This article is written by Khushnum Motafram, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.com.  Here she discusses “Consequences of Purchasing Shares Beyond the Limits in the Takeover Code without Issuing an Open Offer?”.

Introduction

With the ever-changing global scenario, increase in use of M&A transactions for restructuring the companies, complexity of takeover market and growing number of domestic and cross- border acquisitions, the Securities and Exchange Board of India replaced the old SEBI (SAST) Regulations, 1997 with the new SEBI [Substantial Acquisition of Shares and Takeover (SAST)] Regulations, 2011 (“Takeover Code”). The main objective for enforcement of the said Takeover Code was to prevent hostile takeovers and protection of minority shareholders in a listed company by providing them an exit opportunity upon acquisition of shares by the acquirer. The said Takeover Code regulates the market of listed companies by stipulating the procedure for acquisition of shares beyond a given threshold. It also regulates the procedure and provisions pertaining to open offer size and price, a time-bound process for making an open offer, exemption from making an open offer etc.

Takeover Code Guidelines

1. Definitions

Clause 2(1)(a) of the Takeover Code describes an acquirer means a person, who directly or indirectly, either acquires or agrees to acquire, by himself or with other person acting in concert, shares or voting rights in, or control over a target company.

Clause 2(1)(q) of the Takeover Code describes person acting in concert to be a person has a common objective of acquiring shares or voting rights of the target company, directly or indirectly with the acquirer, pursuant to an agreement or understanding, whether formal or informal. Furthermore, Clause 2(1) (q)(2) provides a list of entities which would fall within the purview of a person acting in concert. 

As per Clause 2(1)(e) of the Takeover Code, control shall mean right to appoint majority of the directors in a company or to control the management or policy decisions exercisable by a person or person acting individually or in concert, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements. However, the director of the target company shall not be considered to be in a position of control by virtue of holding such a position.

2. Applicability

The Takeover Code is applicable to those companies whose shares are listed on the stock exchange. The said code is also applicable to the unlisted company which has a listed subsidiary. Basically, Takeover Code comes into effect on acquisition of shares, voting rights or control of the target company by an acquirer company, either individually or with persons acting in concert beyond a certain prescribed percentage holding. On such acquisition of shares, it becomes imperative for the acquirer company to comply with certain provisions pertaining to open offer for acquiring the shares of such target company. 

3. Provisions pertaining to Offer Letter

• As per Clause 3(1) of the Takeover Code, the acquirer along with the persons acting in concert proposing to acquire shareholding of the target company in order to entitle them to 25% or more of the voting rights in that target company would be required to make a public announcement of the open offer for acquiring shares of the target company. For example: If the acquirer holds 3% of the shareholding in the target company, then the acquirer is not supposed to make an open offer if he wishes to acquire 21% shareholding in the target company. But, in case the acquirer wishes to acquire 22% shareholding in the target company, the acquirer shall be bound to make a public announcement of the open offer for acquiring such shares. However, as per Clause 7, the minimum offer size shall in no case fall below 26% of the total shares of the target company, as of the tenth working day from the closure of the tendering period. In case, the total number of shares increases as on the tenth working day, the offered size shall be accordingly increased so that it becomes 26% of the total shares of the target company. 

• As per Clause 3(2) of the Takeover Code, no acquirer, together with the persons acting in concert, already holding 25% or more of the shareholding in the target company but less than the maximum permissible non-public shareholding in the target company (i.e. 75%), shall acquire more than 5% of the total shares of the target company in any financial year, unless a public announcement of an open offer for acquiring shares of the target company is made by the acquirer company in accordance with the provisions of the Takeover Code. Continuing with above example, if the acquirer is already holding 26% shares in the target company and wants to acquire 5% of the shares of the target company, then such acquirer company needs to make an open offer amounting to 26% of the increased shares. However, the open offer cannot go beyond such percentage as would amount to increase in shareholding of the acquirer company beyond maximum permissible non-public shareholding. 

• As per Clause 6 of the Takeover Code, an acquirer can make a voluntary open offer in case its shareholding along with the person in the concert is more than 25% but less than 75%. In such a voluntary open offer, the acquirer can make an offer for not less than 10% of the total shares of the target company. However, the acquirer is prohibited from acquiring shares of the target company if the acquirer, individually or together with the persons acting in concert, acquired shares in the target company not attracting public announcement of the open offer, during the preceding 52 weeks. In such an event, the acquirer shall be required to wait for at least 52 weeks to make a voluntary open offer. 

3. Objective of Open Offer

The objective behind the making of an open offer is to allow the shareholders of the target company an exit opportunity who do not wish to continue with the target company post-acquisition by the acquirer company. Furthermore, it also allows shareholders to exit from the target company in an event where the acquirer decides to delist the shares of the target company from the stock exchange in accordance with the SEBI (Delisting of Equity Shares) Regulations, 2009 before the reduction in the liquidity of their shareholding.

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Consequences

Non-adherence to the Takeover Code by the acquirer company in event of acquisition of shares beyond the trigger limit amounts to non-compliance with the provisions of the Takeover Code. Such an event causes considerable loss to the existing investors in the target company. The small investors are highly effected in such an event as they are not provided with an exit opportunity in an untimely and inadequate disclosure of acquisition of shares. 

SEBI has time and again slapped non-adhering acquirer companies with a penalty for purchasing shares beyond the limits in the takeover code without issuing an open offer. Few of the instances are given hereinbelow which articulates the strict demeanour of the SEBI towards non-compliance with the provisions of Takeover Code: 

1. SEBI imposed a penalty of INR 3.4 million on five individuals for violation in compliance with the disclosure norms under Takeover Code with regards to change in their shareholding in the Parichay Investments in 2019. Upon investigation, SEBI found that all the individuals’ shareholding crossed the threshold of 5% and the change in the holding was more than 2% on several occasions.

    

2. In June 2018, SEBI imposed a penalty of INR 1 billion on the three promoters of Man Industries (India) Limited for not making a public announcement of the open offer to the company’s shareholders.
    
3. In March 2018, SEBI imposed a penalty of INR 6 lakhs on 11 individuals for failing to make a public announcement of an open offer for acquiring shares of Shreenath Industries Investment Limited under Clause 3(1) of the Takeover Code.

    

4. In July 2017, SEBI imposed a penalty of INR 25 lakhs on one individual for the delay in making an open offer to the shareholders of Enbee Trade & Finance Limited, thereby violating the provisions of Takeover Code.

    

5. In September 2015, SEBI imposed a penalty of INR 5 lakhs on four entities, including one individual for not making a timely public announcement of public offer to the shareholders of the Himachal Fibers Limited.

    

6. Reliance Industries Limited (RIL): The combined holding of the Reliance Group was 6.62% in Larsen & Toubro (L&T) in March 2011. Their shareholding reduced to 3.92% is October 2011. However, RIL increased their stake to more than 10% in L&T without public announcement of an open offer under Clause 3(2) of the Takeover Code. They then sold their entire lot to Aditya Birla Group. Upon complaint received from Investors Grievance Forum, SEBI investigated the matter and confirmed that RIL was guilty of a violation of the disclosure requirement under the Takeover Code and therefore imposed a penalty of INR 4.75 lakhs.

Conclusion

Thus, in conclusion, purchasing shares beyond the limits in the takeover code without issuing an open offer has severe consequences and penalties that are levied upon by SEBI. 

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