Background of the amendment dated October 30, 2008
With the stock market tumbling and sinking, most of the investors started selling their stake in the company. However, due to the down fall in the stock market, the buyers are not available. On the other hand, there is one category of buyer who can really value the company even in the downfall market, i.e the promoters of the company which can be group into two classes. Those who are holding between 15%-55% shares and those who are holding above 55% shares in the company
The promoters who are holding between 15%-55% can acquire further 5% shares as creeping acquisition in terms of regulation 11(1) of the SEBI (SAST) Regulations, 1997. However, those promoters who are holding above 55% shares are restricted from buying the shares in terms of regulation 11(2) of the SEBI (SAST) Regulations, 1997. Therefore, to give an opportunity to those promoters to buy further shares and to stop further downfall in stock market, SEBI came out with an amendment on October 30, 2008, thereby, relaxing the provisions of regulation 11(2) of the SEBI (SAST) Regulations, 1997. The amendment was introduced by the SEBI with the objective of again infusing the Investor confidence and for strengthening the stock market which was going through the unpleasant phase at that point of time.
An Analysis of provisions of regulation 11(2) of SEBI (SAST) Regulations, 1997
Regulation 11(2) as existed before the amendment dated October 30, 2008 is stated below:
No acquirer, who together with persons acting in concert with him holds, fifty five percent. (55%) or more but less than seventy five per cent. (75%) of the shares or voting rights in a target company, shall acquire either by himself or through persons acting in concert with him any additional shares or voting rights therein, unless he makes a public announcement to acquire shares in accordance with these Regulations:
Provided that in a case where the target company had obtained listing of its shares by making an offer of at least ten per cent. (10%) of issue size to the public in terms of clause (b) of sub-rule (2) of rule 19 of the Securities Contracts (Regulation) Rules, 1957, or in terms of any relaxation granted from strict enforcement of the said rule, this sub-regulation shall apply as if for the words and figures ‘seventy five per cent. (75%)’, the words and figures ‘ninety per cent. (90%)’were substituted.
Vide notification dated October 30, 2008, SEBI has amended the provision of regulation 11(2) of the SEBI (SAST) Regulations, 1997 and allowed the acquisition of another 5% shares by shareholders who already hold 55% or more shares but less than 75% shares or voting rights of a Listed Company subject to the certain conditions. The provision of regulation 11(2) as existed today after the amendment dated October 30, 2008 is stated below:
No acquirer, who together with persons acting in concert with him holds, fifty five per cent (55%) or more but less than seventy five per cent (75%) of the shares or voting rights in a target company, shall acquire either by himself or through persons acting in concert with him any additional shares entitling him to exercise voting rights’ or voting rights therein, unless he makes a public announcement to acquire shares in accordance with these Regulations:
Provided that in a case where the target company had obtained listing of its shares of making an offer of at least ten per cent (10%) of issue size to the public in terms of clause (b) of sub-rule (2) of rule 19 of the Securities Contracts (Regulation) Rules, 1957, or in terms of any relaxation granted from strict enforcement of the said rule, this sub-regulation shall apply as if for the words and figures ‘seventy five per cent (75%)’, the words and figures ‘ninety per cent (90%)’ were substituted.
Provided further that such acquirer may, without making a public announcement under these Regulations, acquire, either by himself or through or with persons acting in concert with him, additional shares or voting rights entitling him upto five per cent.(5%) voting rights in the target company subject to the following:-
(i) the acquisition is made through open market purchase in normal segment on the stock exchange but not through bulk deal /block deal/ negotiated deal/ preferential allotment; or the increase in the Shareholding or voting rights of the acquirer is pursuant to a buy back of shares by the target company;
(ii) the post acquisition shareholding of the acquirer together with persons acting in concert with him shall not increase beyond seventy five per cent.(75%). ”
An analysis of the provision of regulation 11(2) before and after the amendment is detailed below
| S. No. | Regulation No. | Before the amendment dated October 30, 2008 | After the amendment dated October 30, 2008 | ||||||
| Limit | Acquisition | Mode of acquisition | Open offer | Limit | Acquisition | Mode of acquisition | Open offer | ||
| 1 | 11(2) | 55%-75% | Any % | Any Mode | Yes | 55%-75% | Up to 5% | 1.Only through Open market purchases in the normal segment &NOT through · Bulk Deal · Block Deal · Negotiated deal or · Through preferential allotment OR | No |
| 55%-75% | Beyond 5% | Only through Open market purchases in the normal segment & NOT through · Bulk Deal · Block Deal · Negotiated deal or · Through preferential allotment OR | Yes | ||||||
| 55%-75% | Any % | Other than specified above | Yes | ||||||
An analysis of the amendment as understood by the Corporate world before the clarification circular dated August 06, 2009
· As the amendment only prescribed that an acquirer who already holds 55% or more shares but less than 75% shares or voting rights in a company can acquire another 5% shares provided the conditions prescribed under the said sub regulation are complied with. Therefore, it is understood that the acquisition is allowed for every financial year in the same manner as creeping acquisition is allowed under regulation 11(1) of the SEBI (SAST) Regulations, 1997.
For example: If any acquirer is holding 56% shares, then he can acquire further 5% shares in each financial year as allowed in regulation 11(1) of the SEBI (SAST) Regulations, 1997
· Further, it is also understood that an acquirer who is currently holding 54% shares can further acquire 5% shares in terms of the second proviso to sub-regulation (2) of regulation 11.
· It is assumed that the maximum limit of 75% provides in the amendment would stand modified to 90% in case of companies which are required to maintain the minimum public shareholding of 10% in terms of the Listing Agreement.
For example: If the promoter shareholding in the company, which is allowed to maintain the maximum promoter shareholding at 90%, is 84%, then they can further acquire 5% shares in terms of second proviso to sub-regulation (2) of regulation 11.
Thus, it can be said that although the SEBI by amendment dated October 30, 2008, has opened the gate for the Investor who were earlier restricted in terms of regulation 11(2) of the SEBI (SAST) Regulations, 1997, however, the amendment has been subject to the multiple interpretation.
Therefore, taking into consideration the interpretative confusion among the corporate world, SEBI has issued a Clarification circular No. CFD/DCR/TO/Cir-01/2009/06/08 dated August 6, 2009 amplifying the provision of regulation 11(2) as contained in the amendment dated October 30, 2008.
Analysis of the circular
· Minimum 55% shareholding:
The creeping acquisition is allowed only to the acquirer who together with the PACs with him holds 55% or more shares in the Target Company:
For example: Where an acquirer holding 53% shares wanted to acquire another 2% shares in the company, then he would be govern by the provision of regulation 11(1) of the SEBI (SAST) Regulations, 1997 and would be required to give the open offer. The creeping acquisition as prescribed under regulation 11(2) of the SEBI (SAST) Regulations, 1997 is allowed only to the acquirer who holds 55% or more shares in the company and not to the person whose existing holding is less than 55%.
· Not at par with regulation 11(1)
The creeping acquisition as allowed under second proviso to sub-regulation (2) of regulation 11is not at par with the creeping acquisition allowed under regulation 11(1) of the SEBI (SAST) Regulations, 1997.
The creeping acquisition as prescribed under regulation 11(1) is allowed in each financial year i.e. an acquirer who is holding 15% or more shares can go on acquiring the further shares upto 5% in each financial year till the time his holding does not reaches to 55%.
However, the creeping acquisition as prescribed under second proviso to sub-regulation (2) of regulation 11 is not allowed in each financial year.
· One time acquisition
Creeping acquisition as prescribed under second proviso to sub-regulation (2) of regulation 11 is a one time acquisition.
The creeping acquisition limit of 5% as prescribed under the said proviso is allowed once during the entire life time of the Target Company and can be made in one or more trenches without any restriction on the time frame.
For example: If an acquirer holding 57% shares have acquired further 2% shares in the financial year 2008-09 and another 3% shares in the financial year 2009-10, then he cannot acquire further shares in the coming years as the entire acquisition as allowed under the aforementioned proviso has been exploited.
· No netting off allowed
The limit of 5% shall be calculated by aggregating all the purchases without netting the sales;
For example: where an acquirer holding 56% shares have acquired further 4% shares in the company during the financial year 2008-09 and sold of 2% shares in the financial year 2009-10, then he can further acquired only 1% shares without making the public announcement regardless of the fact that he has sold of 2% shares in the financial year 2009-10
· Maximum 75% shareholding
Irrespective of the level of minimum public shareholding to be maintained in terms of clause 40A of the listing agreement, the total shareholding of the acquirer along with the PACs consequent to the creeping acquisition as allowed under second proviso to sub-regulation (2) of regulation 11 should not increased beyond 75%.
For Example: Where the promoter of a company, which is required to maintain a minimum public shareholding of 10% in terms of clause 40A of the Listing Agreement, are holding 85% shares, then they cannot acquire another 5% shares in terms of second proviso to sub-regulation (2) of regulation 11 without making the public announcement as the said proviso has restricted the maximum shareholding to 75% irrespective of the fact that the company is allowed to maintain the promoter shareholding at 90%.
A comparison of issues involved in the amendment dated October 30, 2008 and the clarification given by the SEBI in the clarification circular dated August 06, 2009 is given below:
|
| Amendment dated October 30, 2008 | Clarification circular dated August 06, 2009 |
| Minimum shareholding | It is not clear whether the acquirer who is holding 54% shares in the company can acquire the further shares in terms of second proviso to sub-regulation (2) of regulation 11. | Now, it has been clarified that only an acquirer who is holding 55% or more shares can avail the benefit of the provision as inserted in regulation 11(2) by the amendment dated October 30, 2008. |
| Creeping acquisition of 5% | It is not clear whether the acquisition is allowed for every financial year or is allowed once for the entire life time of the Target Company. | The creeping acquisition of 5% is allowed once during the entire lifetime of the Target Company. |
| Maximum shareholding i.e. 75% or 90% | It has not been provided whether the maximum limit of 75% would stand modified to 90% in case of companies which are required to maintain a minimum of 10% public shareholding in terms of Listing Agreement. | It has been now clarified in the circular that the maximum shareholding of the acquirer cannot increased beyond 75% pursuant to the creeping acquisition allowed under second proviso to sub-regulation (2) of regulation 11 regardless of the minimum public shareholding required to be maintained in terms of the Listing Agreement. |
Query: 1
Whether an acquirer, who is currently holding 57% shares in the company, can acquirer further shares by way of preferential allotment in terms of second proviso to sub-regulation (2) of regulation 11?
Answer:
The second proviso to sub-regulation (2) of regulation 11 allowed the further acquisition of 5% to an acquirer who is currently holding 55% or more but less than 75% shares provided that the acquisition is made through:
· open market purchase in normal segment on the stock exchange but not through bulk deal /
o block deal/
o negotiated deal/
o preferential allotment;
or
· the increase in the Shareholding or voting rights of the acquirer is pursuant to a buy back of shares by the target company;
Thus, in terms of the above mentioned provision, an acquirer who is already holding 57% shares cannot acquire further shares by way of preferential allotment in terms of second proviso to sub-regulation (2) of regulation 11. He can do so by making the public announcement in terms of regulation 11(2) of the SEBI (SAST) Regulations, 1997.
Query: 2
Whether an acquire, who along with PACs holds 54% shares in the company, can acquire another 5% shares in terms of second proviso to sub-regulation (2) of regulation 11?
The amendment as well as the clarification circular as issued by the SEBI has specifically provides that the creeping acquisition of 5% as prescribed under second proviso to sub-regulation (2) of regulation 11 is allowed to an acquirer who together with the PACs with him holds 55% or more but less than 75% shares of a company. Thus, where an acquirer holds 54% shares in the company, then he can acquire further 0.99% shares ( i.e. upto 54.99%) as creeping acquisition without making the public announcement in terms of regulation 11(1) of the SEBI (SAST) Regulations, 1997.
Query: 3
Whether the creeping acquisition limit of 5% as prescribed under second proviso to sub-regulation (2) of regulation 11 is allowed for each financial year or is an only one time acquisition?
Answer:
In accordance with the clarification given in the SEBI circular dated August 06, 2009, the creeping acquisition limit of 5% as prescribed under second proviso to sub-regulation (2) of regulation 11 is a onetime acquisition and allowed once in the entire life of the Target Company. However, the acquisition can be made in one or more trenches in any numbers of years.
Query: 4
Whether an acquirer, who already holding 56% shares in the company has further acquired 5% shares in terms of second proviso to sub-regulation (2) of regulation 11 during the financial year 2008-09 and sold of 2% during the year 2009-10, can acquired another 2% shares in terms of the aforesaid proviso.
Answer:
SEBI Circular has specifically mentioned that for calculating the limit of 5% as permitted under said proviso, aggregate of all the acquisition without netting of the sales is to be considered. Therefore, in this case, as the acquirer has already acquired 5% shares in the company, therefore, he cannot acquired further shares without making the public announcement regardless of the fact that he has sold of 2% shares in the financial year 2009-10.
Query: 5
Whether where an acquirer who along with the PACs holds 74% shares of a company can acquire another 5% shares in terms of second proviso to sub-regulation (2) of regulation 11?
Answer:
Second proviso to sub-regulation (2) of regulation 11 allowed the further acquisition of 5% by an acquirer who already holds 55% or more shares but less than 75% shares in a company subject to some conditions as prescribed therein. One of such condition is that the post acquisition shareholding of the acquirer together with persons acting in concert with him after such creeping acquisition shall not increase beyond seventy five per cent.(75%).
Therefore, an acquirer who along with the PACs with him already holds 74% shares can acquire further 0.99% shares (i.e. upto 74.99%) in terms of second proviso to sub-regulation (2) of regulation 11.
Query: 6
Whether, where the company is allowed to maintain the promoter shareholding at 90% (i.e. the company which are required to maintain a minimum public shareholding of 10 %*) in terms of clause 40A of the Listing Agreement, an acquirer can acquire the shares increasing his shareholding beyond 75%?
Answer:
In terms of clause 40A of the Listing Agreement, the company is required to maintain on a continuous basis, public shareholding of at least 25% of the total number of issued shares of a class or kind, for every such class or kind of its shares which are listed.
*However, where the number of outstanding listed shares of any class or kind of the companyare two crore or more and the market capitalization of such company in respect of shares of such class or kind is Rs. 1000 crores or more, the company is allowed to maintain, on a continuous basis, a minimum public shareholding of at least 10% of the total number of issued shares of such class or kind.
It is noteworthy to mention here is that the circular has expressly restricted the acquirer from increasing the shareholding beyond the limit of 75% pursuant to the creeping acquisition provided under second proviso to sub-regulation (2) of regulation 11 irrespective of the level of minimum public shareholding to be maintained in terms of clause of 40A of the Listing Agreement i.e regardless of whether the company is required to maintain minimum public shareholding at 10% or 75%, the shareholding of the acquirer pursuant to the creeping acquisition allowed in the amended regulation 11(2) cannot increase beyond the limit of 75%.
Unanswered Questions
What is the applicability of the SEBI (SAST) Regulations, 1997 on the acquirer who has acquired 5% shares before March 31, 2009 and another 5% shares after March 31, 2009 in terms of the second proviso to sub-regulation (2) of regulation 11 on the assumption that the creeping acquisition as allowed under said regulation is for each financial year.
Thus, it is required that SEBI should come out with another clarification regarding the above unanswered question in a good faith for the benefit of those investors who have taken this action.
No comments:
Post a Comment