16 May 2017

Listing date crucial in determining exemption from open offer obligations

Key Points

  • It is irrelevant whether the same promoters were holding the same shares for over a long period either in the target company or in the parent company or both, prior to listing the target company. The only relevant factor is date of listing the target company and the promoter holding filed by the target company as part of the listing agreement.
  • The informal guidance provided by an official from the department of Security Exchange Board of India (SEBI) under SEBI’s Informal Guidance Scheme, 2003 shall not be construed as an Order from SEBI under Section 15T of the Securities and Exchange Board of India Act, 1992.

In the instant case, the Securities Appellate Tribunal (“SAT”) was faced with issues relating to the legal interpretation of Regulation 10(1)(a)(ii) of the SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011 (Takeover Regulations).

In terms of Regulation 3(2) of the Takeover Regulations, if a person along with any other person acting in concert, holding shares or voting rights in the target company, acquires additional shares or voting rights more than the prescribed threshold; such person shall be required to make a public announcement of an open offer for acquiring shares of such target company in accordance with these regulations. However, the Takeover Regulations have carved out certain exemptions from the requirement of making open offers, one of which being an acquisition pursuant to inter-se transfer of shares amongst qualifying persons, which includes persons named as “promoters in the shareholding pattern filed by the target company in terms of the listing agreement or these regulations for not less than three years prior to the proposed acquisition”.

The target company was incorporated on November 9, 2010 and listed on July 30, 2012. Thus, the target company had filed its shareholding pattern in terms of its listing agreement on July 30, 2012. Subsequently, certain inter-se promoter transfers were effected during July to October, 2014 (i.e. when the company had filed the shareholding pattern details for only 2 years post-listing).

Given the said background, it was contended by the appellant that Regulation 10(1)(a)(ii) did not stipulate a minimum 3-year post-listing condition, and that the inter-se promoter transfers effected in 2014 were eligible for exemption from open offer obligations. On the other hand, SEBI argued that Regulation 10(1)(a)(ii) clearly and unambiguously mandated that the shareholding pattern filed by the target company in terms of the listing agreement should be available for a minimum of 3 years, post listing.

Thus, the question that arose was whether the period of being disclosed as promoter of the target company, prior to listing of the target company, could be considered for computing the aforesaid period of three years.  The SAT answered this question in the negative and has confirmed SEBI’s decision in this matter, observing that the 3-year period of reckoning of promoters in the shareholding pattern of a company shall commence from the date of the target company's listing.

Since the appellant had relied on an informal guidance submitted by a SEBI official under the Securities and Exchange Board of India (Informal Guidance) Scheme, 2003 in this matter, the sanctity of such an opinion issued by SEBI official was also brought under the scanner.

The SAT in its Order dated 5-4-2017 concluded that the views/interpretations by an official of SEBI should not be construed as a conclusive decision or determination of any question of law or fact, and cannot be used against a correct interpretation of the law. Such interpretation cannot be binding on the Board of SEBI, neither shall it be considered as an order passed by SEBI.


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