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India: Recent Amendments To SEBI Takeover Regulations And Insider Trading Regulations

30 August 2019

By AZB & Partners

AZB & Partners

Disclosure of Encumbrances

The Securities and Exchange Board of India (‘SEBI’) had, by way of a notification dated July 29, 2019,
approved amendments to the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
(‘Takeover Regulations’) with respect to disclosure requirements for encumbrances. Prior to the
amendment, an “encumbrance” was defined in Regulation 28(3) of the Takeover Regulations to include
“a pledge, lien or any such transaction, by whatever name called”. Pursuant to the amendment, the
scope of the term “encumbrance” under Regulation 28(3) has been significantly broadened to now also
include:

i. Any restriction on the free and marketable title to shares, by whatever name called,
whether executed directly or indirectly;

ii. Pledge, lien, negative lien, non-disposal undertaking; or

iii. Any covenant, transaction or condition or arrangement in the nature of encumbrance by

Additionally, a new Regulation 31(4) has been added to the Takeover Regulations which requires
promoters of listed companies to declare, on a yearly basis, that they, along with persons acting in
concert, have not made any encumbrance other than the encumbrances already disclosed during the
financial year.
On August 7, 2019, SEBI has issued a circular which prescribes additional disclosure requirements under
the Takeover Regulations, as follows (‘Disclosure Circular’):

i. Promoters of listed companies are required to specifically disclose detailed reasons for
encumbrance, whenever the combined encumbrance by the promoters along with persons
acting in concert equals or exceeds 50% of their shareholding in the company or 20% of the
total share capital of the company. Such disclosures are required to be made on every
occasion, when the extant encumbrance (having already breached the above thresholds)
increases further from the prevailing level; and

ii. In case of existing encumbrances as on September 30, 2019 which are above the thresholds
set out in sub-point (i), a first disclosure, as above, must be made by the promoter by
October 4, 2019. These details are required to be maintained by the stock exchanges on
their respective websites.

The disclosures set out above are in addition to the disclosures to be made by promoters under
Regulation 31(1) of the Takeover Regulations. The Disclosure Circular sets out the format for such
disclosures, which includes providing details such as the type of encumbrance, the entity in whose
favour the encumbrance is created and end-use of the money borrowed. The Disclosure Circular will
come into effect on October 1, 2019.

Informant Mechanism

SEBI had, in its Discussion Paper released on June 10, 2019, considered adopting an informant
mechanism to detect cases of insider trading, given that direct evidence is not readily available in such
matters making prosecution extremely difficult. At its board meeting on August 21, 2019, SEBI has
approved amendments to the SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT Regulations’)
establishing an informant mechanism. Some of the key features of this mechanism are as follows:

i. An informant means a person voluntarily submitting a form detailing credible, complete and
original information relating to an act of insider trading;

ii. SEBI has clarified that confidentiality of the identity of the informant and the information
provided will be maintained (except where the evidence of the informant is required during
proceedings initiated by SEBI) and that since information provided for the purpose of law
enforcement is exempted from disclosure under Sections 8(1)(g) and 8(1)(h) of the Right to
 Information Act, 2005, information provided by the informant will be exempted from
disclosure;

iii. An independent office separate from the investigation and inspection wings or any of the
operational departments will be established by SEBI to devise the policy relating to receipt
and registration of voluntary information disclosure forms;

iv. A reward would be given to the informant if the information provided by them leads to
disgorgement of at least Rs. 1 crore, of an amount upto 10% of the money disgorged
(capped at Rs. 1 crore) (approximately USD 140,000);

v. All organisations required to implement codes of conduct under the PIT Regulations are
required to amend their codes of conduct to provide protections from victimization of
informants;

vi. The original information may be shared with an appropriate agency or law enforcement
authority within or outside India or a self-regulatory organisation, subject to confidentiality
of the informant being maintained; and

vii. If SEBI finds that the information submitted by an informant is frivolous or vexatious, SEBI
may initiate appropriate action against the informant under the securities laws or any other
applicable law.

The formal text of the amendments is awaited.

Structured Digital Database

In April 2019, SEBI amended the PIT Regulations and introduced a requirement for the ‘Board of
Directors’ to maintain a structured digital database containing details of persons with whom information
is shared under the PIT Regulations. By way of an amendment to the Guidance Note dated August 24,
2015 issued by SEBI on the PIT Regulations, SEBI has clarified that the requirement to maintain a
structured digital database applies not only to listed companies, but also to intermediaries and
fiduciaries who handle unpublished price sensitive information for listed companies in the course of
business operations.
The content of this article Is intended to provide a general guide to the subject matter. Specialist advice
should be sought about your specific circumstances.

Introduced under Regulation 6 has now relaxed the pre-open offer requirement to invoke a voluntary
offer. Therefore, any acquirer or persons acting in concert holding shares or voting rights to the extent
of twenty-five percent or more, by virtue of the amendment can make a voluntary open offer
irrespective of whether such acquirer had acquired shares in the preceding fifty-two weeks with or
without making an open offer. Through this amendment, the regulator has encouraged participation in
capital markets twinned with an intention of also providing liquidity to shareholders who may
participate in the open offer. The relaxation may also serve the purpose of thwarting any possibility of
hostile takeovers; provide viable valuations for acquisitions and paying way for consolidation. On the
possibility of consolidation through this amendment it is also worth referring to the committee
deliberations of the TRAC Report at paragraph 2.19 which reads as below:

“2.19 The Committee observed that with the proposed increase in the open offer size to 100 % of the
voting capital of the target company, there is a need to provide for flexibility to acquirers to voluntarily
make open offers outside the mandatory public offer requirements. The Committee felt that voluntary
offers are an important means for substantial shareholders to consolidate their stake and therefore
recognized the need to introduce a specific framework for such open offers.”

The committeee deliberated that the option of Voluntary Offers would enable substantial shareholder to
consolidate their holdings. The relaxations through the amendment without any restrictions can enable
acquirer’s to consolidate their respective stakes and use the same as a defensive mechanism against
possible hostility.

Other measures by SEBI:

The SEBI on 16th June 2020 have also amended sub-regulation (3) of regulation 172 (“Eligibility for
Qualified Institutional Placements”) the Securities and Exchange Board of India (Issue of Capital and
Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”) by replacing the words “six months”
with the words “two weeks”. By virtue of this amendment, the issuer can now make subsequent
Qualified Institutional Placements raising monies from institutions on the expiry of two weeks rather
than six months which existed pre-amendment. The said relaxation of time period would stimulate
further fund raising opportunities.

Conclusion:

The measures by the SEBI in issuing relaxations are to provide a convenient economic environment to
raise funds by reducing any cumbersome process or regulatory approvals. This would be celebrated as
the much needed ammunition to stabilize our capital markets. Though such actions are necessitated to
open up resources of sustainability, caution is to be exercised to avoid and filter any opportunistic
takeovers for which necessary measures have been introduced by the Department of Promotion of
Industry and Internal Trade through its Press Note No.3 of 2020 wherein all the neighboring countries
which share borders with India or where beneficial ownership is situated in Country which shares orders
with India would require the Government approval in event of any Foreign Direct Investment (“FDI”).
Not only India, even the European Commission has issued guidelines for screening of investments from
Non-European Union countries which may affect the security and public order of the European Union
countries. The United Kingdom has now proposed to introduce a specific legislation to specifically
protect entities involved in fighting the COVID 19 pandemic to hostile takeovers.

The MPS threshold and not that of the acquirer.

Proposition
The acquirer aims to meet the MPS threshold when the delisting offer fails or where it has shown the
intention to keep the target company listed. SEBI’s methods require complete dependence on the
company by the acquirer to reduce the shareholding and meet the MPS threshold. The failure of the
delisting offer results in the yo-yo model of first acquiring the above MPS and then being required to
release the shares, which is a deterrent to the deal-making and delisting process. Also, the acquirer has
merely 12 months to meet the MPS threshold. Therefore, the option of scaling down the purchase of
shares should also be provided to the acquirer if the delisting offer fails.

The Amendment allows the acquirer to opt for a new method to achieve the MPS by the acquirer under
regulation 7(4). According to the regulation, when the acquirer exceeds the MPS threshold, it has the
option to scale down the shareholding acquired on a pro-rata basis from the TTD and the shares
acquired from open offer, thereby having the effect that the MPS threshold is not crossed. According to
the PMAC, enabling the acquirer to proportionally scale down its shareholding and not requiring them to
sell-down balances the interest of the public and the acquirer where the law provides for separate
delisting threshold and MPS. It added that the suggestion is made considering the principle of equity as
the party to the TTD, and the public would have similar levels of acceptance of their respective
shareholding in the company. However, this brainchild of SEBI is only available to the acquirer if it
intends to retain the listing of the target company.

Therefore, the process of release of shares in 12 months is theoretically attractive but commercially
challenging. Here, the pressure is on the acquirer to follow the SEBI’s methods for reinstating the MPS
within 12 months. If the acquirer can proportionally scale down the shareholding, the acquisition can be
designed in a way where the MPS is automatically reinstated. As per the TTD, the acquisition of the sum
of shares can be subjected to the acquirer conducting a successful delisting offer. If the acquirer fails,
the shareholding in the TTD can be scaled down, binding the other contracting party. It can enter into a
share purchase agreement with a third party for the sale of excess shares. Additionally, the acquirer can
offer to sell for the acquired shares or sell the shares acquired through an open offer to the public. This
strategy allows for a convenient and efficient route to the acquirer when faced with a time crunch to
bring the acquired shareholding in consonance with MPS when the delisting offer fails.

Concluding Remarks

Substantial acquisition of shares of a listed company impacts the stakeholders, such as the acquirer, the
target company, and the public shareholders. It is crucial that the legal structure governing multi-
faceted transactions are straightforward and explicit and that a balance is struck such that all parties
benefit from the transaction. This long-overdue amendment aims to make acquisitions of listed entities
more equitable and practicable. However, the failure of the delisting offer results in a problematic
method of release of shares within a time crunch to the acquirer. Therefore, the option of scaling down
the shares should be provided to the acquirer to enable efficiency and balance the rights of the
stakeholders.