Background

The SEBI (SAST) Regulations, 2011 were introduced to regulate the acquisition of shares, voting rights, and control in listed companies in India. They aim to ensure transparency and fairness in takeover and acquisition activities. The regulations protect the interests of minority shareholders by mandating open offers on substantial acquisitions. They also provide a clear framework for disclosures and obligations of acquirers and target companies. Overall, the regulations promote orderly development and integrity of the securities market.

Applicability

These regulations apply to the acquisition of shares, voting rights, or control in listed companies in India. They are applicable to any acquirer, including persons acting in concert, who acquires shares or voting rights beyond the prescribed thresholds. The regulations cover direct and indirect acquisitions, whether through market purchases, agreements, or corporate actions. They are also applicable to preferential allotments, conversions of securities, and changes in control. Certain exemptions are provided for specified transactions, subject to conditions laid down by SEBI.

Compliance Requirements under the Regulations

1. No person representing acquirer or PAC to be appointed as Director of Target Company (Regulation 24(1))

During the offer period, no person representing the acquirer or any person acting in concert with him shall be appointed as director on the board of directors of the target company, whether as an additional director or in a casual vacancy

a) After 15 working days from detailed public statement, acquirer or PAC can appoint directors to target company’s board if full offer consideration is deposited in escrow a/c as per Reg 17

b) If acquirer has set conditions for open offer under Reg 23(1)(c), no acquirer representative may be appointed to board during offer period unless those conditions are waived/met & cash is deposited in escrow a/c

c) If open offer is conditional on a min. acceptance level, neither acquirer nor PAC can appoint any director to target company’s board during offer period, regardless of escrow a/c deposit

d) During competing offers, no new directors can be appointed to target company’s board, regardless of escrow deposit, except in case of a director’s death/incapacity, where a replacement may be approved by shareholders via postal ballot

e) If acquirer or PAC is already represented on target company’s board, such director cannot participate in any board deliberations/vote on matters related to open offer

    2. Obligations of the acquirer (Regulation 25)

Before making public announcement of open offer, acquirer to ensure firm financial arrangements have been made for fulfilment of payment obligations & statutory approvals as necessary are obtained

a) If acquirer has not indicated any intention to sell or alienate material assets of target company in public statement/offer letter, they are prohibited from doing so for two years after acquiring control, unless it is within ordinary course of business

b) If target company or its subsidiaries must alienate assets despite acquirer not expressing such intention, a special resolution approved by shareholders through a postal ballot is required, including reasons for necessity of the alienation

c) Acquirer shall ensure that contents of public announcement, detailed public statement, letter of offer & post-offer advertisement are true, fair and adequate in all material aspects & not misleading and are based on reliable sources & the source wherever necessary

d) Acquirer and PAC shall not sell shares of target company held by them during offer period

e) Acquirer and PAC shall be jointly & severally responsible for fulfilment of applicable obligations under these regulations

 3. Obligations of the target company (Regulation 26)

• During offer period, B.O.D:

a)must ensure target company operates in ordinary course after public announcement

b)cannot alienate material assets, incur material borrowings, or issue unissued securities with voting rights without shareholder approval via special resolution through postal ballot

• Target company can issue/allot shares –

i) upon conversion of convertible securities issued prior to public announcement (PA)of open offer,

ii) pursuant to any public issue for which RHP has been filed prior to PA of open offer, iii) pursuant to rights issue for which record date has been announced prior to PA

• O.D without shareholder approval via special resolution through postal ballot cannot buy-back/change in capital structure, enter/terminate/amend any material contract to which target company/subsidiary is a party or accelerate the contingent vesting of any right, including employee stock options, for any person to whom the target company or its subsidiaries have an obligation.
• Target company to further fulfil all the conditions mentioned in Regulation 26(3) to (10) of SAST Regulations

Penalty & Punishment

Penalty under SEBI Act 1992 for contravention where no separate penalty has been provided (Section 15HB):  Whoever fails to comply with any provision of this Act, the rules or the regulations made or directions issued by the Board thereunder for which no separate penalty has been provided, shall be [liable to a penalty which shall not be less than one lakh rupees but which may extend to one crore rupees.

Section 15H:  If any person, who is required under this Act or any rules or regulations made thereunder, fails to-

(i)  disclose the aggregate of his shareholding in the body corporate before he acquires any shares of that body corporate; or 

(ii)  make a public announcement to acquire shares at a minimum price; or

(iii) make a public offer by sending letter of offer to the shareholders of the concerned company; or 

(iv)  make payment of consideration to the shareholders who sold their shares pursuant to letter of offer, he shall be liable to a penalty which shall not be less than ten lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of such failure, whichever is higher

Sec 15A of SEBI Act: If any person, who is required under this Act or any rules or regulations made thereunder,—

(a)  to furnish any document, return or report to the Board, fails to furnish the same or who furnishes or files false, incorrect or incomplete information, return, report, books or other documents, he shall be liable to a penalty which shall not be less than one lakh rupees but  which  may  extend  to  one  lakh  rupees  for  each  day  during  which  such failure continues subject to a maximum of one crore rupees

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