Ruling on passive buyback a boon for market players

The year 2011 has witnessed a dramatic overhaul of the regulations governing the acquisition and takeover of listed companies. While a dampened capital market has left players with a lot to desire in terms of suitable opportunities to test the provisions of the revised Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations (takeover code) of 2011, as the year drew to an end the Securities Appellate Tribunal (SAT) has gone on to give market players and SEBI some additional food for thought.

On 21 November, the SAT at Mumbai (in the matter of Raghu Hari Dalmia & Ors v SEBI) passed an order that could have far-reaching consequences. It decided that an increase in shareholding due to buyback of shares by a company would not give rise to any obligations under regulation 11(1) of the takeover code of 1997.

Where it started

In the case in question, OCL India, a company promoted by the Dalmias and some others, announced and successfully carried out a scheme for the buyback of its equity shares in 2003. As a result of the buyback, the shareholding of the promoters rose from 62.56% to 75% of the company’s total paid-up capital. As the promoters had not participated in the buyback, they did not make any public announcement to acquire shares as mandated under the takeover code.

Siddharth Hariani is a partner and Rohith Ashok is an associate at the Mumbai office of Phoenix Legal.