Special Circumstances for Exemption from Takeover Offers

In
the last few days, SEBI issued two exemption orders and one informal guidance
based on requests made by acquirers not to be obligated to make mandatory open
offers under the SEBI Takeover Regulations due to the existence of special
circumstances. This post briefly discusses each of these situations and the
rationale for SEBI’s views.
Forfeiture of Shares
In
an application in the case of Prima
Industries Limited
, the company sought exemption on
account of increase in the promoters’ shareholding from 60.13% to 71.36% due to
a forfeiture of shares by the company. SEBI granted the exemption. This was
largely due to the presence of certain specific factors that warranted such
exemption.
First,
there was no “acquisition” of shares by any shareholder. The increase in the
promoters’ shareholding was an incidental result of the forfeiture of shares.
Although this is akin to buyback of shares, the automatic exemption under Reg.
10(4)(c) is available only to a buyback and not forfeiture; hence the specific
exemption request.
Second,
the forfeiture was the result of notice given to shareholders, to which no
response was received. It was found that the company had duly complied with the
process of forfeiture.
Third,
there was no change in control of the target company.
There
are valid reasons for grant of exemption, and it is understandable that SEBI
accepted the company’s request.
Increase in Government Shareholding
The
second exemption order pertains to Central
Bank of India
. A request was made on behalf of the Government of India
(GOI) to increase its shareholding in Central Bank of India from 79.15% to
85.31% without the requirement of making an open offer to the other
shareholders. The purpose of increase in the bank’s capital was to ensure that
it was able to maintain the required Tier 1 capital to risk-weighted assets
ratio (CRAR) in accordance with the Basel II norms. The issue of shares to GOI
was approved by the board and shareholders of Central Bank of India.
SEBI
found it fit to grant GOI an exemption from making the open offer as:
the infusion of funds by the GOI would enable the Target
Company to achieve the 8% Tier I CRAR in accordance with the BASEL II
guidelines. Higher CRAR is a factor that represents that a bank or a financial
institution has sufficient capital in order to keep it out of financial
difficulty and protect the interest of its depositors and in turn the economy.
Of
course, in this case too, there was no change in the control of the company. Nevertheless,
SEBI’s reasoning seems to have been motivated by the nature of the entity,
being a public-sector bank, and the financial difficulties that it may face
without the exemption, rather than the on the merits from a takeover
perspective keeping in mind the interests of the minority shareholders.
Gift of Shares
In
the case of OCL
Iron & Steel Limited
, an application was made to SEBI for
informal guidance. This case involved a transfer of shares by two sisters in
unlisted companies (that in turn held shares in the listed target company). The
shares were transferred by a way of a gift to their brother who was not part of
the promoter group. This could result in a takeover of the target company
through the application of the chain principle.
SEBI
found that this scenario was within the exemption under Reg. 10(a)(i) as it was
an inter se transfer between “immediate
relatives”. Moreover, being a gift, there was no acquisition price involved. However,
SEBI confirmed the exemption subject to compliance with the requisite
disclosure norms under sub-regulations (5), (6) and (7) of Reg. 10.
In
this case, the informal guidance confirming the exemption is justified,
particularly because the transfer is among immediate relatives.

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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