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Lightening the greys in the Takeover Code

Finsec Law Advisors

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An Adjudicating Officer of SEBI passed an Order in respect of Bhavook Tripathi on 1 October, 2013, in the matter of M/s R System International Limited. It touched upon an interesting grey area of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (“1997 Code”), one on which there has been ample debate.

The issue is of whether placing of a buy order, by a shareholder on the cusp of the open offer threshold under the 1997 Code, and subsequent netting off, through sale of such shares on the same trading day, would constitute a valid trigger for open offer obligations by such acquirer.

Mr. Tripathi held 14.96% shares of R System International (“Target Company”) as on July 28, 2011. On the same day, on learning about the press release issued by SEBI announcing its decision to increase the initial threshold for making an open offer from the existing limit of 15% to 25%, he placed an order to acquire an additional 2.1% of the paid-up share capital of the Target Company, from the open market. On realizing that the new limits had not been notified yet, he sold such additional shares on the same day, prior to taking delivery.

The issue that arose was whether such netting-off could still trigger Regulation 10 of the 1997 Code, since the acquisition had not entitled the acquirer to exercise the voting rights associated with such shares to the tune of 15% or above, of the voting rights in the target company. It was argued that the settlement cycle had not resulted in delivery and consequently, the acquirer's name was not registered as a beneficial owner of such shares. Further, it was submitted to SEBI that intra-day netting off of the trade could not result in it mandating the acquirer to make an open offer, since the conditions of Regulation 10 had not been met.

Notably, SEBI accepted this as a valid contention, noting that it had been a consistently accepted interpretation that even if an acquisition exceeded 15% of a company's paid-up share capital, Regulation 10 would not be attracted unless the acquisition entitled such acquirer to exercise 15% or more of the voting rights in the company. The decision exonerated the investor of any wrongdoing, thus imparting a certain degree of certainty to one of the several vexed questions in the jurisprudence of takeovers.

Disclosure: Finsec Law Advisors appeared for Mr. Bhavook Tripathi in these proceedings.