SEBI clarifies ambiguities in takeover code

Pursuant to its board meeting on 22 September 2009 the Securities and Exchange Board of India (SEBI) has sprung into action, bringing out a notification dated 6 November (the “amendment regulations”) to amend the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (the “takeover code”).

Regulation 3(2): Under regulation 3(2) of the takeover code, acquisitions of American depositary receipts (ADRs) and global depositary receipts (GDRs) were exempted from the open offer requirement until the time of their conversion into the underlying equity shares (carrying voting rights). SEBI has now clarified that an exemption from open offer will be available only as long as the ADR/GDR holders remain passive investors, without any kind of voting arrangement on the underlying equity shares. Hence, any customary voting arrangement between the depository and the ADR/GDR holders providing direct or indirect voting benefits to the ADR/GDR holders could trigger the open offer requirement if such indirect voting right, together with any direct equity that is held, exceeds the prescribed threshold.

Regulation 7(1A): An acquirer who acquired shares or voting rights of a company under regulation 11(1) – that is, equal to or more than 15% but less than 55% – was required to make a disclosure to the target company and to the stock exchanges of any purchase or sale aggregating 2% or more of the share capital of the target company. Following the amendment regulations, any acquirer who acquires shares under the terms of regulation 11(2) – between 55% and 75% or 90%, as the case may be – will also be required to make a disclosure under regulation 7(1A). This move by SEBI is probably aimed at providing more transparency with respect to public market deals.

The legislative and regulatory update is compiled by Nishith Desai Associates, a Mumbai-based law firm. The authors can be contacted at nishith@nishithdesai.com. Readers should not act on the basis of this information without seeking professional legal advice.