A recent informal
guidance issued by the Securities and Exchange Board of India deals with
the questions pertaining to the intersection of the SEBI Takeover Regulations
of 2011 and the process of complying with the minimum public shareholding in
listed companies. In the case involving R Systems International Limited, the
acquirer made an open offer and acquired certain shares of the target company
so as to hold 34.82% shares. On the other hand, the promoters of the company
held 50.17%, thereby leaving the public shareholding at 15%, which is less than
the required minimum of 25%. In this case, an additional fact of relevance was
that the acquirer was not in any way connected with or acting in concert with
the promoters.
guidance issued by the Securities and Exchange Board of India deals with
the questions pertaining to the intersection of the SEBI Takeover Regulations
of 2011 and the process of complying with the minimum public shareholding in
listed companies. In the case involving R Systems International Limited, the
acquirer made an open offer and acquired certain shares of the target company
so as to hold 34.82% shares. On the other hand, the promoters of the company
held 50.17%, thereby leaving the public shareholding at 15%, which is less than
the required minimum of 25%. In this case, an additional fact of relevance was
that the acquirer was not in any way connected with or acting in concert with
the promoters.
The question that arose was whether pursuant to Reg. 7(4) of
the SEBI Takeover Regulations, the acquirer was required to reduce its
shareholding so as to ensure that the target company complies with the minimum
public shareholding norms. After a consideration of the various legal
provisions (which are discussed in detail in SEBI’s informal guidance letter),
SEBI came to the conclusion that the acquirer was to be treated as part of the
“public”, thereby fulfilling the minimum public shareholding norms. The
acquirer was therefore not required to reduce its shareholding in the target.
the SEBI Takeover Regulations, the acquirer was required to reduce its
shareholding so as to ensure that the target company complies with the minimum
public shareholding norms. After a consideration of the various legal
provisions (which are discussed in detail in SEBI’s informal guidance letter),
SEBI came to the conclusion that the acquirer was to be treated as part of the
“public”, thereby fulfilling the minimum public shareholding norms. The
acquirer was therefore not required to reduce its shareholding in the target.
While this ruling favours potential acquirers, it leaves
some possibilities and questions open. For example, it may be possible for a
single investor to hold a significant percentage (in this case nearly 35%) and
still be treated as part of the “public”. Moreover, the question as to whether
such a large shareholding (through which negative control can be exercised by
blocking special resolutions) would amount to “control” has not been
specifically answered, although one can deduce from the result of the informal
guidance that SEBI does not believe this to amount to “control”. This appears
to depart to some extent from its stance in other cases such as Subhkam Investments,
but that may also be relatable to the facts of the specific case where the
promoters held 50%. In other words, the implication is that a shareholder
holding a significant percentage of shares may not have much control if that
person’s shares are held in the shadow of a much larger group of shareholders
such as the promoters.
some possibilities and questions open. For example, it may be possible for a
single investor to hold a significant percentage (in this case nearly 35%) and
still be treated as part of the “public”. Moreover, the question as to whether
such a large shareholding (through which negative control can be exercised by
blocking special resolutions) would amount to “control” has not been
specifically answered, although one can deduce from the result of the informal
guidance that SEBI does not believe this to amount to “control”. This appears
to depart to some extent from its stance in other cases such as Subhkam Investments,
but that may also be relatable to the facts of the specific case where the
promoters held 50%. In other words, the implication is that a shareholder
holding a significant percentage of shares may not have much control if that
person’s shares are held in the shadow of a much larger group of shareholders
such as the promoters.
Even
though the issues raised in the informal guidance are somewhat technical and
microscopic in nature, they may signal some broader trends in the regulatory
thought-process.
In this regard it may be useful to read the open offer document, available at http://www.sebi.gov.in/cms/sebi_data/commondocs/rsystemsfinallof_p.pdf
It provides in the relevant part that "The Acquirer has not entered into any agreement / arrangement for the purposes of purchasing the Equity Shares of the Target Company.
The Acquirer does not intend to make changes in the Board of Directors or the management of the Target
Company. During the offer period i.e. from date of purchase order, till the date of payment of consideration
and certification from Manager that the Acquirer has complied with all the requirements under the SEBI
(SAST) Regulations, the Acquirer or his nominees will not be appointed on the Board of Directors of the Target Company in terms of Regulation 24(1) of the SEBI(SAST) Regulations."
Not taking away from the import of the IG, this makes the clarifications contained therein fairly redundant for an acquirer entering the Company through an arrangement with the Promoters (involving some grant of shareholder rights to the acquirer).