This article is written by Anupam Bhaduri, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.
Table of Contents
Introduction
The takeover laws are a specific set of legislations that have been enacted in most of the countries to establish a framework for the acquisition of listed companies. The establishment of a systematic framework helps in securing the interests of the shareholders. The growing activity of mergers and acquisitions and the sophistication of the market regarding takeovers led SEBI to revamp their Takeover legislation and enact a new code in 2011.
What are disclosures
Disclosures are referred to information that is mandatory to be made known to the target company and each of the stock exchanges to protect the interest of the shareholders. Disclosures are a method to secure the faith of the investors in the listed company and to make the shareholders, who are not a part of the management of the company, aware of the changes taking place.
Broadly speaking, the provisions stated under Chapter V of SEBI’s Substantial Acquisition of Shares and Takeover Regulations, 2011 stipulate that disclosures made can be segregated into three types. They are:
- Acquisition based disclosure defined under Regulation 29.
- Continual Disclosure defined under Regulation 30.
- Disclosure of encumbered shares discussed under Regulation 31.
Acquisition based disclosure
As is suggested by the name itself, these kinds of disclosures come into action when an acquisition occurs or there is a disposal of securities of a listed company. The rules of the disclosure are dealt with by Regulation 29 of the Takeover Code, 2011.
|
S. No |
What initiates the disclosure? |
Who is liable for the disclosure? |
Where should the disclosure be made? |
Period of compliance 
|
|
1. |
According to the provisions stipulated under Regulation 29(1), the process to start disclosure triggers when the acquirer along with the PAC successfully acquires a minimum of 5% shares of the target company. The voting rights and the shareholding needs to be made known. |
The disclosure needs to be made by the acquirer. |
The disclosure should be made at all the stock exchanges where the listed company operates and to the target company at its registered office. |
The compliance period is set to within 48 hours from the receipt of the voting right or the acquisition of shares or disposal or allotment of shares. |
|
2. |
According to the provisions stipulated under Regulation 29(2), |
The disclosure needs to be made by the acquirer. |
The disclosure should be made at all the stock exchanges where the listed company operates and to the target company at its registered office. |
The compliance period is set to within 48 hours from the receipt of the voting right or the acquisition of shares or disposal or allotment of shares. |
- All shares referred here belong to the Target Company.
- Share acquired by the method of encumbrance will be treated as acquisition.
- Share received because of the release of encumbrance will be treated as a disposal.
How acquisition-based disclosures happen
The acquisition-based disclosure can be best explained in the following illustration:
In a certain situation, ABC Ltd. has a stake of 10% equity shares of Hindalco. In a separate business dealing, ABC Ltd. offers the shares of Hindalco as a mortgage to Mr X as security for a loan. Mr X must make a disclosure that he now has 10% equity shares of Hindalco by way of encumbrance.
Continual disclosure
Continual disclosures are the ones that are made through the annual filings in order to reaffirm the shareholding of a listed company which are filed every year.
|
Rule |
Trigger |
Person who is supposed to disclose |
Reporting authority |
Compliance Period |
|
30(1) |
Any individual along with PAC if holds a 25% or more shares and voting rights must disclose the shareholding or voting rights. |
The person who has the shareholding or the voting rights including the PAC. |
The Registered office of the target company and every stock exchange where the listed company is visible. |
Within seven days from the closure of the Financial Year. |
|
30(2) |
The promoter and a PAC, if any must disclose their aggregate shareholding and voting rights. |
The promoter must make the disclosure along with the PAC if any. |
The disclosure must be made at the registered office of the target Company and at each of the stock exchanges where the shares of the listed company are traded. |
The compliance period is set to seven working days from the closure of the Financial Year. |
- The shares and the voting rights referred to for the purpose of disclosure belongs to the Target Company.
How continual disclosures happen
For instance, the promoter of XYZ Ltd. holds 10% of the shares of XYZ Ltd. he has a family with one son. His wife and his son also hold 8% shares separately. The promoter along with his wife and son is to make prompt disclosure of their shareholding by the end of the financial year. The wife and son are the promoter’s family and thus shall be considered as acting in concert with the promoter.
Disclosure of encumbered shares
The encumbrance caused substantially affects the rights of a shareholder on its free use and causing apprehensive contingency of future transfer. The Takeover Code, 2011 recognizes this problem and hence makes the disclosure of creation and release of encumbrance mandatory in the provisions stipulated under Regulation 31. The different regulations are elaborated as follows:
|
Regulation |
Trigger |
Person who is responsible for the disclosure |
Reporting authority |
Compliance period |
|
31(1) |
The promoter shall make a disclosure of the encumbrance of shares (pledge of shares) created by him. The disclosure made will also include the PAC if any. |
The disclosure must be made by the Promoter and the PAC if any. |
The disclosure must be made to the registered office of the target company and to every single stock exchange that participates in the trade of the shares of the listed company. |
The compliance period for the disclosure is set to be within seven working days from the creation, invocation or release of encumbrance (pledge of shares). |
|
31(2) |
The promoter shall make a disclosure in the situation where an invocation or release of an encumbrance (pledge of shares) takes place. Disclosure will also have to be made by the PAC if any. |
The disclosure must be made by the promoter and the PAC if any. |
The disclosure must be made to the registered office of the target company and to every single stock exchange that participates in the trade of the shares of the listed company. |
The compliance period for the disclosure is set to be within seven working days from the creation, invocation or release of encumbrance (pledge of shares). |
|
31(4) |
The promoter needs to mandatorily declare that no further encumbrance or pledge of shares have been made directly or indirectly by him other than the ones that have already been made and declared. Disclosure will also have to be made by the PAC if any. |
The disclosure must be made by the promoter and the PAC if any. |
The disclosure should be made to the audit committee of the target company and to each of the stock exchanges where the shares of the listed company are traded. |
The compliance period for the disclosure is set to be within seven working days from the creation, invocation or release of encumbrance (pledge of shares). |
- All shares and voting rights referred to in the above regulation belong to the Target Company.
- The word ‘shares’ also refer to the convertible securities held by a person.
Penalties under SAST regulation
In case the compliances are not accordingly followed, the SEBI is imbued with the power to impose penalties in the provisions laid down under Section 15A read with Regulation 7 of the SEBI (SAST) Regulations Act, 2011. The penalties that are imposed by SEBI in cases of non-compliance are as follows:
- SEBI can issue an order to divest the shares that have been acquired.
- SEBI, in case of non-compliance, can direct the individual liable to issue the disclosure to transfer the shares or the proceeds of a sale of shares to a fund created for investment protection.
- The SEBI has the power to direct the target company in question to not give effect to the transfer of shares.
- SEBI can stop the acquirer of the shares from exercising any voting right or any other right that is acquired due to the acquiring of the shares which have not been disclosed.
- SEBI can bar a person from making deals in security or accessing the capital market.
- SEBI can direct the acquirer of the undisclosed shares to make an open offer for the shares at the price that has been determined by SEBI in accordance with its Regulations.
- SEBI can issue an order, directing the acquirer to not cause and the target company to not bring it into effect.
- In case of a disposal of assets that belonged to the target company or any of its subsidiaries was not mentioned in the offer letter, the person acquiring can be made to pay interest on the offer price for having failed to make an offer within the stipulated price or because of delaying the offer.
- SEBI can inhibit the acquirer of the shares of the target company from making an open offer or from entering into a course of action that would trigger an open offer when the acquirer of the shares failed to make the payment for the open offer.
- SEBI can direct the acquirer of the shares issued by the target company to pay interest as compensation for the delayed payment of the open offer consideration.
- The SEBI can instruct the acquirer to cease and desist from exercising any control over the target company due to the acquisition of its shares.
- The SEBI can instruct a divestiture of a certain number of shares that would result in the shareholding of the acquirer and the PAC is limited to the maximum permissible amount of non-public shareholding or blow.
Conclusion
Owing to the increase in the volume of mergers and acquisitions happening in India, the Securities and the Exchange Board have made its laws more accomodating and have taken into consideration the issues that arise out of such deals. In order to maintain a more transparent approach, SEBI has made it mandatory to make certain disclosures to facilitate proper transparency.
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