In this article, Syeda Muneera Ali of KIIT School of Law discusses Top 3 SEBI Orders under the Takeover Code in the year 2017.
What do you mean by a takeover?
The term ‘Takeover’ has not been specifically defined under the Securities and Exchange Board of India (Substantial Acquisitions of shares and Takeovers) Regulations, 1997, or in any of its subsequent amendments (primarily, 2002, 2011 and 2017). However, it may be understood generally that it includes an acquirer, who aims to take over the control or management of the company in a direct, or an indirect manner, whereby, if a substantial number of shares or voting rights of the target company are acquired, it results in the ‘Substantial Acquisition of Shares’.
The SEBI (substantial acquisition of shares and takeovers) regulations, 1997 specifically define the terms substantial quantity of shares and voting rights separately:
For any disclosures to be made by acquirer(s)
A person who, along with PAC (Persons acting in Consent), if any (referred to as ‘Acquirer’ hereinafter) acquires shares or voting rights is required to disclose the details of his shareholding to the target company within four days of acquisition, or within four days of receiving the information about share allotment, if the acquired share or voting right and any existing holding together entitles him to more than 5 per cent shares or voting rights of target company.
An acquirer is bound to disclose his aggregate shareholding to the target company, if he holds more than 15 per cent shares or voting rights of target company, within 21 days from the financial year ending March 31 and record date fixed for dividend declaration. Similarly, it is the duty of the target company to inform all stock exchanges with its share listings, within 30 days from the financial year ending March 31 and the record date fixed for dividend declaration.
For the purpose of making an open offer by acquirer
If an acquirer intends to acquire a certain amount of shares, which, together with his existing shareholding entitles him to more than 15 per cent voting rights, then s/he is required to make a public announcement (PA) to acquire at least additional 20 percent of the voting capital of target company from the shareholders through an open offer before he can proceed with the acquisition.
Creeping limit of 5 per cent
An acquirer whose shares/voting rights of a target company is between 15 per cent and 75 per cent, is able to consolidate his holding up to 5 percent of the voting rights in any period of 12 months. However, if the acquirer intends to make any additional acquisition over and above 5 percent, it is required to make a public announcement to acquire at least 20 percent shares of the target company from the corresponding shareholders through an open offer.
Consolidation of holding
In the case an acquirer has 75 per cent shares/voting rights of target company, it is required that a public announcement is made, specifying the number of shares to be acquired through an open offer from the shareholders of the target company before any further acquisition can be made.
What is the origin of the SEBI Takeover Code?
The inception of SEBI was in the year 1992. SEBI’s existence was primarily to establish a regulatory body, that aimed to promote, develop and better the securities market, and strive to protect the interests of the investors in the said securities market. Hence, SEBI appointed a committee that was headed by P.N.Bhagwati, in order to study the effects of takeovers and mergers:
‘The confidence of retail investors in the capital market is a crucial factor for its development. Therefore, their interest needs to be protected, an exit opportunity shall be given to the investors if they do not want to continue with the new management., full and truthful disclosure shall be made of all material information relating to the open offer so as to take an informed decision, the acquirer shall ensure the sufficiency of financial resources for the payment of acquisition price to the investors., the process of acquisition and mergers shall be completed in a time-bound manner. disclosures shall be made of all material transactions at the earliest opportunity.’
In today’s competitive corporate world, the takeover of companies is a common and well-known business strategy. Therefore, in order to ensure a substantial amount of fairness, and the protection of the interests of small business, SEBI framed the regulations that provided for the Acquisition of Shares and Takeover of Listed Companies. This came to be referred as the ‘Takeover Code’. The SEBI Takeover Regulations, are applicable to the acquisition of the voting rights or control over the listed companies.
What are the highlights of the SEBI Takeover Code Amendment, 2011
Though there have been several modifications as per the 2011 amendment, some of the primary and significant highlights are:
- Increase in the initial threshold limit from 15% to 25%.
- Increase in the creeping acquisition limit from 15%-55% to 25%-75%.
- Provisions of a voluntary open offer.
- Recommendation on open offer by the board of the target company.
- Increase in offer size from 20%-26%
- Provisions related to indirect acquisition introduced.
- New definitions introduced such as Enterprise value, Volume weighted average market price, the volume weighted average price, weighted average number of total shares, etc..
- Abolition of non-compete fees.
- Revision of fees.
- Takeover code, 1997 included a company with any of its directors, or any person entrusted with the ‘management of the funds if the company’. the 2011 amendment widens the scope of such persons as may be entrusted with the management of the company.
Exemptions by the Board
(1) The Board may for reasons recorded in writing, grant exemption from the obligation to make an open offer for acquiring shares under these regulations subject to such conditions as the Board deems fit to impose in the interests of investors in securities and the securities market.
(2) The Board may for reasons recorded in writing, grant a relaxation from strict compliance with any procedural requirement under Chapter III and Chapter IV subject to such conditions as the Board deems fit to impose in the interests of investors in securities and the securities market on being satisfied that,—
(a) the target company is a company in respect of which the Central Government or State Government or any other regulatory authority has superseded the board of directors of the target company and has appointed new directors under any law for the time being in force, if,—
(i) such board of directors has formulated a plan which provides for transparent, open, and competitive process for acquisition of shares or voting rights in, or control over the target company to secure the smooth and continued operation of the target company in the interests of all stakeholders of the target company and such plan does not further the interests of any particular acquirer;
(ii) the conditions and requirements of the competitive process are reasonable and fair;
(iii) the process adopted by the board of directors of the target company provides for details including the time when the open offer for acquiring shares would be made, completed and the manner in which the change in control would be effected; and
(b) the provisions of Chapter III and Chapter IV are likely to act as impediment to implementation of the plan of the target company and exemption from strict compliance with one or more of such provisions is in public interest, the interests of investors in securities and the securities market.
(3) For seeking exemption under sub-regulation (1), the acquirer shall, and for seeking relaxation under sub-regulation (2) the target company shall file an application with the Board, supported by a duly sworn affidavit, giving details of the proposed acquisition and the grounds on which the exemption has been sought.
(4) The acquirer or the target company, as the case may be, shall along with the application referred to under sub-regulation (3) pay a non-refundable fee of rupees fifty thousand, by way of a banker’s cheque or demand draft payable at Mumbai in favour of the Board.
(5) The Board may after affording reasonable opportunity of being heard to the applicant and after considering all the relevant facts and circumstances, pass a reasoned order either granting or rejecting the exemption or relaxation sought as expeditiously as possible: Provided that the Board may constitute a panel of experts to which an application for an exemption under sub-regulation (1) may, if considered necessary, be referred to make recommendations on the application to the Board.
(6) The order passed under sub-regulation (5) shall be hosted by the Board on its official website.
What are the top 3 orders by the SEBI board under the takeover code in 2017
SEBI is an institution that protects the interests of investors. Therefore, it has been reposed with various powers and functions. One of its various powers is that of the power to pass rulings, orders, etc., in the time of a dispute, whereby it determines the substantive rights and liabilities of the parties. The rulings, orders, etc., given by the SEBI may be challenged at the appellate forum, i.e., the Securities Appellate Tribunal (SAT).
The three most significant orders passed by SEBI, in terms of the takeover code in the year 2017, are:
In respect of Mr Anil T Jain, in the matter of Acquisition of shares of Refex Industries Limited, formerly known as Refex Refrigerants Limited. (WTM/GM/EFD/DRA III/10/FEB/2017)
Area of Dispute: Under section 11B of the Securities and Exchange Board of India Act, 1992 and Regulation 44 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 read with regulations 32 and 35 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.
Background: Refex Industries Limited (hereafter referred as Target Company/Refex) is a company registered under the Companies Act, 1956, with its office in Chennai, and its securities are listed on the Bombay Stock Exchange (BSE). An investigation by the SEBI showed that Mr Anil T. Jain (thereafter referred as ‘noticee’), a promoter and director of Refex, together with the promoter group, was holding 55% shares during the quarter ending on June 30, 2008, and September 30, 2008. On September 4, 2008, the noticee acquired 42 shares through an off-market transaction from Mr Anand Kalu Marathe. The dispute arises as the noticee had not made a public announcement of an open offer before acquiring the shares.
Therefore, on February 26th, 2016, SEBI issued a show cause notice to the noticee, however, received no response.
Order: The SEBI board, upon an assessment of the facts and arguments that were presented by the council for the noticee, concluded in the following manner:
(a) that there has been a violation of Section 11(2) on the part of the noticee, however, such violation was not intentional or for acquisition and was merely technicality.
(b) that there had been clear mitigating circumstances, due to the subsequent amendments to the takeover regulations, which further lessen the gravity of the situation.
The SEBI board disposed of the show cause notice, due to the fact that this was not a fit case.
Basically, to simplify, this situation it can be said that due to the subsequent amendment of 2011, the provisions that were valid as per 1997, have been overwritten and therefore, to some extent, nullified. Legally speaking, this principle may be referred to as ‘ex-post facto’ law whereby, a person cannot be held liable for something that was not an offence when committed.
In the matter of Proposed Acquisition of Shares and Voting Rights of Deep Industries Limited by Shantilal Savla Family Trust. (SEBI/WTM/SR/CFD-DCR/23 /03/2017)
Area of dispute: Under Regulation 11(5) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.
Background: The Shantilal Salva family trust (thereafter referred as acquirer, is a private family trust) sent an application to the SEBI in September, 2016, seeking an exemption from making an open offer in request to the proposed acquisition and the control of the shareholding and voting rights of Deep Industries Limited (hereafter referred as the target company). The target company is listed under the Companies Act, 1956 as of January 1991, with its office in Ahmedabad, Gujarat. The securities of the target company are listed on BSE and NSE. The ultimate beneficiary of the acquirers are the promoters and members of the promoter group of the target company.
Now, legally speaking, as per the regulation of the Takeover Code, 2011, any individual or persons acting in consent with the individual, is mandated to make a public announcement of an offer for acquiring the shares of such company (as per Regulation 3(2) of the SEBI Takeover Regulations).
However, the acquirer made the following points:
“The proposed acquisition is further to an internal reorganisation within the promoter family and beneficiary trusts is intended to streamline succession and promote the welfare of promoter family. The proposed acquisition would be a non-commercial transaction which would not affect or prejudice the interests of the public shareholders of the Target Company in any manner. The proposed acquisition would not result in a change in control and management of the Target Company. In any event, since the Acquirer has been set up for the benefit of the members of promoter family, the trustees of the Acquirer will exercise control only as part of promoter family. Therefore, regardless of whether the trustees exercise control in their personal capacity or as trustees, the promoter family would continue to be in control of the Target Company.”
Order: Keeping in mind all the situations and propositions made by the acquirer, the Order passed in exercise of powers conferred under Section 19 of the Securities and Exchange Board of India Act, 1992 read with Regulation 11(5) of the Takeovers Regulations, thereby granted exemption to the proposed Acquirer i.e. Shantilal Savla Family Trust from complying with the requirements of Regulation 3 of the Takeover Regulations in respect to its proposed acquisition/exercise of voting rights of the Target Company viz., Deep Industries Limited. There were 9 conditions that were to be fulfilled, in order for it to be applicable for exemption. All of these orders were pertaining to the smooth functioning of the company, and the scrutiny of the acquirer, in order to ensure efficiency and the legality of the situation.
The exemption granted, was limited to the requirements of making open offer under the Takeover Regulations and shall not be considered as an exemption from the disclosure requirements under Chapter V of the Takeover Regulations, the compliance with the SEBI (Prohibition of Insider Trading) Regulations, 2015, the Listing Agreement/SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 or any other applicable Acts, Rules and Regulations.
To simplify the above situation, it can be said that though public declarations are mandatory in matters of acquisitions, there are some exceptional circumstances, whereby this mandate becomes an exception. In the given situation, this circumstance is the rearrangement of shares, instead of any form of change in the management or control of the company.
In the matter of proposed acquisition of shares and voting rights in Pudumjee Industries Limited (SEBI/WTM/SR/CFD–DCR/15/03/2017).
Area of Dispute: Under regulation 11(5) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.
Background: Pudumjee Industries Limited (“Target Company”) was incorporated under the Companies Act, 1956 (“Companies Act”) on December 31, 1965. The Registered Office of the Target Company is in Pune, and the shares of the Target Company are listed on BSE and the NSE. SEBI received an application from Yashvardhan Jatia Trust (proposed acquirer), seeking an exemption in respect of the proposed acquisition and control of the shareholding and voting rights in the Target Company.
The reasoning behind such an exemption request, was stated as follows: “Shri Arum Kumar Jatia who is the father and natural guardian of the minor child is a single parent and the entire shareholding bequeathed to the minor child as well as those shares which are held by the minor child in his own name, is being managed by him, as the minor child’s guardian. Shri Arun Kumar Jatia is also the sole signatory of the Demat Account of Master Yashvardhan Jatia and in his absence, there is no other signatory to the said Account. It is felt that transfer of the said the said shares to the Trust would facilitate the better management of the shares entitled to and held by the minor child since there would be more than one signatory to operate the Demat Account. The proposed transfer of shares to the Trust, thus, emanate from the father’s concern and effort to spread the responsibility of securing the minor son’s future and financial interests among a group of trusted, close and immediate relatives. The shares bequeathed to Master Yashvardhan Jatia are currently being held by Executors of the respective wills.”
The proposed acquisition is only an arrangement wherein the shares of the minor beneficiary will be held by the Trust and therefore, it will not be prejudicial to the interests of the public shareholders of the Target Company.
Order: In exercise of the powers conferred under Section 19 of the Securities and Exchange Board of India Act, 1992, read with Regulation 11(5) of the Takeover Regulations, thereby granted an exemption to the Proposed Acquirer, viz. Yashvardhan Jatia Trust from complying with the requirements of Regulation 3(2) of the Takeover Regulations with respect to its proposed acquisition/exercise of voting rights in respect of the Target Company, viz. Pudumjee Industries Limited, by way of proposed transactions as mentioned in the Application. There were nine conditions that were to be followed, for the granting of the said application. Each of these conditions was stated, in order to ensure that there were compliance and efficiency, instead of a blatant disregard for the order passed.
The exemption granted above is limited to the requirements of making open offer under the Takeover Regulations and shall not be construed as exemption from the disclosure requirements under Chapter V of the Takeover Regulations; compliance with the SEBI (Prohibition of Insider Trading) Regulations, 2015; Listing Agreement/SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 or any other applicable Acts, Rules and Regulations.
To simplify this situation, there was a grant of the exemption order, as this situation dealt with the assurance that the minor had his future and financial situation secured. However, in order to assure that such exemptions are not misused, there were conditions attached to the order, that would ensure the compliance of the said order in an efficient manner.
SEBI aims to ensure that there are fair and just practices of takeovers, which do not violate the rights and liabilities of the people. The SEBI ‘Takeover Code’, strives to ensure the same, in order for people to have faith and believe in the system of legality and respect the procedures of law. However, it is also in the understanding of SEBI that there are circumstances, where it is necessary to deviate from a norm. Such situations, however, need to be genuine and not fraudulent in nature. The SEBI Takeover Code is a well drafted and competent Regulation, that must be followed and respected, in order to ensure the applicability of its regulations.