Creeping acquisition limits raised

Pursuant to its notification dated 30 October, the Securities and Exchange Board of India (SEBI) has made amendments to the creeping acquisition limits available to the promoters of listed companies. Until recently a person holding a 15% to 55% stake in a listed company could acquire additional shares or voting rights up to 5% per financial year without having to make a mandatory open offer. Any acquisition of further shares beyond 55% required the acquirer to make an open offer.

The amendment provides an opportunity to promoters holding more than 55% but less than 75%, to acquire a further 5% stake in a company without making an open offer to public shareholders; 75% will be read as 90% for companies which have a minimum public shareholding limit of 10% pursuant to the first proviso of regulation 11(2), which is applicable to the entire sub-regulation. The opportunity to acquire 5% is not available on an incremental basis every financial year, but is a one-shot opportunity to further consolidate a 5% stake in a company.

The amendment also specifies that the 5% increase in shareholding by the promoter beyond 55% will only be possible through open market purchases, which surprisingly, excludes bulk deals. Acquisitions through a block deal or through preferential allotment have been expressly ruled out.

Statements made by the finance minister indicate that the objective of this revision is to boost the sagging stock market. However, the amendment itself does not appear to be a short-term measure as there is no specific time period for which this window of creeping acquisition is available. If the purpose of the revision is to cure a short-term ill, it is only reasonable to expect an upfront time limitation, which is preferable to any surprise move withdrawing the creeping facility.

While SEBI’s aim to boost the stock market during such turbulent times is appreciated, it is debatable whether the end justifies the method adopted, given the objectives of the takeover regulations. Any move to enable existing controlling shareholders to further consolidate their shares should be balanced with the interests of ordinary investors.

Creeping acquisitions were originally introduced in 1997, on the recommendations of the Bhagwati Committee Report. The aim was to enable individuals in control of a company to consolidate their holdings or to build defences against takeover threats, provided it did not unduly affect shareholder interests.

Prior to the amendment, there was a reasonable balance between the interests of controlling shareholders in a competitive market, and small investors; on reaching 51% and above a person could be reasonably assured of control over a company.

At the same time, if a promoter was interested in amassing further voting rights up to the maximum limit permitted under the listing agreement or even 100% pursuant to a delisting offer, they had to provide relevant exit opportunities i.e. a fixed price offer under the takeover regulations with complete disclosures on all future plans relating to the target company. This would have to be followed by a delisting offer where prices are determined by minority shareholders.

By permitting a further acquisition of 5% beyond 55%, SEBI has now rocked the delicate balance of the takeover regulations. Today, a controlling shareholder who holds beyond 55% and intends to delist the securities of a target company can buy 5% in a depressed market and later make a delisting offer.

A delisting offer is deemed successful only if the public shareholding falls below the required minimum. Consequent to the 5% acquisition, it is easier for controlling shareholders to ensure the success of delisting offers. For example, an 85% promoter holder can acquire 5% through open market purchases and delist the securities, since only one share needs to be tendered for the offer to be successful. The promoter can always relist the securities after two years and make huge gains once the market recovers.

Another change made by SEBI is to permit an increase in shareholding or voting rights of the acquirer pursuant to a buyback without having to make an open offer or obtain a specific exemption of SEBI, provided the promoter in question holds shares between 55% to 75%, or 90% as the case may be. This change is welcome given the fact that SEBI need not be approached for an exemption, as has been the practice, for an increase in shareholding for a buyback offer.

However, it is necessary to point out that while the press release expressly states that the buyback exemption is permitted for 5% per annum, the notification simply states 5% with no reference to “per financial year”, which raises questions about SEBI’s exact intention.

A more appealing change would be to expressly exempt any increase in voting rights due to a buyback offer from the purview of regulations 10, 11 and 12 through an amendment to regulation 3 of the takeover regulations.

The recent changes seem to be a reactive approach to a volatile stock market rather than a strategic change in policy. If the intention was only to bolster the markets, that could have been achieved simply by increasing the creeping acquisition limits permitted under section 11(1) to 7.5% or 10% (up to 55%), without having to tamper with the fundamental provisions of the takeover regulations.

Akila Agrawal is a partner at Amarchand & Mangaldas & Suresh A Shroff & Co.