Buyback of shares and exemption from takeover regulations

In Raghu H Dalmia vs. SEBI a SAT ruling from last week, the tribunal held that a buy back resulting in an increase in the shareholding of the promoter is not a result of acquisition of shares or votes and such increase in shareholding will not trigger the open offer obligations of an acquirer. I was sitting in SAT on the day this was argued - waiting for my case - so heard the arguments.

The logic of the tribunal was that a buy back where the promoter does not tender his shares (and therefore there is an increase in the percentage shareholding) is not a positive action of acquisition. If there is no acquisition, then there cannot be a trigger event for an open offer. Though the ruling was under the old takeover regulations, it has a huge impact on the new regulations as well. If there is never a trigger resulting from a buyback, the two exemptions provided in the new regulations for buyback will never be required.

SEBI's stated position is:
a) It does not give exemptions - post facto. You must seek an exemption before the trigger occurs. SEBI in the present case rejected the exemption application on this ground alone.
b) It does not permit buyback as a routine exemption from takeover regulations. Unfortunately, SEBI has taken many inconsistent positions with respect to granting of exemptions through the panel route.

SAT's ruling is riddled with holes - and is likely to have an adverse impact on the structure of the new regulations. Here is why:
i) When a company does a buyback, (through a shareholder resolution or a board resolution), a promoter is actively involved in and votes for the buyback. To call a buy back as a passive non-act of the promoter who suffers is inaccurate.
ii)  Not only is the resolution a result of the active participation of the promoter, but the promoter shareholding going up itself is a result of the action of the promoter in not tendering his shares in the buyback. Had the promoter chosen to tender his share, his votes can never go up.
Thus, it is grossly unfair to allow a promoter to use the company funds to increase his shareholding in a company and also be exempt from the takeover regulations. This ruling destroys the fundamental substratum of the takeover regulations - both the 1997 and 2011.

Finally, the SAT posed a question, which created some confusion. Imagine a company with a non promoter shareholder holding 14.99% shares (under the old regulations, or 24.99% under the new one). Now imagine that company doing a buyback. Imagine further that the person did not even participate in the shareholder vote or did not even know of the board vote to do the buyback. Imagine that the person did not tender shares or did not tender all shares, would that person be saddled with an open offer. This possibility shocked SAT as SEBI's position implied that such a person requires an exemption.

The answer to this riddle is that the 14.99% shareholder does not satisfy i) above and therefore is not an acquirer as he is not doing any positive act to increase his shareholding. But to put such a person in the same category as another person with control of the company who chooses to move the resolution, uses the company's money to do so and chooses not to tender his shares and thus directly seeks to increase his shareholding is incorrect. It also disturbs the delicate balance the new regulations have placed by exempting only certain types of buybacks - by exempting all buybacks blindly.