SAT rejects SEBI interpretation of `bulk deal’ under the Takeover Code
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SAT rejects SEBI interpretation of `bulk deal’ under the Takeover Code

Varun Marwah

The Securities Appellate Tribunal (SAT) has, while partially upholding orders passed by the Securities and Exchange Board of India (SEBI), ruled on the certain transactions that took place under provisions of the erstwhile Takeover Code.

While clubbing several appeals, two questions pertaining to Regulation 11(2) of the SEBI (Substantial Acquisitions of Shares and Takeovers) Regulations, 1997 have been answered in this order.

Regulation 11(2) of the 1997 Regulations prohibits any acquisition of shares by persons who already hold between 55% to 75% shares of the target company, without making a public announcement. The second proviso to the said regulation further allows acquisition of up to 5% without making an announcement, provided two conditions are met. One of the two conditions is that the said acquisition is not made through a ‘bulk deal’. What constitutes a bulk deal, however, has not been defined in the 1997 Regulations.

The SEBI Whole Time Member (WTM) in the (clubbed) appeals had held that the Appellants had violated regulation 11(2) of 1997 Regulations – Firstly, by acquiring additional shares entitling more than 5% voting rights without making a public announcement. Secondly they have violated the second proviso to regulation 11(2) by acquiring additional shares in bulk deal, that is, acquisition of more than 0.5% shares through the transactions executed during the day in the normal market segment.

The Appellants, in this case, had acquired shares in two tranches:  4.95% and 4%, two months apart, but falling in different financial years, one being 2008-09 and other being in 2009-10. The Appellants were admittedly holding 57.55% in the target company before the said acquisition and thus fell within the ambit of 11(2). Since the total acquisition was greater than 5%, the WTM member of SEBI ruled that Regulation 11(2) was violated.

The first question thus, was whether the 11(2) of the Regulations allows an acquirer to acquire only up to 5% (in aggregate) of the total shares/voting rights of the company.

The Appellants argued that since the acquisition was less than 5% in each financial year, the obligation to trigger open offer would not apply. They, firstly, relied on regulation 11(1) which places similar obligations on the acquirer, but the threshold applies only for acquisitions in a given financial year.

They further relied on a 2009 interpretative circular issued by SEBI. According to this circular, which was issued after the said acquisitions took place, the 5% limit in Regulation 11(2) was the overall maximum limit and not limited to a financial year. The Appellants thus sought the benefit of doubt, in view of this circular which was issued only subsequent to the acquisition in question.

The SAT, however, found no merit in this argument and said that the absence of similar language in 11(2) was evidence enough that the intent was different from 11(1). Therefore, the Appellants who had acquired additional shares entitling voting rights in excess of 5% without making open offer were guilty of violating regulation 11(2) of 1997 Regulations and hence no fault was found with the SEBI decision  to that extent.

The second question which arose was on whether acquiring more than 0.5%  shares during a given day amounted to a violation of the proviso to 11(2).

One of the conditions which allow acquisition of up to 5% under the second proviso to 11(2) is that such additional shares are not acquired in ‘bulk deal’. The problem is that the expression bulk deal is not defined in the 1997 Regulations and SEBI relied on circulars issued in 2004 and 2005 to arrive at a conclusion that acquisition of more than 0.5% shares of the target company during the day would constitute bulk deal. These circulars relied on by SEBI for defining bulk deal were, however,  in a different context – for the limited purpose of imposing a disclosure obligation.

As the Appellants in all these appeals had acquired more than 0.5% shares of the target company during the day, the WTM of SEBI has held that the said acquisitions constitute bulk deal which is not permitted under the second proviso to regulation 11(2).

The SAT did not find merit in SEBI’s definition of a bulk deal. It said that, even if it was assumed that the 2004 and 2005 circulars could be applied to define what bulk deal is in the given context, the 2009 interpretative circular issued by SEBI clearly said that the 5% voting rights could be acquired in one or more tranches, making it abundantly clear that it could be acquired even in a single transaction.

To that extent, SEBI’s order was overruled.

Lawyers for Appellants (in clubbed appeals) and Respondent

Counsel Somasekhar Sundaresan along with  Advocates Abhishek Venkataraman, Akash Joshi and Stuti Shah of  J. Sagar Associates represented the Appellants.

Advocate Harshada Nagare of Joby Mathew & Associates appeared for Appellants.

Advocate J. J. Bhatt along with Rinku Valanju and Akshit Jain of RV Legal also appeared for the Appellant.

Senior Counsel Pradeep Sancheti, along with Advocates Mihir Mody and Nishant Upadhyay of Ashar & Co. appeared for the Respondent (SEBI).

Advocates Kumar Desai and Rajesh Nagor, along with Tomu Francis and Vivek Shah appeared for the Respondent.

(Read the order)

Tarun-Jiwrajka-SAT-Order.pdf
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