In view of concerns about promoters and companies raising funds from Mutual Funds and NBFCs through structured obligations, pledge of shares and non-disposal undertakings, SEBI in its Board Meeting of 27 June 2019 decided that the term ‘encumbrance’ under the Takeover Regulations 2011 will include:
any restriction on the free and marketable title to shares, by whatever name called, whether executed directly or indirectly;
any covenant, transaction, condition or arrangement in the nature of encumbrance, by whatever name called, whether executed directly or indirectly.
In pursuance of the above decision, in a circular dated 7 August 2019, SEBI prescribed additional disclosure requirements under Regulation 31(1) of the Takeover Regulations, 2011 with respect to shares encumbered by a promoter of a listed company along with persons acting in concert (PACs) with him. Accordingly, with effect from 1 October 2019, the promoter is obliged to disclose detailed reasons for the encumbrance, if the combined encumbrance by the promoter along with PACs equals or exceeds: (a) 50% of their shareholding in the company; or (b) 20% of the total share capital of the company. A declaration is also required to be made to the Audit Committee and to the stock exchanges on a yearly basis.
The disclosure is required to be made in the prescribed format (Annexure –II) to every stock exchange where the shares of the company are listed and to the listed company itself, within two working days from the creation of such encumbrance and on every occasion when the extent of encumbrance (having already breached the above threshold limits) increases further from the prevailing levels. Such disclosure is in addition to disclosure in Annexure –I of Circular No. CIR/CFD/POLICYCELL/3/2015 dated 5 August 2015.
If the existing combined encumbrance by the promoter along with PACs with him is either 50% or more of their shareholding in the company or 20% or more of the total share capital of the company as on 30 September 2019, the promoter is required to make a first disclosure on the detailed reasons for encumbrance, in the prescribed format, by 4 October 2019.
The stock exchanges are required to disseminate a list of such companies with details of encumbrances and reasons on their websites. The listed company must also disclose such information on its website within two working days of receipt of disclosure.
SAM & Co comment
This is a welcome measure as it adequately elaborates on various ways in which an encumbrance can be created. The existing definition of the term “encumbrance” was broad/wide enough to cover all such arrangements. However, to avoid confusion, SEBI has now clearly and expressly spelt out what kind of encumbrance warrants disclosure. Further it puts to rest any scope for uncertainty on what attributes are required in order to be classified as an encumbrance for the purpose of Takeover Regulations. The additional disclosure requirements are the consequence of recent incidents which have come to light where mutual funds have been (lending and not) investing in lesser known companies backed by shares of promoters. The disclosures will help in greater transparency with respect to raising of funds by promoters and listed companies and security created in this connection.
The Bar Council of India does not permit solicitation of work and advertising by legal practitioners and advocates. By accessing the Shardul Amarchand Mangaldas & Co. website (our website), the user acknowledges that:
The user wishes to gain more information about us for his/her information and use. He/She also acknowledges that there has been no attempt by us to advertise or solicit work.
Any information obtained or downloaded by the user from our website does not lead to the creation of the client – attorney relationship between the Firm and the user.
None of the information contained in our website amounts to any form of legal opinion or legal advice.
All information contained in our website is the intellectual property of the Firm.