FAQs for encumbrance definition raise concerns

By Yogesh Chande and Preeti Kapany, Shardul Amarchand Mangaldas & Co
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The concept of encumbrance was cursorily adopted in the Securities and Exchange Board of India (SEBI) (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (takeover regulations). The takeover regulations defined an encumbrance in connection with the disclosures that must be made pursuant to the creation, invocation and release of encumbrances on the equity shares of a listed company by its promoters, along with persons acting in concert (PACs).

encumbrance
Yogesh Chande
Partner
Shardul Amarchand Mangaldas & Co

The definition of encumbrance was vague. It included a pledge, lien or any such transaction, by whatever name called. This left scope for interpretation of the expression and disclosures that should follow. The specific ambiguity created was whether it included an encumbrance on the shares of the holding company of a company (holdco level encumbrance). Logical analysis would lead to the conclusion that such encumbrances, by virtue of their possible impact on the company upon invocation, that is a potential change in control indirectly, should be disclosed to shareholders of the company.

Perhaps for these reasons, the FAQs on the takeover regulations (prior to the amendment dated 3 September 2019) clarified that the details of a holdco level encumbrance must be disclosed as an encumbrance.

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Yogesh Chande is a partner and Preeti Kapany is an associate at Shardul Amarchand Mangaldas & Co.

SCRA

Shardul Amarchand Mangaldas & Co
Amarchand Towers
216 Okhla Industrial Estate, Phase 3
New Delhi – 110 020
Executive Chairman: Shardul Shroff
Managing Partner: Pallavi Shroff & Akshay Chudasama
Contact details
Tel: +91 22 4933 5555
Email: Connect@AMSShardul.com
New Delhi | Mumbai | Gurugram | Chennai | Bengaluru | Ahmedabad | Kolkata

 

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