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A take on the Recent Amendments in the Takeover code

Renucka Vaiddya*

The Securities and Exchange Board of India (“SEBI”) has come up with three amendments in a matter of sixteen days to SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“SEBI SAST Regulations” or “the Takeover Code”). The amendments came in on 16 June 2020, 22 June 2020 and 1 July 2020.

The first amendment provides two specific relaxations from open offer requirements in the Takeover Code in view of the pandemic. The second amendment harmonises the substance of the relaxation with SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”). The third amendment deals with deposit in escrow account and indirect acquisition. This article aims to discuss the amendments and their impending implications.

Need for these provisions

Under the open offer mechanism, an offer is made to existing shareholders to sell their shares at a decided price to the acquirer. Thus, it offers a chance for shareholders to tender their shares and exit the company in view of the change in control of the company. In the absence of these provisions, a change in the control would go unnoticed resulting in the shareholders being forced to continue under the new management. This enables smoother transition for the company as well, with shareholders unhappy with the acquisition leaving the company. The provision of voluntary open offers is also aimed at consolidation of holdings.

Amendment in Regulation 3 of the Takeover Code

Regulation 3 deals with ‘Substantial acquisition for shares and voting rights’. This regulation contains the mandatory open offer provisions. To briefly introduce open offers, when an acquirer acquires shares or voting rights beyond a specified threshold, he has to mandatorily make an open offer to the public at large to acquire more percentage of shares. There are two types of open offer triggers:

  1. When an acquirer is about to acquire shares or voting rights which entitle him to a control of 25% or more of the voting rights in a company, the acquirer may proceed with such acquisition only on making a public announcement of an open offer.

  2. Further, where an acquirer is already entitled to voting rights of 25% but less than the maximum permissible non-public shareholding as permitted under Securities Contracts (Regulations) Rules, 1957, he may further acquire only 5% shares in a financial year after making a mandatory open offer.

Now the Amendment gives a relaxation to a specific class of acquirers, i.e. the promoters to acquire an additional 5%, a total of up to 10%, in the current financial year ending on 31 March 2021. Further, the mode of acquisition should only be in case of a preferential offer of equity shares.

Amendment in Regulation 6 of the Takeover Code

Regulation 6 deals with voluntary open offers. The Takeover Code makes a provision for making a voluntary offer in case of acquirers who hold less than or upto 25% of voting power in a company. The decision to make the voluntary offer is not based on a trigger percentage; it can be made on the decision of the acquirer. However, once a voluntary offer is made, a further acquisition of 10% is required to be made. There are separate set of conditions to a voluntary open offer, such as the holding cannot exceed the maximum permissible public shareholding. The other important condition is that when an acquirer has acquired any shares in the previous 52 weeks and without making a voluntary open offer, he is not eligible to make a voluntary open offer.

The second relaxation is on this point, that even if an acquirer has acquired shares in the previous 52 weeks, he is not stopped from making a voluntary open offer, in view of the acquisition made.

Indirect acquisitions: Escrow account requirements

Where public announcement of open offer has been made, certain amounts have to be deposited in an escrow account, as a security for performance of payment obligations. For this escrow account, cash, bank guarantee and frequently traded securities could be deposited to fulfil the amount of consideration.

Through the third amendment, for indirect acquisitions, the full amount of consideration has to be deposited in the escrow account. Further, securities cannot be deposited as part of the escrow account. The Indian stock market has substantially declined by nearly 32% since January 2020 on account of the pandemic. Therefore, due to this volatility the prices of securities cannot be relied upon, justifying the step taken by the regulator.

Penal interest in case of inability to pay

Where the acquirers are unable to make payment to shareholders who have accepted the open offer, they have to pay interest at the rate of 10% to the shareholders. However, if such delay is without any default on acquirers’ part, SEBI shall have the power to waive such interest.

Acquisition of shares through bulk deal or block deals

Regulation 22 of the Takeover Code states that an acquirer who has made an open offer is to complete the acquisition of control over the target company only by way of purchase through the shareholders and not by subscribing to shares or purchase of shares which will entail open offer triggers, till the expiry of the offer period. An acquirer is further permitted to acquire shares through block deals or bulk deals, which was not permitted under Regulation 22 earlier.

Analysis of the relaxations

The relaxations have been duly granted only to promoters to acquire more shares while fund raising through preferential offer of equity shares by the target company, during this financial year ending 31 March 2021. While securities cannot be deposited to fulfil the requirements of escrow account, any failure to pay the shareholders can be pardoned by SEBI. Acquirers can also acquire through block or bulk deals now, even if they have acquired shares in the past 52 weeks.

Introducing these amendments at a time when raising funds from the public has become difficult due to a global slowdown of business is a very thoughtful step by the regulator. These relaxations aim to enable listed companies to raise funds through their promoters more easily in view of the pandemic and cash crunch faced by nearly all companies. And as the effects of the pandemic may last for at least a few more months the relaxation has been extended to 31 March 2020.

This has also been enabled by permitting the acquirers to purchase shares in bulk or block deals from the stock exchange which was otherwise not permitted. Simultaneous changes have also been implemented in the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, to provide relaxations in the pricing norms. Overall, it is a welcome move to support the listed companies as well as the shareholders, and the economy as a whole.

*Renucka Vaiddya has graduated from ILS Pune in 2019.


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