SEBI Order on PAC and Open Offer

Securities and Exchange Board of India (“SEBI”) recently passed an order on July 25, 2018, in the matter of Patels Airtemp (India) Limited In the said matter, there was an inter-se transfer of shares of 0.30% (zero point three%) between 2 (two) promoters. However, as a result of the inter-se transfer, the shareholding of one of the promoters (i.e. the purchaser) (“Noticee”) increased from 24.74% (twenty four point seven four%) to 25.04% (twenty five point zero four%), thereby breaching the threshold limit of 25% (twenty five%), as provided under regulation3(1) read with 3(3) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Regulations”). Notably, the total shareholding of the promoter group did not change and it remained at around 45% (forty five%). The Noticee argued that the abovementioned acquisition does not trigger the applicability of either regulation 3(1) or 3(3) of the Takeover Regulations, as the said acquisition of shares by the Noticee was an inter se transfer among the promoter entities and the overall shareholding of the promoter group, of which the Noticee is a part, remained unchanged after the said acquisition. It was further submitted that the entire promoter group has always been considered as a homogenous unit and is also deemed to be acting in concert in the acquisition of the said shares. The Noticee further argued that since the Noticee as a promoter along with other promoters who are persons acting in concert with it already held more than 25% (twenty five%) i.e. 45% (forty five%) of the shares / voting rights of the target company on the relevant date, the question of the Noticee acquiring shares under regulation 3(1) does not arise. Since the Noticee along with the other promoters who are persons acting in concert already held more than 25% (twenty five%), they could acquire shares only under regulation 3(2) within prescribed limits (i.e. creeping acquisition). However, SEBI held that the 2 (two) promoters in this case cannot be held to be ‘persons acting in concert’ because the persons must have a common objective or purpose of acquisition of shares or voting rights. In the instant case, the acquisition in question was an inter se transfer of shares from one promoter entity to another promoter entity, which implies that the promoter entities, including the Noticee, did not have a common objective or purpose of acquisition but were rather acting in opposite directions, where one promoter entity had purchased the shares and another entity had sold the same shares. Hence, SEBI rejected the Noticee’s claim that it was acting in concert with other promoter entities, while acquiring the said shares. SEBI further held that even if it is assumed for the sake of argument that the Noticee was acting in concert with other promoter entities, regulation 3(1) of the Takeover Regulations clearly provides that the threshold of 25% provided under regulation 3(1), the breach of which triggers the obligation to make an open offer for acquiring shares, shall also apply to a person if his individual shareholding exceeds the said threshold, irrespective of whether there is a change in the aggregate shareholding with persons acting in concert. Since, in the instant case, since the Noticee had acquired shares as a result of which its individual shareholding had increased from 24.74% to 25.04% of the total shareholding of the Target Company (even though the overall shareholding of the promoter group remain unchanged), the threshold limit provided under regulation 3(1) of the Takeover Regulations was breached. SEBI ordered the Noticee to make an open offer and also pay interest @ 10% (ten%) per annum along with the offer price to the public shareholders. Download Pdf