Regulation 3 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011

Introduction

SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 was introduced to guide and keep a check on the acquisition and takeover of shares of a listed entity. An Acquirer cannot acquire shares to any extend as per his own discretion, just because they have the resources to do so, without public disclosure or obligations. This Regulation have imposed stringent disclosures and other requirements on the Acquirer and the Person Acting in Concert (herein after referred as PAC) while acquiring shares of a Listed Company. This will help to protect the interest of minority and other categories of shareholders in the stock market from hostile takeovers and exploitation of public shareholders.

Applicability

This regulation is applicable to direct and indirect acquisition of shares or voting rights in, or control over a Listed company.

This regulation will not apply to direct and indirect acquisition of shares or voting rights in, or control over a company listed without making a public issue, on the Innovators Growth Platform of a recognised stock exchange.

Who is an Acquirer under SEBI (SAST) Regulation, 2011

As per Regulation2(1)(a) an acquirer means and includes 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 Listed company.

Acquisition need not be always a past event. It also includes an agreement or expressly agreeing to acquire shares of a Listed company.

Who is Person Acting in Concert (PAC)?

Person Acting in Concert means any persons who, with a common objective or purpose of acquisition of shares or voting rights in, or exercising control over a Target Listed Company, by way of an agreement or understanding, directly or indirectly co-operate for acquisition of shares or voting rights in, or exercise of control over the target Listed company.

Also, the following persons shall be covered as PAC under Regulation 2(1):

• A Company, its holding company, subsidiary company and any company under the same management or control.
• A Company, its directors, and any person entrusted with the management of the company.
• Directors of companies referred to in item (i) and (ii) of this sub-clause and associates of such directors.
• Promoters and members of the promoter group.
• Immediate relatives.
• Mutual fund, its sponsor, trustees, trustee company, and asset management company.
• Collective investment scheme and its collective investment management company, trustees and trustee company.
• Venture capital fund and its sponsor, trustees, trustee company and asset management company.
• Alternative Investment Fund and its sponsor, trustees, trustee company and manager.
• Merchant banker and its client, who is an acquirer.
• Portfolio manager and its client, who is an acquirer.
• 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].
• 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].

What is mean by Creeping Acquisition

Generally Creeping means to move very quietly and carefully so that nobody will notice you. Acquisition by way of acquiring shares in a small amount consequently to attain a level of shareholding in a listed company in a silent manner could be a creeping acquisition. This will enable the Acquirer and PAC to increase their shareholding in a secret manner, without getting notice by way of huge transaction (E.g., Bulk Deal, Block deal etc) until they reach a certain threshold set for meeting compulsory open offer.

Triggering events for Compulsory Open Offer

As per Regulation 3(1), No acquirer shall acquire shares or voting rights in a target company which taken together with shares or voting rights, if any, held by him and by persons acting in concert with him in such target company, entitle them to exercise 25% or more of the voting rights in such target company unless the acquirer makes a public announcement of an open offer for acquiring shares of such target company in accordance with this regulation.

Thus, if an acquirer individually or along with PAC acquired shares or agreeing to acquire shares of a Listed company or target company which will allow them to have 25% or more of voting rights.

As per Regulation 3(2), No acquirer, who together with persons acting in concert with him, has acquired and holds in accordance with these regulations shares or voting rights in a target company entitling them to exercise twenty-five per cent or more of the voting rights in the target company but less than the maximum permissible non-public shareholding, shall acquire within any financial year additional shares or voting rights in such target company entitling them to exercise more than five per cent of the voting rights, unless the acquirer makes a public announcement of an open offer for acquiring shares of such target company in accordance with these regulations.

In simple words, an acquirer either individually or with any PAC, has already acquired 25% or more of shareholding, shall acquire additional shares which allow them to exercise more than 5% of the voting rights, should make a public announcement for open offer for acquiring shares of Listed company in compliance with SAST regulations. So, the acquirer can acquire shares up to 4.99% in a financial year without making open offer. But may attract disclosure requirements under regulation 29 of 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 for 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,

1. 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.

2. 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 shareholder 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

By way of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, The nodal regulator has kept a check on acquisition and substantial takeover by any acquirer either himself or along with person acting in concert in a listed entity without the notice of public shareholders. This will foster confidence among investors due to higher transparency and will curb the hostile or sudden takeover by another group of acquirers without disclosing the same to the public.