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Informal guidance pertaining to trigger of open offer

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In a recent informal guidance provided to KJMC Financial Services Limited (Target Company) by way of an interpretative letter under the SEBI (Informal Guidance) Scheme, 2003, SEBI has clarified whether a proposed private placement to three promoters of the Target Company would trigger the requirement to make an open offer under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Regulations).

The promoters’ cumulative shareholding prior to the proposed allotment stood at about 69.1% pursuant to an acquisition of shares amounting to 2.07% earlier in the financial year. Through the proposed allotment, three of the promoters (each holding under 25%) proposed to acquire a further 0.1%, 3.3% and 3.78%, each. Simply going by the sum of these allotments, the allotments would be in excess of 5% and may be considered to be in breach of the 5% creeping acquisition threshold. However, it is also pertinent to note that the proposed allotment would also result in an increase in the total paid-up share capital and thereby dilute the shareholding of the remaining promoters of the Target Company, i.e., the persons acting in concert with the acquiring promoters. Taking this into consideration, the shareholding of the promoter group as a whole would only increase from 69.1% only to 72.02% pursuant to the proposed allotment. This increase taken together with the earlier acquisition of 2.07% results in a cumulative increase of the promoter group’s shareholding during the given financial year by 4.99%, i.e., within the creeping acquisition threshold.

SEBI, without providing any reasons, has clarified that such an acquisition does not breach either regulations 3 or 4 of the Takeover Regulations. This is indeed a correct interpretation of the provisions of the Takeover Regulations and it is in line with Explanation (ii) of Regulation 3(2). From this guidance, it may be inferred that, in the case of a private placement, a mere sum of percentage acquisition by the acquirers will not trigger the open offer requirements. A trigger of regulations 3 or 4 of the Takeover Regulations will occur in the similar scenarios only when any of the acquirers and PACs individually or collectively breach the 25% threshold, or the acquirers and PACs individually or collectively breach the 5% creeping acquisition threshold within a financial year when they individually or collectively hold more than 25%, or if there is a change in control.