Promoters’ Contribution; SEBI Ruling in the Reliance Power Case

In its order passed yesterday, the Securities and Exchange Board of India (SEBI) ruled that shares acquired by the promoters of Reliance Power Limited (RPL) pursuant to a scheme of amalgamation approved by the High Court of Bombay would be eligible for computation of promoters’ contribution under the SEBI (Disclosure and Investor Protection) Guidelines. SEBI however imposed the condition that the promoters’ contribution of 20% is to be locked-in for a period of 5 years from the date of allotment in the IPO.

The order states:

From the above Clause 4.6.2 it is noted that in case of public issue by unlisted companies, securities which have been (acquired by) the promoters during the preceding one year, at a price lower than the price at which equity is being offered to public shall not be eligible for computation of promoters’ contribution. Clause 4.6.4 creates an exemption to this requirement in case of the shares which are acquired pursuant to a Scheme of Merger/Amalgamation approved by a High Court.

We note that the Scheme of Amalgamation came into effect on 29-09-2007 when the Scheme was filed with the Registrar of Companies. On September 30, 2007, 50,00,00,000 equity shares of Rs. 10 each were allotted by RPL to REL and another 50,00,00,000 shares of Rs.10 each were allotted to AAA Project Ventures Pvt. Ltd . We find that these equity shares so allotted pursuant to the Scheme of merger/amalgamation approved by the Hon’ble High Court would be eligible for computation of promoters’ contribution in terms of Clause 4.6.4 of DIP Guidelines.

As for another issue that arose in the proceedings, i.e. whether there has been a violation of Section 293(1) of the Companies Act, 1956 in relation to the transfer of certain projects from another company to RPL, SEBI rightly held that it does not have the mandate to administer provisions of the Companies Act and hence has no jurisdiction to conclude a finding under that section.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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