24 June 2020

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