Open Offer Obligations under Takeover Code: Determining the Trigger Point – Acquisition vs. Conversion of Convertible Securities
Avantika
(3rd year LL.B. student at Campus Law Centre, Faculty of Law, Delhi University)
Introduction
The Securities Appellate Tribunal (“SAT”) recently ruled in favour of Reliance Industries Holding Private Limited (“Reliance”) in an appeal[i] challenging SEBI’s order. SEBI had imposed a penalty of Rs. 25 crores on Reliance for allegedly violating Regulation 11(1) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (“Takeover Code”).
The violation was related to the acquisition of shares exceeding the 5% threshold. The main issues raised in the appeal were related to the timing of the obligation to make an open offer, particularly concerning convertible securities like warrants. Regulation 11(1) of the Takeover Code provides that no acquirer who holds more than 15% but less than 55% of the shares or voting rights in a company shall acquire, either himself or through Persons Acting in Concert (“PAC”), additional shares or voting rights entitling him to exercise more than 5% of the voting rights in any financial year, unless such acquirer makes a public announcement to acquire shares in accordance with the Code. In the present case Reliance allotted non-convertible debentures with detachable warrants in 1994 and the same were converted in 2000.
The Adjudicating Officer (“AO”) held that acquisition of 6.83% shares in Reliance pursuant to exercise of share warrants was in excess of the prescribed thresholds under Regulation 11(1) of the Takeover Code, triggering a requirement for making a public announcement for the acquisition of shares and since the appellants failed to make a public announcement, there was a contravention of Regulation 11(1) of the Takeover Code. Even though warrants were issued in the year 1994, much before the Takeover Code came into existence, since the warrants were converted into shares in 2000, it triggered the obligation to make an open offer under the Takeover Code.
A share warrant is a “share” for the purpose of Regulation 11
The tribunal observed that the word “shares” in Regulation 2(1)(k) has been defined to mean shares carrying voting rights and also includes “any security which would entitle the holder to receive shares with voting rights”. Thus, if the acquirer acquires shares which includes warrants beyond a percentage specified in Regulation 11, then it triggers an obligation to make an open offer. SAT rejected the plea that acquisition of warrants does not trigger the obligation to make an open offer under Regulation 11 as the warrants does not carry any voting rights and that such obligation is triggered only when the warrants are converted into equity shares carrying voting rights is also erroneous. It was held that plain reading of Regulation 2(1)(k) makes it clear that shares include warrants and, therefore, the contention that warrants is not a share for the purpose of Regulation 11(1) is erroneous.
Thus, the acquirer who agrees to acquire or acquires security/warrants which in future would entitle the acquirer to exercise voting rights, is under an obligation to make an announcement to make an open offer and such an obligation is not contingent upon the acquisition of shares which would entitle the acquirer to exercise voting rights.
Rationale behind mandating acquisition of convertible securities as trigger point to make an open offer
The tribunal observed that if two views are possible on the interpretation of Regulation 11, then the regulator should take a view which is in the interest of the shareholders. For example, if an acquirer acquires 15% of the warrants and converts 5% of the warrants into shares with voting rights in each financial year, then the acquirer would be escaping from making an open offer under Regulation 11 since the conversion of warrants into shares with voting rights would be less than the prescribed limit as prescribed under Regulation 11. Such position would will not be in the interest of the public shareholders because the whole idea under the Takeover Code is to provide an exit opportunity at the earliest point of time to the shareholders which is what is in the interest of the shareholders.
Acquisition of warrants constitutes an agreement to acquire shares carrying voting rights and the concept of an “Acquirer”
It was contented that an agreement to acquire shares is when both the seller and the buyer have the obligation to deliver and purchase the shares respectively and, in the event of non-performance by either of them, the other parties can enforce a specific performance and hence, Regulation 11(1) applies only when the acquirer has actually acquired the additional shares or voting rights which entitles him to exercise more than the prescribed percentage of votes.
However, SAT rejected the aforesaid plea and held that “acquirer” has been defined under Regulation 2(1)(b) to mean where a person acquires or agrees to acquire shares or voting rights in the target company. The words “agrees to acquire” is of some significance, namely, that it is not necessary that there is actual consideration of the acquisition. The tribunal held that even if there is an intention to acquire which intention is in the public domain, there it triggers the obligation to make a public announcement for an open offer under the Takeover Code. Further, the Tribunal also determined that Reliance was not considered an ‘acquirer’ within the meaning of the Takeover Code because the warrants acquired before the Regulations came into effect.
Takeover Code is prospective in nature
In the present case, the convertible warrants were acquired in 1994, before the Takeover Code was introduced. The warrants were converted into shares in 2000 and, therefore the issue arises as to whether the Takeover Code is applicable on the acquisition of warrants in 1994 or whether the Code has a “retrospective application” or “retroactive application”. The tribunal held that the Takeover Code is not retrospective in application and there is nothing in the Code suggesting its application prior to its enforcement.
Violation of Regulation 11(1) of the Code is not a continuing offence
It was contented that the conversion of warrants into shares in 2020 triggered the obligation to make an open offer and since the open offer was not made the appellants, there was a continuous violation of Regulation 11(1) which continues “de die in diem”. The tribunal observed that a continuing offence is one which is susceptible of continuance and is distinguishable from the one which is committed once and for all and held that if the shares are acquired without making a public announcement, there is injury to the public shareholders, but the injury is once and for all. Thus, it is only when there is a continuous acquisition of shares, the injury continues.
Conclusion
The ruling clarified that the trigger point to make an open offer under Regulation 11(1) of the Takeover Code is the time of acquisition of convertible securities and not the time of conversion of such convertible securities into shares with voting rights. It also confirmed that the Takeover Code is prospective, applicable post its introduction in 1997. The ruling underscores clarity in regulatory definitions, timing of obligations, and shareholder interests.
Reference
[i] Reliance Industries Holding Private Limited & Ors. v SEBI, Appeal No. 748 of 2021
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