I. Introduction:
Acquisition-related disclosures under Schedule III[1] of the SEBI LODR Regulations often raise several practical and operational questions for listed entities.
While the regulation prescribes specific thresholds for disclosure, the real compliance challenge lies in identifying when an acquisition[2] become reportable, whether acquisitions falling below the specific thresholds are still required to be disclosed, what types of transactions are covered, and whether the nature of the investee entity impacts the disclosure requirement. These questions become particularly relevant in cases involving tranche-based acquisitions, conversion of securities, statutory voting rights, and investments in entities which are yet to be incorporated.
II. Whether an acquisition not crossing the threshold under sub-para 1 of Para A is required to be disclosed?
If in case when an acquisition does not meet the prescribed threshold under sub-para 1 (i.e. control or 20% or change etc.), it may still require disclosure if the cost of acquisition or price of exceeds materiality criteria under regulation 30(4)(i)(c) [i.e. the 2-2-5 criteria]. Accordingly, acquisition disclosures cannot be assessed only from the perspective of the specific thresholds under sub-para 1. A parallel assessment under the materiality criteria is also necessary.
For NBFCs and insurance companies, industry standards[3] clarify that for acquisitions of listed equity, convertible or debt, the primary trigger is the cost exceeding 2% of net worth. For any other type of acquisition, each of the prescribed materiality thresholds under Regulation 30(4)(i)(c) would continue to apply.
III. Practical compliance scenarios in acquisition disclosures:
The disclosure requirement may be better understood by examining the key elements of an “acquisition” and the circumstances in which the obligation may arise.
- Tranche-based acquisitions
Where a listed entity acquires shares in multiple stages, the disclosure trigger has to be assessed on an aggregate basis.
For instance, if a listed entity already holds 16% shares in a company and subsequently acquires an additional 4%, the aggregate holding reaches 20%. In such a case, the listed entity would be required to make timely disclosure upon crossing the 20% threshold.
However, separate acquisitions of 5% in three different tranches, aggregating to 15%, may not require individual disclosures merely under the acquisition threshold, unless any such tranche independently triggers the monetary materiality criteria or results in acquisition of control. The reporting obligation would arise once a subsequent acquisition takes the total holding to 20% or more.
Further, once the 20% threshold has been disclosed, any subsequent change exceeding 5% from the last disclosed holding would trigger a fresh disclosure obligation. Therefore, the listed entity must track not only the first acquisition crossing the threshold, but also subsequent changes from the last reported holding.
- Indirect acquisitions and conversion of securities
The meaning of “acquisition” under sub-para 1 of Para A is not limited to direct purchase of shares from the secondary market or fresh allotment of equity shares. Certain indirect events may also result in acquisition and, therefore, require disclosure evaluation.
The conversion of Compulsorily Convertible Preference Shares (CCPS), Convertible Debentures (CCDs), or warrants into equity constitutes an acquisition.[4] Listed entities must evaluate if the resulting equity shares lead to an acquisition of control, meets the 20% threshold, or hits monetary materiality thresholds.
Another important scenario relates to voting rights. Where a listed entity gains voting rights on preference shares due to non-payment of dividend for two years or more under Section 47[5] of the Companies Act, 2013, such voting rights may also require disclosure assessment. Although there may not be a fresh purchase of shares, the listed entity may acquire voting rights by operation of law, and the impact of such rights must be evaluated from a disclosure perspective.
- Nature of entity/ investee
Another important question is whether the acquisition disclosure requirement applies to all forms of entities or only to companies?
Sub-para 1 of Para A uses the term “company”. The Companies Act, 2013 defines a company as a company incorporated under the Companies Act, 2013 or under any previous company law.
The Act also separately defines a foreign company under section 2(42) of the Companies Act, 2013.
Therefore, on a plain reading, the disclosure requirement under sub-para 1 appears to cover a ‘Company’ as defined under the Companies Act, 2013, and may not extend to acquisition of an LLP, foreign company or body corporate.
IV. Conclusion:
The determination of a reportable event remains deeply contingent on the substance of the transaction, the specific nature of contractual control rights, and the precise timing of legally binding commitments. Ultimately, for a listed entity, navigating these requirements necessitates a holistic evaluation of every investment. Compliance teams must continue to vigilantly assess indirect acquisitions through convertible instruments and statutory voting shifts to ensure that the material information is communicated to the market accurately and within the prescribed timelines.
[1] Schedule III Part A, Sub-para 1 of Para A of the SEBI (LODR) Regulations
[2] “Acquisition” means:
- acquiring control, whether directly or indirectly; or
- acquiring or agreeing to acquire shares or voting rights in a company, whether existing or to be incorporated, whether directly or indirectly, such that
- the listed entity holds shares or voting rights aggregating to 20% or more; or
- there is a change in holding from the last disclosure made under the 20% threshold and such change exceeds 5%; or
- the cost of acquisition or the price at which the shares are acquired exceeds the threshold specified under Regulation 30(4)(i)(c).
The amended proviso to sub-clause (c) of clause (ii) of Explanation (1) further states that acquisition of shares or voting rights aggregating to 5% or more in an unlisted company, and any change exceeding 2% from the last disclosure made under this proviso, shall be disclosed on a quarterly basis in the specified format. [Integrated filing (Governance)]
[3] Industry standards on regulation 30
[4] Industry standards on regulation 30
[5] Section 47(2) of the Act: Provided further that where the dividend in respect of a class of preference shares has not been paid for a period of two years or more, such class of preference shareholders shall have a right to vote on all the resolutions placed before the company.