No Open Offer Obligation Arises for Promoters If Warrant Conversion Doesn’t Breach Individual Shareholding Limit | SEBI

Informal Guidance No. SEBI/HO/CFD/PoD-2/OW/P/2023/29370/1, Dated: 21.07.2023

The SEBI, in its reply to an Informal Guidance sought by Kreon Financial Services Ltd, a BSE-listed NBFC has clarified that there is no obligation to make an open offer under SEBI (SAST) Regulations, 2015 if the individual shareholding of promoters is below 25%.

Brief facts relating to the Applicant Company

The Applicant Company is a public limited company registered as an NBFC with the RBI and with its equity shares listed on the BSE Limited. The Board of Directors in its meeting dated 28.10.2021 approved the issuance of 95,00,000 warrants to the promoters and other public investors on a preferential basis. The same was also approved by the shareholders.

Subsequently, the Board in its meeting dated 24.01.2022 allotted the warrants to the allottees. Later, at a meeting held on 28.03.2023, the board allotted 28,77,000 equity shares against partial conversion into equity. As a result of this conversion of warrants, the individual shareholdings of the promoters for FY 2023 stood at 14.28% and 4.99% and for FY 2024, stood at 19.65% and 14.84% respectively.

Query raised by the Applicant Company

The applicant company sought informal guidance on whether the proposed transaction of acquisition of shares to be made during FY 2024 by conversion of all pending warrants will trigger the Open Offer Obligation under Regulation 3(3) of SEBI (SAST) Regulations.

This is pursuant to an increase in the individual shareholding/voting rights of the promoters even though the aggregate shareholding/voting right of the promoter and promoter group will not exceed 5% as required under Regulation 3(2) of the SEBI (SAST) Regulations.

Provisions specified in Regulation 3 of SAST Regulations, 2011

As per Regulation 3(1), no acquirer shall acquire shares or voting rights in a target company which taken together with shares or voting rights, if any, held by him and by persons acting in concert with him in such target company, entitle them to exercise 25% or more of the voting rights in such target company unless the acquirer makes a public announcement of an open offer for acquiring shares of such target company.

As per Regulation 3(2), no acquirer, who together with persons acting in concert with him, has acquired and holds in accordance with these regulations shares or voting rights in a target company entitling them to exercise 25% or more of the voting rights in the target company but less than the maximum permissible non-public shareholding, shall acquire within any financial year additional shares or voting rights in such target company entitling them to exercise more than 5% of the voting rights, unless the acquirer makes a public announcement of an open offer for acquiring shares of such target company.

As per Regulation 3(3), for the purposes of sub-regulation (1) and sub-regulation (2), acquisition of shares by any person, such that the individual shareholding of such person acquiring shares exceeds the stipulated thresholds, shall also be attracting the obligation to make an open offer for acquiring shares of the target company irrespective of whether there is a change in the aggregate shareholding with persons acting in concert.

SEBI reply

In response to the query, SEBI clarified that since the individual shareholding of the promoters is below 25%, open offer obligations shall not be triggered for them under Regulation 3(3) read with Regulation 3(2) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

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