“Majority wins” is a widely accepted rule, be it among friends looking to choose a game to play on a weekend or when deciding a destination for an outing. Moreover, the rule also applies in the corporate world, when decisions related to a company are based on what the majority of shareholders agree too.
These decisions include mergers and acquisitions (M&A), a popular form of restructuring a company. Only, M&A has a significant impact on the affairs and management of the company to be merged (target company). That’s when, “Majority wins” might suppress the rights/interests of the minority shareholders and also result in mismanagement or poor corporate governance of the entity.
But with the growing popularity of M&A as a form of restructuring companies in India, something had to be done to prevent hostile takeover resulting in the consequences for the company and its investors. That is why SEBI introduced Substantial Acquisition of Shares and Takeovers Regulations, 2011 (SAST Regulations, 2011) in Sep 2011. This Regulation governs the substantial acquisition procedure so as to prevent hostile takeover of voting rights in a company and, in turn, ensure good corporate governance in the entity.
However, such regulations restrict/modulate the flow of capital in a company, which may not be feasible now, when companies are cash-strapped due to the pandemic and are looking for ways to survive and grow. Well, SEBI has amended the SAST Regulations, 2011 for the current year to support such companies. So, what gives? Let’s learn that, important terms, and critical interpretations of the SAST Regulations, 2011 here.
Note that, this article only explains the essence of the SAST Regulations 2011 in a simple and easy to understand manner. You can read the entire coverage of the SAST Regulations, 2011 here.
The article covers:
Introduction to substantial acquisition and takeover
Equity shares give ownership rights of a company. More the number of shares you hold, the higher stake you will have in the entity. Meaning, you will have a stronger say or control over the affairs and management of the business. However, minority shareholders (i.e. who do not exercise control over a company), might be at the risk of being suppressed.
Contrary to their position as one of the owners of the company, majority shareholders may decide or act in a way that may be hostile to their interests. As a minority shareholder, your right may thus be suppressed in case you want the management to be unchanged. Therefore, it is vital to ensure that the minority interest is not oppressed by the majority, to ensure which, SEBI has established several measures and regulations. SEBI Substantial Acquisition of Shares and Takeovers Regulations, 2011 (SAST Regulations 2011) is one such measure.
What is SEBI Substantial Acquisition of Shares and Takeovers Regulations, 2011?
Mergers and acquisitions (M&A) are well-known ways of restructuring a company. If the majority shareholders of a company unanimously agree to merge with another entity, it would significantly impact the company and the shareholders, which may or may not be good. As the regulator of the capital markets in the country, SEBI is, therefore, responsible to ensure that the process is fair and the interest of all the shareholders is protected.
That is why SEBI introduced the Substantial Acquisitions of Shares and Takeover Regulations, 2011, which regulates the direct and indirect:
- Acquisition of shares and
- Voting rights or
In excess of 25% in/over a target company that is publicly listed. Here, acquisition means to buy shares in the company, which also gives the acquirer voting rights in the target entity.
What is control?
Control means the power to appoint/manage/direct a majority of the directors to direct or influence the management and policies of a company. Such power may be the result of owning equity shares, being party to a contract or anything beyond.
General rule of acquisition of shares in a target company
The general rule is that an acquirer or persons in cohort are prevented from buying additional shares if that gives them voting rights equal to or in excess of 25% in the target company. However, the rule has an exception. That is, the acquirer or persons in cohort can acquire additional shares only on making an open offer publicly.
Meaning, as per SEBI Substantial Acquisition of Shares and Takeovers Regulations, any person or persons having a shared objective looking to buy/acquire shares or control the voting rights of the target company, such that their combined interest is more than 25%, are mandated to make a public announcement of an open offer. Note that the title of an ‘officer’ or a ‘director’ of a target company doesn’t give control over the target company to the personnel holding such positions.
What is an open offer?
As per the Substantial Acquisition of Shares and Takeovers Regulations, 2011, an open offer is an ‘exit opportunity’ offered by an acquirer of shares to the existing shareholders of the target company so that they can sell their stock positions and exit the company should the developments not interest them. The offer price at which the existing shareholders can sell their stocks is ascertained by a person appointed by SEBI. This allows a fair procedure. Besides, an open offer also discloses significant developments that would happen in the company in the near future to the existing shareholders.
What is a trigger point?
A trigger point is when the acquirer of shares is mandated to make an open offer via a public announcement. As per the Substantial Acquisition of Shares and Takeovers Regulations 2011, trigger point kicks in when an acquirer, who is an existing shareholder:
- Holds 25% voting rights on owning equity shares in a company and wants to buy over 5% more voting rights in a financial year OR
- Holds less than 25% shares or voting rights in the target company and wants to buy more such that their total shareholding exceeds 25% interest in the target company
Significance of the Substantial Acquisition of Shares and Takeovers Regulations, 2011
As mentioned before, shares give ownership rights to the shareholders, resulting in a significant impact on the management of the business and shareholders’ interest. Ergo, it is vital to ensure that shareholders’ interest is protected and also that there is smooth corporate governance in an entity. SAST Regulations, 2011 is one such measure put in place by SEBI.
16th Jun 2020 modification to the SEBI Substantial Acquisition of Shares and Takeovers Regulations, 2011
Keeping in mind the extraordinary circumstances that have arisen due to the pandemic (coronavirus/COVID-19) and have affected the finances of domestic companies, SEBI announced the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) (Amendment) Regulations, 2020.
As per the amendment, an acquirer can buy additional shares accounting for more than 5% but not over 10% in a target company only for the FY 2020-21 without making a public announcement of an open offer. However, these conditions must be fulfilled:
- The acquirer has to be the promoter of the company
- The target company has to raise the capital by way of preferential issue of equity shares
Significance of the SAST (Amendment) Regulations, 2020
Since many companies are cash-strapped due to the pandemic and the lockdown triggered by it, the amendment to the SAST Regulations, 2020 temporarily relaxes the regulatory requirements for investors to invest in a company. This, in turn, allows easier inflow of funds in the target company and supports its operations in difficult times like now. However, the amendment to SEBI Substantial Acquisition of Shares and Takeovers Regulations, 2011 is only applicable during the current financial year, that is, until 31st March 2021.