SEBI has issued a Discussion Paper on “Review of policy relating to forfeiture of partly paid-up shares – Amendments to SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011”. The paper opens with references to partly-paid shares and forfeiture of unpaid capital as provided under the Companies Act, 2013. Essentially, in case of partly paid shares, the holder can exercise voting rights only proportionate to the amount paid up (section 47(1)(b)). Moreover, in case of non-payment of calls, the company may prevent the exercise of voting rights on such shares if the articles so provide (section 106(1)). In any event, the company has the ability to forfeit the shares in accordance with the provisions of the articles. Since the prevention of exercise of voting rights and forfeiture of shares will result in the remaining shareholders’ percentage holding in the company increasing, a question arises as to whether that would trigger the mandatory offer requirements under the Takeover Regulations. Currently, the regulations are silent on this aspect, and hence SEBI seeks to clarify the same.In the discussion paper, SEBI proposes to include a new exemption whereby any increase in a shareholders’ percentage on account of forfeiture of shares or unavailability of voting rights of other shareholders will not trigger a mandatory offer. While this is understandable and welcome, SEBI’s broader rationale and philosophy for this change is of greater interest. In suggesting this amendment, SEBI has reiterated the principle that “passive” increases in shareholding ought not to be brought within the mandatory offer requirement. It has cited other exemptions such as buyback of shares, rights issues, schemes of arrangement and increase in voting rights of preference shareholders on account of non-payment of dividend. The present effort is to include a specific type of passive increase in the form of non-payment of calls and forfeiture of shares. In case there are other situations of passive increases not specifically covered by the exemptions, this principle should enable parties in those circumstances to approach SEBI for a specific exemption.