Creeping acquisitions under regulations 11 (1) and 11(2) in the same year: Did SEBI go wrong in its interpretation?

Regulation 11(1) of the SEBI (Substantial Acquisition of Shares Takeovers) Regulations, 1997 ("Takeover Code") allows an acquirer holding 15% to 55% of shares in a target company to additionally acquire up to 5% of shares of the target company (with post acquisition shareholding of the acquirer not exceeding 55%) in any financial year without making a public announcement/ offer under the Takeover Code. The second proviso to regulation 11(2) of the Takeover Code states that an acquirer holding 55% to 75 % of the shares in a target company may acquire additional shares up to 5 % in the target company without making a public announcement/ offer under the Takeover Code.

SEBI has recently in an 'Interpretive Letter" (under the SEBI (Informal Guidance) Scheme 2003) stated that acquisitions under regulation 11 (1) and second proviso to regulation 11(2) of the Takeover Code can be undertaken by an acquirer in the same financial year. SEBI also clarified that the 5% acquisition under second proviso to regulation 11(2) is a one-time exemption.

Thus an acquirer holding 50% of the shares in a target company may acquire an additional 5% of the shares in a financial year under regulation 11(1) of the Takeover Code. Later the same acquirer (who currently holds 55%) may also acquire another 5% of the shares under second proviso to regulation 11(2) in the same financial year. This would mean that an acquirer holding 50% of the shares in a target company can acquire an additional 10% of the shares in the target company in a single financial year without making a public offer under Takeover Code.

Going by SEBI's interpretation an acquirer holding 15% to 49.99% of the shares in a target company may acquire additional shares up to 5 % in the target company in any financial year without making a public offer under the Takeover Code. However the moment acquirer holds 50% in the target company, he is conferred with the right to acquire an additional 10% shares in the target company in any financial year without making a public offer under the Takeover Code.

The spirit of the Takeover Code is to provide the shareholders of a target company with a suitable exit in case of acquisition of certain quantity of shares/ control of the target company by an acquirer. As per SEBI's interpretation if an acquirer, holding 15% to 49.99% of the shares in a target company, acquires more than 5% of the shares in the target company in any financial year, the Takeover Code provides for an exit option to the shareholders. However if an acquirer, holding 50% to 55% of the shares in a target company, acquires more than 5% of the shares in the target company (up to 10% in cases where the acquirer is holding 50% shares) in any financial year the Takeover Code does not provide for an exit option to the shareholders.

A viable alternative in this case would have been to allow the acquirer to undertake acquisitions under regulation 11 (1) and second proviso to regulation 11(2) in the same financial year up to 5% of the shares of the target company. SEBI has already clarified that an acquirer may exercise his right under second proviso to regulation 11(2) in one or more tranches, without any restriction on the time-frame within which the same can be acquired. Thus if the cumulative acquisition of shares under regulation 11 (1) and second proviso to regulation 11(2) has been limited to 5% in any financial year, the acquirer can exercise his remaining right under the second proviso to regulation 11(2) in the following financial years.