SAT decision contradicts new takeover regulations

Under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, as amended, a practice developed whereby promoters of listed companies approached the Securities and Exchange Board of India (SEBI) to seek exemption from making an open offer on account of increase in their voting rights pursuant to a buyback.

SEBI granted such exemptions on a case-by-case basis where, among other things, the increase in voting rights of the acquirers was only incidental to the buyback, the acquirers did not intend to participate in the buyback and the buyback did not result in either change of control or breach of the minimum public shareholding threshold in the target company.

In October 2008, SEBI amended the 1997 regulations to permit a shareholder holding between 55% and below 75% of the share capital of a listed company to acquire up to an additional 5% in any financial year on account of a buyback, provided the company’s minimum public shareholding threshold was not breached. If the buyback exceeded these limits, market practice was for promoters to apply to SEBI for an exemption.

Dalmia case

On 21 November, the Securities Appellate Tribunal (SAT) ruled on the issue of buyback under the 1997 regulations in Raghu Hari Dalmia and Ors v SEBI. This case involved an increase in the voting rights of the promoters of OCL India from 62.5% to 75% following a buyback by OCL in 2003. The promoters of OCL had not applied to SEBI for an exemption.

SEBI held that the promoters had acquired additional voting rights beyond the 5% creeping acquisition limit thereby triggering an open offer under regulation 11(1) of the 1997 regulations, and that the mode of acquisition was irrelevant. Regulation 11(1) provided that no acquirer holding a 15% to less than 75% shareholding in a listed company could acquire more than an additional 5% in any financial year without making an open offer.

SAT ruling

On appeal, SAT reversed SEBI’s decision, holding that an increase in voting rights pursuant to a buyback was only an incidental consequence of the buyback and was not an acquisition in terms of the 1997 regulations.

SAT observed: “In this context the word ‘acquire’ implies acquisition of voting rights through a positive act of the acquirer with a view to gain control over the voting rights. In the case before us, it is the admitted position of the parties that the appellants (promoters of the company) did not participate in the buy-back and that there was no change in their shareholding. The percentage increase in their voting rights was not by reason of any act of theirs but was incidental to the buy-back of shares of other shareholders by the company. Such a passive increase in the proportion of the voting rights of the promoters of the company will not attract regulation 11(1) of the takeover code. The argument … that merely because there is increase in the voting rights of the appellants, regulation 11(1) gets triggered cannot be accepted.”

SAT further stated that: “Passive acquisition as in the present case cannot be regarded as indirect acquisition.”

New regulations

In contrast to SAT’s view in the Dalmia case, the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, which came into effect in October last year, appear to codify the earlier practice followed by SEBI. They regard an increase in voting rights pursuant to a buyback as an acquisition and provide for certain exemptions under regulations 10(3) and 10(4)(c).

Subject to reducing the excess shareholding such that a shareholder’s voting rights fall below 25% within 90 days, regulation 10(3) provides for an exemption if the buyback results in voting rights increasing from below 25% to 25% or more.

Similarly, regulation 10(4)(c) exempts a more than 5% increase in voting rights pursuant to a buyback if the holding is between 25% and less than the maximum permissible non-public shareholding limit and the shareholder’s aggregate shareholding pursuant to the buyback remains within such limit, provided (i) the shareholder resolution is through postal ballot, the shareholder/interested director does not vote in favour of the shareholder/board resolution authorizing the buyback, and the shareholder does not acquire “control”, or (ii) alternatively, the shareholder within 90 days reduces the excess shareholding such that its voting rights fall below the level triggering the open offer.

It remains to be seen whether the Dalmia case gets appealed, and whether the position is reconciled with the new regulations.

Puja Sondhi (puja.sondhi@amarchand.com) is a partner and Rahul Singh (rahul.singh@amarchand.com) is a senior associate at Amarchand & Mangaldas & Suresh A Shroff & Co. The views expressed in this article are those of the authors and do not reflect those of the firm.