Introduction to SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 was initiated as a protective measure to guide the acquisition and takeover of shares in a listed entity. It acts as a guardian, ensuring fairness and transparency in the stock market.
1. Objective of the Regulation: To ensure that acquirers don’t misuse their financial power to acquire shares without due processes, obligations, and public disclosures. The purpose is not merely to control but to establish a transparent procedure that’s fair to all shareholders.
2. The Role of an Acquirer: An Acquirer cannot acquire shares based solely on their financial capacity or desire. The acquisition process is subject to specific requirements and disclosures, ensuring that the acquirer’s actions don’t blindside other shareholders or unfairly tilt the balance of power.
3. Introducing the Person Acting in Concert (PAC): A vital entity in this regulation is the PAC, which refers to individuals or entities that collaborate with the acquirer in the process of acquiring shares. Both the Acquirer and the PAC are bound by stringent disclosure requirements, ensuring they act in the best interests of all shareholders.
4. Protecting the Minority: One of the primary purposes of this regulation is to shield the interests of minority shareholders. By placing checks on major acquisitions and takeovers, the regulation ensures that minority shareholders aren’t marginalized or their interests compromised.
5. Safeguarding against Hostile Takeovers: The regulation acts as a deterrent against hostile takeovers, wherein an entity acquires a company without the approval or knowledge of the company’s board. Such unchecked actions can often lead to the exploitation of public shareholders, and this regulation ensures that every stakeholder gets a fair deal.
Applicability of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
1. Applicability of the Regulation:
a. To Whom is it Applicable? The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, broadly covers any direct or indirect acquisition of shares, voting rights, or control over a Listed company. This ensures that major acquisitions are governed by a standardized set of regulations, ensuring transparency and fairness in the process.
b. Exemptions from the Regulation: It is crucial to note that this regulation is not universally applicable. It does not cater to the acquisition of shares or voting rights in, or control over, a company that is listed without making a public issue on the Innovators Growth Platform of a recognized stock exchange. This particular provision aims at promoting innovation and growth without the constraints of typical regulatory procedures, thereby fostering a more entrepreneurial ecosystem.
2. Defining the Acquirer:
a. Who is an Acquirer? Under SEBI (SAST) Regulation, 2011, Regulation2(1)(a) provides a comprehensive definition of an acquirer. It is not just limited to an individual or an entity that acquires shares. An acquirer refers to any person, whether acting independently or in concert with others, who directly or indirectly acquires or even agrees to acquire shares, voting rights, or control over a Listed company.
b. Scope of Acquisition: The acquisition, in this context, isn’t limited to actions that have already occurred. Future agreements or intents, where an individual or entity explicitly agrees to acquire shares of a Listed company, also come under the ambit of this definition. This broadened scope ensures that even potential market-moving decisions are under regulatory oversight, ensuring preemptive measures against any unfair practices.
Who is Person Acting in Concert (PAC)?
a. Definition: A Person Acting in Concert (PAC) refers to any individual(s) or entities that share a mutual intent or aim concerning the acquisition of shares or voting rights, or in exerting control over a Target Listed Company. Their cooperation towards this common objective, facilitated through an agreement or understanding, can be either direct or indirect.
b. Who Falls Under PAC as per Regulation 2(1)? SEBI provides an inclusive list of entities and individuals who are deemed to be acting in concert:
1. A Company, its holding company, subsidiary company and any company under the same management or control.
2. A Company, its directors, and any person entrusted with the management of the company.
3. Directors of companies referred to in item (i) and (ii) of this sub-clause and associates of such directors.
4. Promoters and members of the promoter group.
5. Immediate relatives.
6. Mutual fund, its sponsor, trustees, trustee company, and asset management company.
7. Collective investment scheme and its collective investment management company, trustees and trustee company.
8. Venture capital fund and its sponsor, trustees, trustee company and asset management company.
9. Alternative Investment Fund and its sponsor, trustees, trustee company and manager.
10. Merchant banker and its client, who is an acquirer.
11. Portfolio manager and its client, who is an acquirer.
12. Banks, Financial Advisors and Stock Brokers of the acquirer, or of any company which is a holding company or subsidiary of the acquirer, and where the acquirer is an individual, of the immediate relative of such individual. [Excluding the bank whose sole role is that of providing normal commercial banking services or activities in relation to an open offer under these regulations]
13. Investment company or fund and any person who has an interest in such investment company or fund as a shareholder or unitholder having not less than 10 per cent of the paid-up 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 holds not less than 10 per cent of the paid-up capital of that investment company or unit capital of that fund. [Excluding the holding of units of mutual funds registered with SEBI]
2. Creeping Acquisition:
a. Etymology: The term “creeping” is derived from the act of moving discreetly, almost silently, so as not to draw attention. In the financial context, it implies a series of small actions or acquisitions that collectively have a significant impact over time.
b. Definition: Creeping Acquisition refers to the strategic purchase of shares in a listed company in small tranches, ensuring that these transactions fly under the radar. By doing this, the Acquirer and PAC can incrementally increase their stake without making conspicuous large transactions such as Bulk Deals or Block Deals. The objective is often to reach a specific shareholding threshold, post which there might be mandatory open offer requirements, without triggering early alarms in the market or among other stakeholders.
Compulsory Open Offer Under SEBI (SAST) Regulation, 2011: Key Triggering Events
The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 prescribes certain thresholds and situations where an acquirer is required to make a public announcement for an open offer to acquire shares of a listed company. These provisions are aimed at ensuring that minority shareholders are given a fair opportunity to participate in substantial acquisitions and takeovers.
1. Acquisition Entitling 25% Voting Rights (Regulation 3(1)):
a. Regulation Provisions: According to Regulation 3(1), an acquirer, either individually or together with persons acting in concert (PAC), should not acquire shares or voting rights which, when combined with existing holdings, would entitle them to exercise 25% or more of the voting rights in the target company unless they make a public announcement for an open offer.
b. Implication: The moment an acquirer, along with PAC, reaches or surpasses the threshold of 25% voting rights in a listed (or target) company, they are mandated to announce an open offer. This is to ensure that the minority shareholders of the target company have an opportunity to exit if they choose to.
2. Acquisition Beyond 5% in a Financial Year for Those Holding 25% or More (Regulation 3(2)):
a. Regulation Provisions: As per Regulation 3(2), if an acquirer, in conjunction with PAC, has already acquired and holds 25% or more voting rights in a target company but less than the maximum permissible non-public shareholding, they cannot acquire additional shares in a financial year that would grant them more than 5% of the voting rights without making a public announcement of an open offer.
b. Implication: Essentially, once the 25% threshold is crossed, any additional acquisition that results in an increase of more than 5% voting rights in a single financial year triggers the need for an open offer. However, an acquirer can acquire up to 4.99% additional shares in a financial year without the need for an open offer. This acquisition, while not triggering an open offer, might still necessitate certain disclosure requirements under regulation 29 of the SAST regulations.
Maximum limit for acquisition of shares by Promoter, Acquirer or PAC: No Promoter, acquirer or person acting in concert shall be entitled to acquire or enter into any agreement to acquire shares or voting rights exceeding such number of shares as would take the aggregate shareholding pursuant to the acquisition above the maximum permissible non-public shareholding i.e.,75% of total shareholding in a listed company. Thus, 25% of shareholding must be held by non-promoter shareholders.
Exemption from trigger limit: Acquisition pursuant to a Resolution Plan approved under section 31 of the Insolvency and Bankruptcy Code, 2016 [No. 31 of 2016] shall be exempt from the obligation under the proviso to the sub-regulation (2) of regulation 3].
Determination of Quantum of acquisition: For purposes of determining the quantum of acquisition of additional voting rights under this sub-regulation, the following should be considered,
- Only gross acquisitions should be considered, regardless of any intermittent fall in shareholding or voting rights, whether owing to disposal of shares held or dilution of voting rights owing to fresh issue of shares by the target company.
Practical Scenario: If a shareholder is holding 36% of shares, he bought additional 4% of shares during the beginning of the FY, then sold 2% shares on the middle of the same FY, again he purchased 3% before the end of the FY. In this scenario, the gross purchase or acquisition made is 4+3= 7%. Thus, he got triggered under 5% limit under this regulation and liable to make an open offer.
- In the case of acquisition of shares by way of issue of new shares by the target company or where the target company has made an issue of new shares in any given financial year, the difference between the pre-allotment and the post-allotment percentage voting rights shall be regarded as the quantum of additional acquisition.
Practical Scenario: If a Company is issuing new shares by way of right issue or any other issues to the existing shareholders who is/are already holding 23%, during the event of allotment, results in increase in their shareholding or allows them to exercise more than 25% or, 5% or more of voting rights for those who already holds more than 25% will trigger the obligation to make open offer.
Non-applicability: This regulation shall not apply to acquisition of shares or voting rights of a listed company by the promoters, PAC or shareholders in control who is acquiring shares by way of providing exit opportunity to the public shareholders in terms of the provisions of Chapter VI-A of Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009.
For Listed entities who have listed their shares on Innovators Growth Platform the trigger limit for open offer would be 49% instead of 25% like other platforms.
Challenges faced by Company Secretaries in complying with the above-mentioned regulations: In most of the listed companies, there is no clear picture of who are all the acquirers and who are covered under the category of person acting in concert. Due to unavailability and non-disclosure of PAC by promoter group, it will be difficult to ascertain the disclosure and trigger events.
All the Promoters and other acquirers should be well versed with the governance requirements and consequences of non-compliance with reference to the respective governance requirements. Companies should adopt good internal policies which will increase the transparency within the organization in order to promote good Corporate Governance.
Conclusion: SEBI’s Regulation ensures transparency and protection against unexpected takeovers in listed entities. Such stringent guidelines promote trust among investors, preventing sudden acquisitions by undisclosed entities. By mandating such regulations, SEBI continues its commitment to ensuring fairness and transparency in India’s stock market landscape.
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