SPEL Semiconductor: SEBI’s Exemption from Open Offer

[The following post is contributed by Yogesh Chande, who is a Consultant with
Economic Laws Practice, Advocates & Solicitors. Views of the author are
personal]
SEBI’s
Whole Time Member has passed an order
dated 6 September 2013 granting an exemption to Natronix Semiconductor
Technology Private Limited (Acquirer – a company incorporated in Singapore)
from making an open offer [regulation 3(1) of SEBI (Substantial Acquisition of
Shares and Takeovers) Regulations, 2011] for the proposed acquisition [through
a block deal] of 55.97% shares of the SPEL Semiconductor Limited, a listed
company (Target Company) on the following facts and grounds:
1. The sole shareholder (promoter) of the Target
Company is SPIC Limited (Southern Petrochemical Industries Corporation Limited)
which is also a listed company (Seller);
2. The proposed divestment to the Acquirer is to
generate cash flow and liquidity to facilitate payments to the creditors of
Seller pursuant to a scheme of arrangement with creditors for settlement of
their dues, which was duly sanctioned by the High Court;
3. Non-payment of dues to the creditors would
result in creditors invoking charge on the assets of Seller which may lead to
winding up of the Seller;
4. The Acquirer would hold the entire
shareholding of the Seller in the Target Company post the proposed transfer;
5. The shareholders of the Acquirer are two
individuals who also happen to be the shareholders of the Target Company, and
have been disclosed as “persons acting in concert” with the Seller in the
Target Company
[Comment:
While clause 3(i) of the order states that the said individuals are part of the
“promoter group” of the Seller, the paragraph preceding it and clause 9 of the
order states that these persons individually also hold shares of the Target
Company aggregating 2.12%. As per the shareholding pattern available on the
website of BSE Limited, it appears that one of the said individuals is holding
shares in the Target Company in the category of “public” (more than 1%
category) aggregating to 2.11% as on 30 June 2013]; and
6. There would be no change in the management or
control of the Target Company as a result of the proposed transfer.
The
exemption from open offer has been granted by SEBI subject to the approval of
the shareholders of the Target Company, provided that the resolution shall be
acted upon only if, the number of vote cast by public shareholders in favour of
the proposal is more than the number of votes cast by public shareholders
against it.
[Comment:
This condition of the order is consistent with clause 7 of the SEBI circular
dated 21 May 2013 which has replaced para 5.16 of the SEBI circular dated 4
February 2013 dealing with scheme of arrangement involving listed companies.]
Analysis:
The order is a welcome
precedent, since in the present case the Seller which is a listed company is
seeking to revive itself by selling its shareholding in the Target Company on
the following grounds, unlike typically a case involving revival of a listed
target company:
(a) to
protect the interest of the investors of the Seller;
(b)to utilise
the proceeds of the proposed sale of the shares to partly meet the financial
liabilities of the Seller in terms of the scheme of compromise and arrangement
as approved by the High Court; and
(c)to avoid
the potential winding up of the Seller.
In
past, there have been some instances, where an exemption from an open offer has
been granted to the proposed acquirer for the purpose of revival or
rehabilitation of a listed target company and utilise the said money for
investing into the target company, as against the acquirer making an open offer
to the public shareholders of the target company. This is logical, since an
open offer leads to cash outflow from the acquirer to the public shareholders
of a target company, rather than cash outflow from the acquirer to the target
company which is in desperate need of liquidity.
It
is also interesting to note that, while the proposal of the Acquirer in this
particular case is to acquire the shares of the Target Company from the Seller
pursuant to a “block deal”, clause 14 of the order also imposes the condition
that, acquisition price should be higher of the parameters prescribed
therein viz:
(a) price calculated as per regulation 8 of the
SEBI takeover regulations; or
(b) price of INR 7.62.
In
this connection, there could be a potential practical challenge while executing
the proposed transaction on the floor of the stock exchange through block deal,
since in terms of the SEBI guidelines the orders for a block deal can be placed
at a price not exceeding +1%
from the ruling market price/previous day closing price. Closing market price
of the shares of the Target Company on BSE Limited on 13 September 2013 is INR
4.02. Hence, the proposed transaction will have to executed through a
“block deal” provided that, apart from the parameters prescribed in the SEBI
order, the guidelines prescribed by SEBI with respect to pricing a block deal
transaction [and not exceeding the range] is also complied with.

– Yogesh Chande

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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