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Amendments in (Substantial Acquisition of Shares and Takeovers) Regulations, 1997
Securities and Exchange Board of India (“SEBI”) has amended the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (“Takeover Code”). Under the erstwhile Regulation 3(2) of the Takeover Code, acquisition of American Depository Receipts (“ADR”) / Global Depository Receipts (“GDR”) were exempted from open offer requirement until the time of their conversion into the underlying equity shares carrying voting rights. SEBI has now clarified that an exemption from open offer would be available only as long as the ADR / GDR holders remain passive investors without any kind of voting arrangement on the underlying equity shares whatsoever.
Certain important and recent legal developments and case laws in this area are set out below.
Amendments in (Substantial Acquisition of Shares and Takeovers) Regulations, 1997
Securities and Exchange Board of India (“SEBI”) has amended the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (“Takeover Code”). Under the erstwhile Regulation 3(2) of the Takeover Code, acquisition of American Depository Receipts (“ADR”) / Global Depository Receipts (“GDR”) were exempted from open offer requirement until the time of their conversion into the underlying equity shares carrying voting rights. SEBI has now clarified that an exemption from open offer would be available only as long as the ADR / GDR holders remain passive investors without any kind of voting arrangement on the underlying equity shares whatsoever.
Earlier, an acquirer who acquired shares or voting rights of a company equal to or more than 15 per cent but less than 55 per cent, was required to make a disclosure on purchase or sale aggregating 2 per cent or more of the share capital of the target company to the target company and to the concerned stock exchanges. In addition to the above, as per the amended regulations, any acquirer who acquires shares between 55 per cent to 75 per cent or 90 per cent, as the case may be, shall also be required to make above disclosure.
It has also been clarified that an acquirer (together with persons acting in concert) holding shares between 15 per cent (inclusive) to 55 per cent (under Regulation 11(1) of Takeover Code) can acquire further 5 per cent shares in any given financial year without triggering an open offer (known as ‘creeping acquisition’) and take its shareholding to a maximum ceiling limit of 55 per cent and not beyond it.
Combating Financing of Terrorism under Unlawful Activities (Prevention) Act, 1967 - Directions to Stock Exchanges, Depositories and all Registered Intermediaries
SEBI has brought to the notice of its registered intermediaries that an updated list of individuals and entities which are subject to various sanction measures such as freezing of assets/accounts, denial of financial services etc., as approved by United Nations and placed on their website at SEBI has further directed the registered intermediaries to ensure that name of their present or proposed customer does not appear in the list. They are required to intimate the full details of accounts bearing resemblance with any of the individuals/entities in the list to SEBI and Financial Intelligence Unit (“FIU”) – India which corresponds with global FIU’s. Under Section 51A of the Unlawful Activities (Prevention) Act, 1967, the GOI is empowered to freeze, seize or attach funds and other financial assets or economic resources held by, on behalf of or at the direction of the entities listed. The present circular directs the stock exchanges, depositories and registered intermediaries to ensure the effective and expeditious implementation of the said procedure. The present circular details the procedure to be followed by the stock exchanges, depositories and registered intermediaries regarding freezing and unfreezing of funds, financial assets or economic resources etc.
Case Laws
Sasken Communication Technologies Ltd. v. SEBI
The Board of Directors (“Board”) of the appellant Company decided to buy-back the equity shares of the appellant Company for an aggregate amount of INR 400 million. SEBI informed the appellant Company that its Board could not have the discretion to close the buy-back of shares at any time they wanted and required the appellant Company to delete certain words from the proposed time table contained in the public notice-cum- announcement. The main issue in the present appeal was whether SEBI has the power to advise the appellant Company to delete some words from its public notice-cum- announcement.
On the facts and circumstances of this case, Securities Appellant Tribunal (“SAT”) decided that SEBI does not have any authority to issue such directions. Public notice-cum- announcement is a commercial document issued by the appellant Company for the attention of its shareholders offering to buy-back equity shares and all its clauses have to be read together and understood in a manner in which a reasonable prudent investor of the appellant Company would read and understand. The amount of INR 400 million which has been described as the offer size in the public announcement was the maximum limit upto which the shares could be purchased by the appellant Company as resolved by its Board and it is not the minimum amount as SEBI has taken it to be. With respect to other directions issued by SEBI, SAT held that it is not a part of SEBI’s duty to advise a purchaser regarding the price at which he needs to put in his buy orders. Thus, SEBI could not direct the appellant Company to place the buy orders above the market price. Furthermore, the appellant Company cannot be compelled to complete the buy-back soon after the passing of the resolutions as has been directed by SEBI. There is nothing in the regulations either to suggest that the buy-back should be completed at the earliest. Hence, SEBI was wrong in issuing such a direction to the appellant Company requiring it to start with the buy-back immediately.
Goldman Sachs Investments (Mauritius) Ltd. v. Adjudicating Officer, SEBI
The issue under consideration before SAT in this case was whether SEBI could ask Foreign Institutional Investor (“FII”) to furnish an undertaking that they had not dealt in respect of Off-shore Derivative Instruments (“ODIs”) with Indian residents, Non-Resident Indians (“NRIs”), Persons of Indian Origin (“PIOs”), or Overseas Corporate Bodies (“OCBs”) in absence of a bar on such deals.
As per the SEBI (FII) Regulations, 1995, every FII is required to submit to SEBI or the RBI, as the case may be, any information, record or documents in relation to its activities as an FII. SAT allowed the appeal and decided that SEBI have the power to call upon the FII’s to report about their activities or furnish to it the information required of them under the regulation. However, SAT disapproved the action of SEBI requiring such FII’s to furnish the undertaking as prescribed for the first time in the revised reporting format in the absence of a bar prohibiting them from dealing in ODI’s with Indian Residents/NRI’s/OCB’s/PIO’s.
Authors:
Sunil Seth (sunil.seth@sethdua.com) is a Senior Partner and Sushil Mehta (e-mail: sushil.mehta@sethdua.com) is a Senior Associate with Seth Dua & Associates, Solicitors & Advocates, India.