Interesting nudge from Sebi with takeovers

It is an extraordinary measure that has taken everyone by surprise. The Securities and Exchange Board of India (Sebi) has amended the takeover regulations to enable an additional creeping acquisition of 5 per cent of the voting rights in listed companies within this financial year without making an open offer. The suspension of the obligation to make an open offer is available only to promoters if the hike in stake is by infusing money into the company and only within this financial year.

Under the takeover regulations, when any person along with those in concert acquires 25 per cent or more voting rights, an obligation to make an open offer to acquire another 26 per cent of the shares from the other shareholders is attracted. Those who already hold above 25 per cent voting rights are obligated to make such an open offer if they were to acquire 5 per cent or more within a financial year. An additional 5 per cent is now permitted but only for promoters and that too only for the current financial year.

There are three facets that make the latest move by the Sebi interesting. Promoters have been clamouring for relief from the Sebi on various counts citing the difficulties in doing business in pandemic times. While the cause and the need for progressive regulatory policy is undisputed, what actual shape such measures should take can get very controversial.  

First, there have even been calls from some quarters for suspending delisting regulations, finding fault with promoters even trying to attempt delisting in compliance with regulations, terming it “opportunistic” and pejoratively running it down as profiting from a crisis — far from it, delisting regulations place power in the hands of public shareholders who can quote a price unconnected with market for being bought out in order to let the company delist. If the price is too high for the promoter, the delisting fails. If it is acceptable to the promoter, purchases at that price must translate into a 90 per cent ownership for the promoter, without which the delisting fails.

The new Sebi measure places an incentive to promoters to infuse money into the business instead of paying it out for buying financial assets, and in the process, gain a 5 per cent higher stake than they would otherwise be entitled to buy without making an open offer. Infusion of funds into a company would shore up value for the company, and that too could be said to benefit all shareholders. A promoter who may contemplate going through an expensive delisting process is now tantalised with getting a higher stake without expending energy on an open offer and using the money to invest in the business instead.

Second, the specific naming of promoters as a class of persons who may acquire more shares only means that there is no change of control by reason of the creeping acquisition. A promoter, by definition, is a person who is already in control of the listed company. Permitting the promoter to get more shares and that too by preferential allotment would not disturb control over the company. If there were a disturbance of control, exempting from an open offer would be ludicrous.  

Therefore, while this may seem like a special treatment given to the promoter, the science behind it is rather simple — the exemption is only available for an increase in the number of shares held by those already in control. In any case, the exemption is only an exemption relating to open offers by reason of hike in voting rights and not an exemption relating to open offers arising out of change of control (which is triggered regardless of the degree of shareholding).

Finally, this is not the first time an additional headroom is provided in a macro-economic crisis. In 2008, during the “Lehman crisis”, an additional acquisition of 5 per cent without triggering an open offer was provided for but it only had to be through market purchases, and not through preferential allotment or pre-negotiated bulk purchases. Ambiguity in the drafting led to immense litigation with the market confused about whether it was a life-time limit or an annual limit. It was then felt that enabling secondary purchases would be good for the market. This time, the approach has been turned on its head — the thinking is enabling infusion of funds into the company would be better than purchasing shares in the market.

The author is an advocate and independent counsel; Twitter: @SomasekharS