1.         Exemption from Takeover Regulations for Gift of Shares to
Family Trust
has granted an exemption
to an acquirer from making an open offer under the SEBI Takeover Regulations in
the case involving Gujarat Organics Limited (the company). In that case, the
promoter Mr. Ashwin S. Dani, owns 71.15% shares in the company, and proposes to
transfer it by way of a gift to a private trust HD Trust, of which he is one of
the trustees. The beneficiaries of the trust are his family members. The
acquirer, HD Trust, does not hold any shares in the company, while Mr. Dani has
been shown as a promoter for more than 3 years. SEBI granted the exemption for
the transfer because this was an inter se
reorganization of holdings that does not alter the control of the company
in any way. Moreover, it was a gift and merely a private family arrangement to
facilitate succession planning.
is understandable because there is no change of effective control of the
company, and an exemption order was sought from SEBI only because the
transaction may not have satisfied the technical requirements for an automatic
2.         Another SEBI Adjudication Order in the IPCL Insider Trading
month, we had discussed
an adjudicating order of SEBI finding that the charges of insider trading were
not established against Mr. Manoj H. Modi and Mrs. Smita M. Modi in relation to
the trading of shares in Indian Petrochemicals Corporation Limited (IPCL). Now,
on a related set of facts and circumstances, another adjudicating
of SEBI has found that a charge of insider trading is sustainable
against Reliance Petroinvestments Limited (RPIL), the controlling shareholder
of IPCL, and also imposed a fine of Rs. 11 crores on RPIL. The facts relating
to the information and announcements are essentially the same as that contained
in the previous post, and are not repeated here.
From a
legal perspective, SEBI’s assertions are based on two grounds. The first is
that RPIL is a “deemed connected person” and second that it is “reasonably
expected to have access to unpublished price sensitive information” with
respect to IPCL. This is necessary to establish RPIL as an insider with respect
to IPCL. On the first count, SEBI found that RPIL and IPCL are companies under
the same management as they are under the common control of Reliance Industries
Limited, which is a fact-based determination. On the second count, SEBI found
that as a controlling shareholder of IPCL, RPIL is naturally said to have
access to unpublished price sensitive information (UPSI) relating to IPCL:
The above facts establish that RPIL was having control over IPCL. It may therefore,
be concluded that by virtue of RPIL having control over IPCL, it was reasonably
expected to have access to UPSI of IPCL. Noticee being the promoter having
control over the company holding approx. 46% shares of IPCL is inherently
expected to have access to UPSI. Noticee being in such a position it is
unacceptable that the Noticee was not aware of such major/ important decisions
of the company IPCL.
conclusion suggests that any promoter entity that falls within the definition
of a “deemed connected person” would generally have access to UPSI in relation
to the investee company and that nothing more needs to be shown.
3.         Interpretation of the MAC Clause in Financing Documentation
England and Wales High Court passed a ruling, which interprets the material
adverse change (MAC) clause in financing documentation. In that case, the
lender withheld further funding based, among other things, upon the occurrence
of a MAC event that adversely affected the borrowing company. Although the
judgment is quite long and involves ascertainment of detailed facts, the
interpretation of the MAC clause is summarised in the judgment as follows:
364.     In summary, authority supports the following
conclusions. The interpretation of a “material adverse change” clause
depends on the terms of the clause construed according to well established
principles. In the present case, the clause is in simple form, the borrower
representing that there has been no material adverse change in its financial
condition since the date of the loan agreement. Under such terms, the
assessment of the financial condition of the borrower should normally begin
with its financial information at the relevant times, and a lender seeking to
demonstrate a MAC should show an adverse change over the period in question by
reference to that information. However the enquiry is not necessarily limited
to the financial information if there is other compelling evidence. The adverse
change will be material if it significantly affects the borrower’s ability to
repay the loan in question. However, a lender cannot trigger such a clause on
the basis of circumstances of which it was aware at the time of the agreement.
Finally, it is up to the lender to prove the breach.
MAC clause has been extensively litigated in the last few years following the
financial crisis, especially in M&A that is supported by acquisition

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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