Share sales via exchange: Decoding the mechanism

By Yogesh Chande, Shardul Amarchand Mangaldas & Co
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Through a notification dated 24 March 2015, the Securities and Exchange Board of India (SEBI) amended its Buy Back of Securities Regulations, 1998, Substantial Acquisition of Shares and Takeovers Regulations, 2011, and Delisting of Equity Shares Regulations, 2009, to facilitate tendering and settlement of shares through the stock exchange’s acquisition window mechanism. The purchase and settlement of shares for tender offers, which had always been “off-market”, was made available for settlement through the stock exchange mechanism in the form of a separate window.

Yogesh Chande
Yogesh Chande

Outlined below are the operational aspects of the acquisition window as regards order placement and settlement of funds and securities. Settlement of trades is carried out in a manner similar to the secondary market.

During the tendering period, eligible sellers place their order for selling the shares through their stockbroker (trading member) during normal trading hours of the secondary market. The cumulative quantity tendered is displayed on the stock exchange website throughout the trading session at specific intervals during the tendering period.

The placing of bids/orders by trading members takes place during normal trading hours of the secondary market. Trading members and custodians have to adhere to the operating process/parameters for placing bids/orders in the acquisition window prescribed by the stock exchange.

The depositing of shares in dematerialized form is seamless. Settlement takes place on a gross basis. The shares so transferred are used as securities pay-in of the trading members whose bids are accepted as per the basis of allotment. The buyer’s trading member receives all the shares in securities pay-out.

For deposit of physical shares, sellers have to show their trading member their share certificates, transfer deeds, etc., as specified in the letter of offer. The trading member then places bids on the stock exchange platform with relevant details, and prints the transaction registration slip (TRS) generated by the stock exchange bidding system. The seller or their trading member delivers the shares and documents along with the TRS to the registrar and transfer agent (RTA).

As and when the RTA confirms the records, such bids are treated as confirmed and displayed on the stock exchange website as “confirmed physical bids”. On acceptance of physical shares by the RTA, the funds received from the buyer’s trading member by the clearing corporation are released to the seller’s trading member as per secondary market pay-out mechanism. Once the basis of acceptance is finalized by the manager to the offer, the concerned clearing corporation facilitates the clearing and settlement of trades by transferring the required number of shares to the buyer’s escrow account.

The trading member issues contract notes for trades executed in the acquisition window as per the same format and specifications as in the equity market segment. Apart from the other details, the contract note specifies the total securities transaction tax for the transactions it covers.

The following additional disclosures must be made in the detailed public statement, the letter of offer under the takeover regulations, and in public announcements under the buyback and delisting regulations: (1) name and address of the stockbroker appointed by the buyer; (2) name of the recognized stock exchanges with nationwide trading terminals where the acquisition window is to be available, including the name of the designated stock exchange; (3) methodology for placement of orders, acceptances and settlement of shares held in dematerialized form and physical form; (4) details of the special account opened with the clearing corporation.

Use of the acquisition window mechanism is mandatory and applies to all tender offers under the takeover, buyback and delisting regulations. Since only registered foreign institutional investors/foreign portfolio investors and non-resident Indians – as per Schedules 2, 2A and 3 respectively of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 – can invest/trade through a registered broker in the capital of Indian companies on recognized Indian stock exchanges, in terms of a SEBI circular dated 13 April 2015, where an acquirer or any person acting in concert with an acquirer who proposes to acquire shares under the offer is not eligible to acquire shares through a stock exchange due to operation of any other law, such offers have to follow the existing “tender offer method”, i.e. off-market settlement.

Subject to conditions, the Reserve Bank of India permits a non-resident investor including a non-resident Indian to acquire shares of a listed Indian company on the stock exchange in accordance with the takeover regulations through a stockbroker registered with SEBI under the foreign direct investment scheme.

Yogesh Chande is a partner at Shardul Amarchand Mangaldas & Co.

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