CREEPING ACQUISITION | RELAXATION OF TAKEOVER CODE

The lockdown on account of the COVID-19 pandemic has led substantial erosion of Indian businesses. To boost the confidence, Securities and Exchange Board of India (SEBI) vide a notification dated 16 June 2020 (Amendment) has amended the SEBI (Substantial Acquisition and Takeovers) Regulation, 2011 (Takeover Code) and relaxed the provisions with respect to creeping acquisition by the promoters under the Takeover Code for the Financial Year 2020-2021.

This update seeks to broadly set out the important changes brought about by the Amendment to the Takeover Code as follows:

CREEPING ACQUISITION

• The creeping acquisition mechanism under Regulation 3 of the Takeover Code provides that any person holding between 25% and 75% off shares in the company is entitled to acquire further shares not exceeding up to 5% voting rights during each financial year without triggering the compulsion to make a mandatory open offer. If such an acquirer breaches this annual limit, they will have to make an offer to the other shareholders to acquire at least another 26% shares on a pro rata basis. However by this Amendment, SEBI has permitted acquisition from 5% up to 10% of voting rights in the listed entity, only pursuant to preferential issue of equity shares.


• It is important to note that the promoters who own more than 25% shares of the listed company can avail the benefit of this Amendment. If the promoter who has less than 25% shares of the listed company will not be able to avail this benefit. Further, it seems to be observed that the exemption is applicable to only equity shares. It seems to be unclear if convertible securities (i.e. securities which have the option to be converted into equity shares at a future date) will be covered under this Amendment.

VOLUNTARY OPEN OFFER

• In terms of Regulation 6 of the Takeover Code, a shareholder can make a voluntary open offer for acquiring shares subject to his aggregate shareholding after completion of offer does not exceeds the maximum permissible non-public shareholding in such listed entity (up to 75%). However the prelude before making an offer is that the intended shareholder should not have acquired shares of such listed entity in the preceding 52 weeks.
• This Amendment has however temporarily relaxed Regulation 6 of the Takeover Code and has allowed such eligible shareholder to make a voluntary open offer even though he may have acquired shares of such listed entity in the preceding 52 weeks.

MHCO Comment: This Amendment will provide some kind of boost to the companies by allowing them to raise funds to address their liquidity concerns in these crucial times. The companies always find raising of funds through these methods easier as this process is efficient and relatively quicker than competing models of garnering funds. However, it would be interesting to see whether by raising the cap by just 10%, would be sufficient for companies to meet their commercial requirements.

he views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.comfor any assistance

IBC ORDINANCE 2020 | SUSPENSION IN OPERATIONS OF SECTION 7, 9 & 10 OF IBC

The COVID-19 pandemic has severely impacted businesses, financial markets and the economies all over the globe creating severely stressful and trying times for businesses. In order to prevent spread of the virus, India had enforced a nationwide lockdown which further added major disruptions to operations of businesses, which may have led to a possibility of a default in discharging their liabilities or debt obligations to various corporate persons.

The Ministry of Corporate Affairs (Ministry) had earlier by a way of Notification dated 24 March 2020 (Notification) increased the threshold for invoking Corporate Insolvency Resolution Plan (CIRP) against a corporate debtor to Rs 1 Crore from the existing Rs 1 Lac. Now the government has announced the decision to suspend the invocation of the Insolvency and Bankruptcy Code, 2016 (IBC). As the Parliament is not in session, the invocation is being promulgated through IBC (Amendment) Ordinance, 2020 (Ordinance) dated 5 June 2020 to further amend IBC and provide the much awaited clarity with regards to the suspension in operations of Section 7,9 and 10 of IBC.

This update seeks to broadly set out the important changes brought about by the Ordinance to the IBC:

• Suspension: The Ordinance mainly inserts Section 10A in the IBC which deals with selectively suspending the applicability Section 7, 9 and 10 of the IBC to protect defaulters on account of a situations beyond their control, from being pushed into insolvency proceedings under the IBC. The newly added Section 10A of IBC mainly deals with two aspects which are as follows:


• No application shall be filled for invoking any default arising on or after 25 March 2020 for a period of 6 months or such further period not exceeding 1 year;
• No application shall ever be filed for initiation of CIRP for defaults occurring during the said period.



• This insertion has not only been added just to protect the defaulters from invocation of CIRP due to defaults arising on/after 25 March 2020 but also taking into account the difficulty in finding a resolution applicant willing to invest money to rescue the defaulter by discharging their liabilities.
• Further, this insertion of Section 10A of the IBC gives rise to certain questions as to the execution of the provisions because it specifically prohibits the filing of any application to initiate CIRP. Now onwards it would fall upon National Company Law Tribunal (NCLT) to determine if the occurrence of the default happened on or after of the 25 March 2020. It would completely be the responsibility of the corporate debtor to prove the same as and when an application is filed. The Ministry would have to provide clarity on the aspect whether any application at all, can be filed post 6 or 12 months as specified in the newly inserted section or it completely bars the same, as provided under the provision which states that no such application can ever be filed. Till the time such ambiguity remains, it would be interesting to see as to how the NCLT or the Apex Court interpret the same, as such ambiguity per se would lead to various interpretations from each side which would have to be dealt with in the course of time.
• Increase in the Threshold Limit: The Ordinance further fails to provide any, much needed clarity from the earlier Notification, wherein the threshold of the default was increased from Rs 1 Lac to Rs 1 Crore under Section 4 of the IBC. It will once again lie on to NCLT to interpret whether if a majority amount of the default occurred before 25 March 2020 and remainder portion of Rs 1 Crore occurs after 25 March 2020. Then would such a default be protected under provisions of this Ordinance or would it be considered beyond the purview of Section 10A allowing the creditor to file an application invoking the initiation of CIRP.
• Voluntary Resolution: The Ordinance further limits the scope of voluntary reference to insolvency especially in the view that all other means of debt resolution outside the IBC would be with the concurrence of the existing management and therefore if the same management is of the view that the resolution under IBC is best and feasible option then any further wastage of time by opting to resort to other modes of insolvency would only lead to deterioration of value of the assets. It would have been appropriate if the option of voluntary insolvency would have been provided in the Ordinance as it would have paved way for stressed businesses to avoid further diving in an already stressed out financial environment.
• The Ordinance also inserts sub-section (3) to section 66 of the IBC prohibiting the resolution professional from filing an application under Section 66(2) of the IBC. Section 66 of the IBC deals with fraudulent trading or wrongful trading i.e. transactions which done to defraud the creditors. With the insertion of sub-section (3) to section 66 it provides protection to directors / promoters of a corporate debtor for any fraudulent transactions committed during the period of 6 months as prescribed under Section 10A.

MHCO Comment: The Ordinance appears to have been passed with the intention of protecting companies from liabilities arising in these difficult and trying times. It is however necessary for the NCLT to ensure that Section 10A does not become a defense mechanism for defaulters. However these new provisions inserted through Ordinance requires clarity in regards to issues explained above, hopefully which shall be clarified by way of a notification in the future. As it stands as of today, businesses can take the breathing time as provided by the Ministry, without being dragged to a court of law for defaults that may have taken place in obliging the payment terms in an otherwise normal day.

he views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.comfor any assistance