03 November 2008

Buy back of securities by companies resulting in compulsory takeover offer - new SEBI amendment to hurt ordinary shareholders

When a company does a buy back of its equity shares, its promoters may choose to tender in their shares into the buy back proposal, or not. If the promoters choose not to put their shares into the offer pot, their percentage shareholding will clearly go up even though they have not bought any shares. SEBI’s takeover regulations prescribe that when a person acquires shares or voting rights beyond a particular threshold, he or she must make a tender offer for a minimum of 20% of shares of the company to the other shareholders. In other words, if the promoters were not to tender their shares, their ownership in terms of number of shares would remain constant, while the proportion of their shareholding in the company's capital would increase (as the other shareholders' equity has been bought back) - thus triggering a compulsory tender offer requirement – where the tender offer limits have been crossed.

In law, the buy-back where the promoter does not participate does indeed trigger the tender offer as the regulations provide for acquisition of shares or voting rights. By electing not to participate in the buy back program, the promoters are exercising their will to increase their shareholding. By so doing, they are acquiring voting rights, thus triggering the tender offer.

Even from a fairness standard, apart from the clear law, the tender offer must be triggered. The increase in shareholding is not incidental to the buy back program. The increase is occurring because the promoters are choosing to elect a particular method of buy back and then electing not to tender their shares into the buyback program - had they chosen to tender fully, their shareholding would have in fact fallen. Only because of the exercise of the volition of the promoters is the acquisition occurring rather than as an incidental occurrence. Besides, if the promoters are obligated to make a compulsory tender offer when they are using their own money to acquire shares (in a usual acquisition of shares), it would be wholly perverse to exempt them if they acquire additional capital with company money (using the buy back route).

Please see the full posting here.

No comments: