling stake in R Systems International Ltd., a leading digital product engineering company. While Blackstone was successful in acquiring a controlling interest in R Systems, its attempt to delist the company was not successful at that time.
The case of Blackstone highlights the practical implications and challenges associated with the new regulation. Although Blackstone’s initial bid did not achieve its delisting goal, the attempt underscored the strategic requirement of Regulation 5A. By leveraging the regulatory framework, Blackstone sought to streamline its acquisition process and manage the complexities of delisting more effectively.
The implementation of Regulation 5A marks a noteworthy evolution in SEBI’s regulatory approach, reflecting a more flexible and integrated framework for managing substantial acquisitions and delisting process. This development is expected to have profound implications for future corporate transactions in India, setting a precedent for how strategic acquisitions and corporate restructurings are approached under the current regulatory environment.
Regulation 5A of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
Regulation 5A (1) of SEBI(SAST)2011 :
Notwithstanding anything in this regulation, if an acquirer makes public announcement or an open offer to acquire shares, voting rights, or control of a target company under specific regulations, they may also initiate a delisting process for that company by making a delisting offer, following the relevant regulations.
Provided, the acquirer must declare their intention to delist the target company both at the time of the public announcement of the open offer and in the detailed public statement. A later declaration of intent to delist will not be sufficient for the delisting offer required by regulation.
Provided further that, the open offer involves an indirect acquisition that isn’t considered a direct acquisition under regulation 5(2), the intention to delist must be declared initially only in the detailed public statement.
Explanation 1: The acquirer must not have been any of the following in the target company during the 2 years prior to the public announcement:
1. a promoter or part of the promoter group, or
2. directly or indirectly associated with the promoter or any person in control, or
3. a person holding more than 25% of the shares or voting rights.
Explanation 2: The acquirer shall not acquire joint control along with an existing promoter or person in control of the company
Regulation 5A (2) of SEBI(SAST)2011 :
The acquirer must fulfil delisting offer obligations as follows:
(a) The public announcement, detailed public statement, and letter of offer must include the open offer price determined according to regulation 8, as well as the indicative price for delisting.
Provided that if the open offer is for an indirect acquisition not deemed a direct acquisition under regulation 5(2), the acquirer must notify the open offer price and indicative price at the time of the detailed public statement and in the letter of offer.
Provided further that the indicative price shall include a suitable premium reflecting the price that the acquirer is willing to pay for the delisting offer, with full disclosures of the rationale and justification for the indicative price. This price can also be revised upwards by the acquirer before the start of the tendering period, which shall be duly disclosed to the shareholders.
Explanation: The indicative price shall be in accordance with regulation 2(1)(o) of the Delisting Regulations and shall not be less than the book value of the company as computed in accordance with the Explanation to regulation 22(5) of the Delisting Regulations.
(b) If the response to the offer meets the delisting threshold as outlined in regulation 21 of the Delisting Regulations:
(i) If the threshold is met, all shareholders who tender their shares will be paid the indicative price;
(ii) If the threshold is not met, all shareholders who tender their shares will be paid the open offer price.
[Regulation 21 of SEBI (Delisting of Equity Shares) Regulations, 2021 states that an offer or counter offer will be successful if the acquirer’s shareholding, combined with eligible shares tendered, reaches 90% of total issued shares, excluding certain categories, like shares held by custodians, trusts for employee benefits, and inactive shareholders. These inactive shareholders must be certified by a Peer Review Company Secretary. The cut-off date for determining inactive shareholders is when the Stock Exchange approval is received, which will be disclosed publicly.]
Regulation 5A (3) of SEBI(SAST)2011 :
If a delisting offer is not successful due to:
(a) Lack of prior shareholder approval as per regulation 11of the Delisting Regulations;
(b) Lack of prior in-principal approval from the relevant stock exchange as per regulation 12 of the Delisting Regulations;
(c) Not meeting the threshold specified in regulation 21of the Delisting Regulations,
the acquirer must announce the failure in all newspapers where the detailed public statement was published within 2 working days. They must also comply with all relevant regulations regarding the completion of the open offer.
[As per Regulation 11 of SEBI (Delisting of Equity Shares) Regulations, 2021 :
1. The company must obtain shareholder approval through a special resolution within 45 days of the Board of Directors’ approval.
2. This resolution must be passed via postal ballot and/or e-voting, following the Companies Act, 2013.
3. The company must disclose all material facts in the explanatory statement sent to shareholders.
4. The resolution is valid only if the votes in favour are at least twice the votes against it.]
[As per Regulation 12 of SEBI (Delisting of Equity Shares) Regulations, 2021 :
1. The company must apply to the relevant stock exchange for in-principle approval for delisting its equity shares within 15 working days of passing the special resolution or receiving other necessary approvals, whichever is later.
2. The application must include an audit report as required under regulation 76 of the SEBI (Depositories and Participants) Regulations, 2018, covering the six months prior to the application date.
3. The stock exchange must process the complete application within 15 working days of receipt.
4. The stock exchange cannot unfairly withhold approval but may require the company to confirm:
(a) compliance with regulations 10 and 11 of SEBI (Delisting of Equity Shares) Regulations, 2021 ;
(b) resolution of investor grievances;
(c) payment of listing fees;
(d) compliance with relevant SEBI regulations affecting shareholders;
(e) any pending litigation that may impact shareholders;
(f) any other relevant matters.]
Regulation 5A (4) of SEBI(SAST)2011 :
If a competing offer is made under regulation 20(1) of SEBI(SAST)2011:
1. The acquirer cannot delist the target company;
2. The acquirer is not liable to pay interest to shareholders for delays caused by the competing offer;
3. The acquirer must comply with all relevant regulations and announce this within 2 working days of the competing offer’s public announcement, in all newspapers where the detailed public statement was published.
Regulation 5A (5) of SEBI (SAST) 2011 :
Shareholders who have tendered shares in acceptance of the offer under sub-regulation (1) can withdraw those shares within 5 working days from the date of the announcement made under sub-regulation (3).
Regulation 5A (6) of SEBI (SAST) 2011 :
If the target company does not get delisted after a delisting offer under sub-regulation (1), but the acquirer’s shareholding exceeds the allowable non-public threshold:
1. The acquirer can attempt to delist the company again within 12 months of the open offer’s completion, as long as they still exceed the threshold.
2. This further delisting attempt will be successful if:
(i) The delisting threshold in regulation 21 is met;
(ii) At least 50% of the remaining public shareholding is acquired.
3. If this further attempt fails, the acquirer must meet the minimum public shareholding requirement within 12 months after the 12-month period mentioned in 1.
4. The floor price for the subsequent delisting attempt must be the higher of:
(i) The indicative price from the first attempt;
(ii) The floor price set under the Delisting Regulations at the time of the new attempt;
(iii) The company’s book value calculated as per the method in the regulations.
Regulation 5A (7) of SEBI (SAST) 2011 :
All provisions of the Delisting Regulations apply to both the first and subsequent attempts, unless stated otherwise in this regulation.
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