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Acquirer |
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| Acquirer |
“Acquirer” means any person who, directly or indirectly, acquires or agrees to acquire shares or voting rights in the target company, or acquires or agrees to acquire control over the target company, either by himself or with any person acting in concert with the acquirer;
The term acquirer can be divided into following:
a. Any person
The term person includes both individuals & juristic persons like company, partnership firm etc, who either directly or indirectly acquire shares, voting rights or control over the target company.
b. Who directly or indirectly
The acquisition extends to both direct & indirect acquisition. The code itself has provided an example of indirect acquisition in regulation 3(k), which states that acquisition of shares of an unlisted holding or investment company, which in turn holds majority stake in listed company.
The other instance can be acquisition of voting rights in a listed company from the present promoters through power of attorneys or by entering into voting rights arrangement.
c. Acquires or agrees to acquire
The acquisition includes both completed acquisition as well as agreement to acquire.
In B.P.Amoco.Plc Vs SEBI, where it was held that the moment the acquirer sets into motion the process of acquiring shares or control, acquisition within the meaning of SEBI(SAST)Regulation,1997 takes place.It was also held that acquirer includes both who has acquired shares as well as who agrees acquire shares or voting rights in a company. Similarly if the word ‘acquirer’ were to mean only those who have already acquired shares, then the provisions regarding ‘public announcement’ in the SEBI Regulations would be rendered nugatory. The salutary protections contemplated through public announcement would be lost.
d. Shares, voting rights or control over target company
e. Either by himself or with any person acting in concert with the acquirer.
The acquisition can be on the behalf of acquirer himself or it may be with the the persons acting in concert which are further defined under regulation 2(e) of the Code. The acquirer can take the shares on its own or along with the persons who share the common objective of acquisition of share or voting rights or control over the target company. | | | |
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Acquisition of Control |
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| Acquisition of Control |
The Takeover Code recognizes both voting rights as well as control irrespective of acquisition of shares. Regulation 12 deals with acquisition of control, irrespective of whether or not there has been any acquisition of shares or voting rights.
The regulation states that if any acquirer including person acting in concert acquires control over the target company irrespective of any acquisition of shares or not, public announcement to acquire shares from shareholders of the Target Company must be given.
However, the requirement of public offer is not there if the shareholders of the company approve change in control by a special resolution. Furthermore, the code provides that the facility of voting through postal ballot shall be provided to the shareholders for passing of the special resolution.
It is appreciable that the acquisition of control also includes both direct & indirect
acquisition of control over target company by virtue of acquisitions of companies whether listed or unlisted and whether in India or abroad.
Further, the control must be taken to mean both de facto control as well as de jure control for the purpose of determining control in Regulation 12 as provided in B.P.Amoco Plc v.SEBI. | | | |
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Acquisition of more than 15% shares in a listed company |
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| Acquisition of more than 15% shares in a listed company |
| Regulation 10 provides a threshold limit for mandatory public offer. This regulation explains that when an acquirer intends to acquire shares or voting rights which along with his existing shareholding would entitle him to exercise 15% or more of the voting rights in a company, in such a case the acquirer is required to make public announcement to acquire at least additional 20% of the voting capital of target company from the shareholders through an open offer. | | | |
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Acquisition of shares in unlisted company |
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| Acquisition of shares in unlisted company |
Acquisition of shares in an unlisted company does not trigger SEBI Takeover Regulations. However, the exemption under clause (k) above shall not be applicable if by virtue of acquisition or change of control of any unlisted company, whether in India or abroad, the acquirer acquires shares or voting rights or control over a listed company.
The code extends to acquisition of shares of listed company. Therefore, if any listed company acquires the shares of an unlisted company, then the takeover code is not attracted. However, if acquisition of shares / change in control of unlisted company results into acquisition of shares or voting rights of listed company indirectly, then the Takeover Code will be applicable.
Example: The acquirer, whether individual or body corporate, acquires 51% shares of Y Ltd. Y Ltd. is an unlisted holding Company of Z Ltd., which is a listed Company.
Therefore, by virtue of acquisition of 51% shares of Y Ltd, the acquirer will acquire control over the Target Company or in other words, it will indirectly acquire the shareholding of Z Ltd. (Listed Subsidiary Company). Hence, although the acquirer has acquired shares of an unlisted Company, yet he will be required to comply with the provisions of SEBI Takeover Regulations in respect of Z Ltd. | | | |
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Acquisition of shares pursuant to open offer |
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| Acquisition of shares pursuant to open offer |
Takeover Code provides for two types of considerations for acquisition of shares i.e. cash as well as non-cash consideration such as shares. The exemption is available when the acquirer is a listed body corporate and it issues its shares to the shareholders of Target Company in consideration of public offer. Therefore such shares received by the shareholder of Target Company in consideration of public offer will not trigger the Takeover Offer, even if it exceeds the limits specified under the regulations.
Example: The acquirer is a listed body corporate (XYZ Ltd) & is acquiring the shares of another listed company (ABC Ltd). In consideration the acquirer is ready to issue shares in XYZ Ltd to the shareholder of ABC Ltd. If any of the shareholders in ABC Ltd. acquires shares in XYZ Ltd. beyond the prescribed limit specified in the takeover offer in consideration of the shares offered to the acquirer, then the provisions of open offer are not applicable. | | | |
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Bail Out Takeovers |
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| Bail Out Takeovers |
Bailout Takeovers are applicable to companies which are financially weak & not being a sick industrial company in pursuance of a scheme of rehabilitation approved by a pubic financial institution or scheduled bank.
A Company whose accumulated losses have been eroded by more than 50% but less than 100% of its net worth as at the beginning of the previous financial year, then the company becomes financially sick company.
The bailout takeover applies to financially weak company, which can be rehabilitated without the intervention of the Board for Industrial & Financial Reconstruction. The regulations provide for simplified procedures for bailout takeover. The public offer for bail out takeovers differs from the public offer requirement as contained in Chapter III only in that there is no minimum offer price and minimum amount for public offer.
The lead institution, which could be any public financial institution or a scheduled bank, is responsible for the compliance of the SEBI regulations regarding takeover of financially weak companies. The lead institution shall prepare the rehabilitation package after appraising the company. Such a rehabilitation scheme may provide for change in management. While drawing up the rehabilitation scheme the financial institution shall keep in mind the interest of the minority shareholders, good management, effective revival and transparency.
The acquisition of shares can be either by purchase of shares, exchange of shares or combination of both. If the acquisition of shares is by new promoters, then old promoters have to give up their shareholding in the financially weak company in its entirety. | | | |
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Consolidation of Holdings |
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| Consolidation of Holdings |
The term consolidation holdings has been used in regulation 11 of SEBI Takeover Regulations. This regulation is meant for allowable acquisitions (both direct & indirect) only for those who already hold more than 15% shares or voting rights but less than 55% shares or voting rights in a company. This regulation allows the persons either by themselves or through persons acting in concert with them who are holding more than 15% but less than 55% shares or voting rights in the company to acquire further upto 5% shares or voting rights in the financial year ending 31st March. The allowable acquisition of 5% is popularly known as ‘Creeping acquisition’. Thus, the acquirer is permitted to acquire additional shares and consolidate his holdings within the aforesaid limits.
The regulation further requires that the persons who already holds more than 15% shares or voting rights and less than 55% shares or voting rights if want to go beyond 5% of the voting rights have to make public offer as per the provisions of the regulations.
Regulation 11(2) further provides that the person who holds more than 55% shares or voting rights but less than 75% shares or voting rights in a company, cannot, either himself or through persons acting in concert with him acquire a single shares & also cannot exercise voting power beyond 55% unless a public offer is given as per the provisions of regulations.
Regulation 11(2A): Where an acquirer who (together with persons acting in concert with him) holds fifty five per cent(55%) or more but less than seventy five per cent(75%) of the shares or voting rights in a target company, is desirous of consolidating his holding while ensuring that the public shareholding in the target company does not fall below the minimum level permitted by the Listing Agreement, he may do so only by making a public announcement in accordance with these regulations. The purpose of this regulation is to provide an opportunity to a person who already holds more than 55% but less than 75%, to consolidate his holding by making a voluntary open offer to acquire such percentage of shares of Target Company so as not to exceed his post-acquisition shareholding beyond 75%. | | | |
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Inter-se Transfer amongst Promoters |
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| Inter-se Transfer amongst Promoters |
Inter se transfer of shares amongst—
(a) Qualifying Indian promoters and foreign collaborators who are shareholders
(b) Qualifying Promoters
Acquisition of shares through inter se transfer amongst qualifying promoters is exempt from the provisions of Regulation 10, 11 & 12 that is to say acquisition through inter se transfer is not subject to open offer if it complies with the following formalities
The inter se transfer should be between & amongst the qualifying promoters.
The transferor(s) as well as the transferee(s) have been holding shares in the target company for a period of at least three years prior to the proposed acquisition. It would be sufficient that parties to the transactions are holding shares as shareholders and not as promoters.
The benefit of exemption will be available subject to such transferor(s) and transferee(s) having complied with regulation 6, regulation 7 and regulation 8.
In case the proposed transaction exceeds 5% of the voting share capital of the company, the acquirers have to, for the intimation of public, notify the details of the proposed transaction at least 4 working days in advance of the date of the proposed transaction to the stock exchanges where the shares of the Company are listed.
[Regulation 3(3)]
The acquirer is further required to file a report within 21 days of the date of acquisition to the Securities & Exchange Board of India (SEBI) giving all details in respect of acquisitions. Though the regulation specifies a limit of 15% or more of the voting rights in a company but the limit is of no use as the persons who have already crossed the limit of 15% seek the exemption under the said regulation 3.
Further the compliance under regulation 3(4) is not a one-time compliance. The acquirer has to file a report within 21 days of the date of acquisition every time he claims exemption under this regulation. [Regulation 3(4)]
The acquirer has to along with the report under regulation 3(4) deposit fees of Rs 25,000/- to the Board either by a Banker cheque or demand draft in favour of Securities & Exchange Board of India. [Regulation 3(5)]
In case of warrants or any other security convertible into equity shares at a later date, Regulation 3(3), 3(4) & 3(5) has to be complied with reference to the date of actual conversion into shares. In other words, the acquirer has to at least 4 working days in advance of the date of conversion of warrants/ any other security convertible into equity shares, notify the details to the stock exchanges as required under regulation 3(3).
The acquirer and seller have to comply with Regulation 6, 7 & 8, as the regulation does not relieve the acquirer from complying with disclosure requirements.
The additional condition for the purpose of inter se transfer between promoters is that the price for executing transaction is not exceeding 25% of the price determined under Regulation 20(4) & (5). The exemption will not be available if the price at which the inter –se transfer has been executed, is greater than 25% of the price as determined u/r regulation 20 i.e. for frequently and infrequently traded shares. | | | |
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Offer Price |
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| Offer Price |
The concept of frequently and infrequently traded shares is used in case of offer price i.e. price to be paid to the shareholders of the Target Company at the time of public offer.
The regulations have divided the shares to be acquired into two heads:
1. Infrequently traded shares
2. Frequently traded shares
MEANING OF INFREQUENTLY TRADED SHARES:
The infrequently traded shares are those where the annualized trading turnover of the shares of target company during the preceding six months in which the public announcement is made is less than five per cent of the listed shares (in number). It is further clarified that the weighted number of shares listed during the said six months period can be taken.
However, if the shares have been listed for less than 6 months, the trading turnover is to be taken with reference to actual number of days for which the shares have been listed.
Factors for determining Price in case of infrequently traded
The merchant banker and the acquirer have to take the highest of the following to determine the price to be paid to the shareholders of the Target company:-
a) Negotiated price paid by the acquirer under regulation 14(1) i.e. the price paid by the acquirer to the seller under share purchase agreement or memorandum of understanding entered with the seller.
b) The highest price paid by the acquirer or persons acting in concert in consideration of shares of target company acquired during 26 weeks prior to public announcement. The acquisition here can be by any mode including the preferential issue, right issue & public issue.
c) Also, the price can be determined on the basis of following:-
a. Return on Net Worth
b. Book value of share of Target company
c. Earning per share
d. Price earning multiple vis –a- vis the industry average.
The Securities & Exchange Board of India may also require the valuation of such shares by Independent merchant banker who is not a manager to the offer or by a chartered accountant who has got the standing of minimum 10 years or from a public financial institution.
However, as per current practice if no price is available, the judgment of Supreme Court in Hindustan Lever Limited is used to calculate the price of the share. The Supreme Court in the mentioned case has provided the weights to different parameters to calculate the price.
MEANING OF FREQUENTLY TRADED SHARES
Those shares which are not infrequently traded shares are considered as frequently traded shares i.e. where the annualized trading turnover of the shares of target company during the preceding six months in which the public announcement is made is more than five per cent of the listed shares (in number). It is further clarified that the weighted number of shares listed during the said six months period can be taken.
Factors for determining price
a. The highest price paid by the acquirer or persons acting in concert in consideration of shares of target company acquired during 26 weeks prior to public announcement. The acquisition here can be by any mode including the preferential issue, right issue & public issue.
b. Highest of the following
a. Average of the weekly high & low of the closing price of the shares of the target company as quoted on the stock exchange where the shares of the company are most frequently traded during the preceding 26 weeks of the date of public announcement
b. Average of the weekly high & low of price of shares of the target company as quoted on the stock exchange where the shares of the company are most frequently traded during the preceding 2 weeks of the date of public announcement.
The highest price may be adjusted for quotations, if any on cum-rights or cum-bonus or cumdividend basis during the mentioned period of 26 weeks, if it is apprehended that such corporate actions affect the price otherwise in normal scenario.
However, in case acquirer acquires shares in the open market or through negotiations after the public announcement at a price higher than the offer price stated in letter of offer, in such case acquisition shall be at the highest price paid by the acquirer acquired through open market or through negotiations. | | | |
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Penalties under Takeover Regulations |
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| Penalties under Takeover Regulations |
In the event of non-compliance of the provisions of SEBI (Substantial Acquisition of Shares & Takeover) Regulations, 1997, commonly known as Takeover Code, the acquirer is liable for the penal provisions contained in the code itself.
Regulation 45 of SEBI (Substantial Acquisition of Shares & Takeover) Regulations, 1997 is dealing with the penal provisions for the non-compliance of the obligations contained in the Regulations.
As per regulation 45 of the Regulations, for failure to carry out obligations under the regulations, following consequences may follow:
1. The acquirer faces the consequences of the escrow amount being forfeited besides penalties.
2. The Board of Target Company shall be liable for action in terms of regulation and Act.
3. The intermediary would face suspension or cancellation of registration.
The penalties stated above may include:
i. Criminal prosecution under section 24 of the SEBI Act.
In addition to any award of penalty by the Adjudicating Officer under the Act, if any person contravenes or attempts to contravene or abets the contravention of the provisions of this Act or of any rules or regulations thereof., he shall be punishable with imprisonment for a term which may extend to one year, or with fine or with both. Further, non compliance of the directions of the Adjudicating Officer shall be punishable with imprisonment for a term which shall not be less than one month, but which may extend to three years or with fine which shall not be less than two thousand rupees, but which may extend to ten thousand rupees or with both.
ii. Monetary penalties under section 15H of the SEBI Act.
If a person fails to disclose the aggregate of his shareholding in the body corporate before he acquires any shares of that body corporate, or make a public announcement to acquire shares at a minimum price, he shall be liable to a penalty of twenty-five crore rupees or three times the amount of profits made out of such failure, whichever is higher
iii. Directions under section 11B of the SEBI Act.
The Board may, in the interest of securities market, give directions, without prejudice to its right to prosecute under section 24 of the SEBI Act including:
a.) Directing the person concerned not to further deal in securities.
b.) Prohibiting disposal of securities acquired in violation of these regulations.
c.) Direct sale of securities acquired in violation of these regulations.
iv. Directions under section 11(4) of the Act;
The authority may give the directions to the person in default & the directions may include the following:
i. Suspend the trading of any security in a recognised stock exchange;
ii. Restrain persons from accessing the securities market and prohibit any person associated with securities market to buy, sell or deal in securities;
iii. Suspend any office-bearer of any stock exchange or self-regulatory organisation from holding such position;
iv. Impound and retain the proceeds or securities in respect of any transaction which is under investigation
v. Attach bank accounts of persons involved in violation for a period not exceeding one month.
vi. Direct any intermediary or any person associated with the securities market in any manner not to dispose of or alienate an asset forming part of any transaction which is under investigation.
v. Cease and desist order in proceedings under section 11D of the Act;
A Cease and desist order can also be passed under section 11D of the SEBI Act from committing or causing any violation of the SEBI (Substantial Acquisition of Shares & Takeover) Regulations, 1997.
vi. Adjudication proceedings under section 15HB of the Act.
A residual clause has been provided in the Act, wherein it is mentioned that if any violation act is not specifically covered under the provisions, then the person may be held liable for a penalty which may extend to one crores rupees.
Further, the acquirer or directors of the acquirer company, directors of the target company, the merchant banker(s) would be liable for action for any misstatement or concealment of material information required to be disclosed to the shareholders. | | | |
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Person Acting in Concert |
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| Person Acting in Concert |
The definition of person acting in concert has been profusely modified. Under regulation 2 (1) (e), the term ‘Person Acting in Concert’ has been defined in two parts. In the first part, the term has been defined in the general terms.
Commonality of objective
The persons who are acting in concert on the basis of commonality of objective of acquisition of shares or voting rights or gaining control over the target company.
The commonality can be achieved pursuant to any agreement or any understanding entered by such person. The agreement or understanding can be formal or may be informal.
There must be an element of co-operation in the concerted action of these persons. This cooperation could be extended in several ways, directly or indirectly, or through an agreement, formal or informal.
Further, the term common objective has been restricted by the subsequent words in the sense that the common objective shall be the substantial acquisition of shares or voting rights or gaining control over the target Company.
Therefore, it becomes clear that the two persons must share a common intention of substantial acquisition of shares or voting rights to be treated as persons acting in concert.
Business Relations
Further, the code identifies persons who virtue of their business relations is presumed to be person acting in concert. The responsibility has been cast on these persons to show that the fact is otherwise in given situation.
The second part of the definition lists out certain instances where two persons will be deemed to be persons acting in concert. Therefore, where first part is general, second part is specific in nature. The section part of the definition lists out certain instances where two persons will be deemed to be ‘person acting in concert.’
PAC VS. DEEMED PAC
The term ‘Person Acting in Concert’ has been defined in two parts. In the first part, the term has been defined in the general terms whereas in the second part certain instances have been specifically listed out where the two persons will be deemed as PAC, unless contrary is established. These are called deemed PAC.
However it is of utmost importance to mention here that second part starts with the words “without prejudice to the generality of this definition, the following persons will be deemed to be persons acting in concert with other persons in the same category, unless the contrary is established”. It means that the first part will prevail over the second part. Therefore, at the first instance, the persons mentioned thereafter will be deemed to be person acting in concert as suggested by the words “unless the contrary is established”. However, notwithstanding the fact that two persons fall in one or other category of second part of the definition, it has nevertheless to be established that they share common objective. This intention of the law-makers has been made clear by the starting words of second part i.e. “without prejudice to the generality of this definition”.
Therefore, if the two persons does not share common objective of substantial acquisition of shares or voting rights or acquisition of control, they will not be treated as persons acting in concert even if they fall in one or the other category of the second part of the definition. Therefore, the main difference between the persons not falling in the second part of the definition and person falling in the second part of the definition is that in the former case it is to be positively established that two persons share common objective whereas in the letter case this presumption is already there and it has to be rebutted that the two persons does not share common objective. | | | |
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Procedure for Lead Institutions |
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| Procedure for Lead Institutions |
| Regulation 31 deals with the procedure to be adopted by the lead institution and stipulates invitation of offers for acquisition of shares from minimum three parties. The lead institution, while selecting bidder, shall have regard to the managerial competence, adequacy of financial resources and technical capability of the persons acquiring the financially weak company. The lead institution shall furnish detailed information about the financially weak company to any person intending to make an offer to acquire shares along with minimum financial and other commitments expected from the person. | | | |
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Shares |
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| Shares |
“Shares” means shares in the share capital of a company carrying voting rights and includes any security which would entitle the holder to receive shares with voting rights but shall not include preference shares;
Shares mean
i. Shares capital of a company carrying voting rights
ii. Includes any security which would entitle the holder to receive shares with voting rights
iii. It excludes preference shares.
The implication of this definition is as under:
1. Equity Shares:
The SEBI (SAST) Regulations, 1997 provides an inclusive definition for shares. Shares are considered to be the part of share capital of the Company. However, only that part of shares which provides for voting rights in the company are taken for the purpose of definition of shares. The voting rights are not been defined in the Takeover Code. The voting rights are the right to vote in the company’s policy decision.
2. Convertible Securities e.g. Warrants
The definition also provide for any other kind of security which entitle the holder to get shares and also voting rights at a later date. That means the inclusion in the definition is with respect to those securities, which provide both shares and voting rights.
3. Preference Shares.
The Takeover code does not take into account preference shares. Prior to SEBI (SAST) (Second Amendment) Regulations, 2002, preference share with voting rights were included. Further, if the security is convertible into preference share at a later date, then since there been no voting right, it would also not be included in definition of share.
Query 1
Whether preference shares which are entrusted with voting rights pursuant to section 87(2) (b) of the Companies Act, 1956 are to be considered for the purpose of Takeover code?
As per the understanding of regulations, the preference shares shall be included in the purview of takeover code when they vest with the voting rights, as they will have the same implication as of equity shares in a company. Thus, the preference may be taken for the purpose of Takeover code provided they are vested with the voting rights.
Query 2
In case of Warrants, at what time the voting rights are to be considered – at the time of initial allotment or after conversion? If at the time of initial allotment, then what if they are not converted into equity shares?
As per the understanding of regulations, the voting rights on the warrants shall be considered on the date of conversion and not before that. Therefore, the provisions of SEBI Takeover Regulations do not apply at the time of acquisition / allotment of warrants but at the time of conversion of such warrants into shares.
SEBI Informal Guidence in Nagreeka Exports Limited:
“Regulations 10 and 11 of the Takeover Regulations are triggered by acquisition of shares entitling the acquirer to exercise voting rights beyond the threshold limits specified in the said regulations. In case of an acquisition of convertible securities such as warrants which would entitle the acquirer to exercise voting rights, exceeding the threshold limit specified in regulation 10 or 11, the regulations are triggered on conversion of warrants, or exercise of option, as the case may whereby the acquirer acquires voting rights on such convertible securities. Therefore, at the time of issue of warrants by the company, regulations will not be triggered.”
SEBI Informal Guidence in Strides Acrolab Limited:
In case of acquisition/ allotment of convertible securities, the regulations as prevailing on the date of conversion are triggered on the date of conversion of warrants, or exercise of option, as the case may be whereby the acquirer acquires voting rights on such convertible securities. Therefore, at the time of issue of warrants by the target company, regulation 11(1) of the Takeover Regulations will not be triggered.
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