Market Regulator, SEBI notified the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) (Amendment) Regulations 2020 on June 16, 2020 (“Takeover Amendment Regulations, 2020”). Vide this amendment, the creeping acquisition limit of equity shares has been enhanced to 10% as against the earlier limit of 5%.
Creeping acquisition refers to a gradual increase in the shareholding up to the maximum permissible shareholding, over a number of smaller transactions. The goal is usually that of gaining a controlling interest in the target company by only a gradual increase in shareholding up to the creeping acquisition limit, thereby exempting the acquirer from statutory obligations of disclosure and of making an open offer. This mechanism utilizes the open market, further benefitting the acquirer to attain a better price in the current value of shares as against the premium price he would have to pay in case of the open offer.
An open offer is an offer made by the acquirer to the shareholders of the target company inviting them to tender their shares in the target company at a particular price. The primary purpose of an open offer is to provide an exit option to the shareholders of the target company on account of the change in control or substantial acquisition of shares, occurring in the target company. - SEBI
Regulation 3(2) of the SEBI Takeover (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Regulations, 2011”)
Regulation 3(2) provides that the shareholders holding 25% or more (either by themselves or through Persons Acting in Concert) are not required to make a public announcement to an open offer for an acquisition of shares up to 5% in one financial year.
The Takeover Amendment Regulations, 2020 has increased the creeping acquisition limit to 10% from the earlier 5%. Such acquisition must be made through preferential allotment. This relaxation has only been made available for FY 2020-2021.
As a result, a promoter holding 25% or more worth shares or voting rights in a company can now increase his shareholding by up to 10% in this FY 2020-2021 as against 5% per the previous limit. Regardless, the maximum threshold for public shareholding remains unchanged at 75%.
Regulation 6 of the Takeover Regulations 2011 provides that an acquirer or a PAC who has acquired shares of a target company in preceding 52 weeks without triggering the open offer obligations is disqualified to make a voluntary public offer for acquiring shares. This disqualification has been removed by virtue of the Takeover Amendment Regulations, 2020 up until March 31, 2021.
As a result of Covid-19 pandemic and the consequent lockdown, several businesses are facing cash flow crunches and are in dire need of funds. However, methods of funding from third parties have also become scarce in these circumstances. At this critical time, this amendment is a positive step forward. On the one hand, it will benefit companies to raise needed equity capital from its promoters, it is also projected to assist companies that have raised funds by debt servicing to infuse funds through equity issuance. On the other hand, it will benefit promoters desiring to enhance their stake in doing so, consequently also raising investor confidence. Furthermore, preferential allotment is a relatively quicker fundraising mechanism and will enable the promoters to instil vital equity funds to their companies without triggering open offer obligations.