Two
separate but recent developments underscore the need to treat the banking
sector differently when it comes to compliance with the SEBI (Substantial
Acquisition of Shares and Takeovers) Regulations, 2011 (the “Takeover
Regulations”). While the first relates to the applicability of the Takeover
Regulations to capitalization of banks, the second relates to restructuring
debts of borrower companies that might trigger the Takeover Regulations in
relation to those companies.
separate but recent developments underscore the need to treat the banking
sector differently when it comes to compliance with the SEBI (Substantial
Acquisition of Shares and Takeovers) Regulations, 2011 (the “Takeover
Regulations”). While the first relates to the applicability of the Takeover
Regulations to capitalization of banks, the second relates to restructuring
debts of borrower companies that might trigger the Takeover Regulations in
relation to those companies.
Exemption for Bank Capitalization
By
way of an order
dated September 12, 2016, the Securities and Exchange Board of India (“SEBI”)
granted an exemption to the capitalization of Syndicate Bank (the target) whereby
the Government of India (being the controlling shareholder of the target) was
dispensed with any obligation to make a mandatory offer to the minority
shareholders on account of an increase in the Government’s stake in the target
by way of a creeping acquisition.
way of an order
dated September 12, 2016, the Securities and Exchange Board of India (“SEBI”)
granted an exemption to the capitalization of Syndicate Bank (the target) whereby
the Government of India (being the controlling shareholder of the target) was
dispensed with any obligation to make a mandatory offer to the minority
shareholders on account of an increase in the Government’s stake in the target
by way of a creeping acquisition.
On
April 1, 2016, the Government of India held 65.17% shares in Syndicate Bank. On
May 5, 2016, the Government subscribed to additional shares in the target that
increased its shareholding to 69.32%. No mandatory offer was required as the
acquisition was within the 5% creeping acquisition threshold for controlling
shareholders as prescribed in regulation 3(2) of the Takeover Regulations. Now,
however, the Government intends to subscribe to additional shares in order to
increase its stake to 72.92%. This would constitute an increase of the
Government’s stake by more than the 5% creeping acquisition threshold for the
current financial year as prescribed in regulation 3(2). Hence, the target
preferred an application to SEBI for exempting the Government from the open
offer requirements.
April 1, 2016, the Government of India held 65.17% shares in Syndicate Bank. On
May 5, 2016, the Government subscribed to additional shares in the target that
increased its shareholding to 69.32%. No mandatory offer was required as the
acquisition was within the 5% creeping acquisition threshold for controlling
shareholders as prescribed in regulation 3(2) of the Takeover Regulations. Now,
however, the Government intends to subscribe to additional shares in order to
increase its stake to 72.92%. This would constitute an increase of the
Government’s stake by more than the 5% creeping acquisition threshold for the
current financial year as prescribed in regulation 3(2). Hence, the target
preferred an application to SEBI for exempting the Government from the open
offer requirements.
SEBI
granted an exemption order permitting the Government to acquire shares beyond
the 5% creeping acquisition threshold without making an open offer to the
minority shareholders. This is essentially because the Government’s acquisition
is part of its effort to capitalize all public sector banks to comply with the
Basel III norms.
granted an exemption order permitting the Government to acquire shares beyond
the 5% creeping acquisition threshold without making an open offer to the
minority shareholders. This is essentially because the Government’s acquisition
is part of its effort to capitalize all public sector banks to comply with the
Basel III norms.
Proposal for Exemption for Distressed
Companies
Companies
A
report
in today’s Economic Times indicates that the lending community in India has
approached SEBI seeking an addition exemption to enable companies that are in
distress to be taken over by potential acquirers thereby resulting in a change
of control and management. Currently, the Takeover Regulations permit banks,
financial institutions or other secured lenders to convert their loans into
equity shares of their listed borrowers without attracting the mandatory open
offer requirements. This is by virtue of an automatic exemption under regulation
10(1)(i) of the SEBI Takeover Regulations, a provision that was inserted in May
2015. That only allows for conversion of loans into equity by the lenders, but
it does not permit others to take over management of distressed targets. This
perceived gap is sought to be filled through the proposal that is before SEBI.
report
in today’s Economic Times indicates that the lending community in India has
approached SEBI seeking an addition exemption to enable companies that are in
distress to be taken over by potential acquirers thereby resulting in a change
of control and management. Currently, the Takeover Regulations permit banks,
financial institutions or other secured lenders to convert their loans into
equity shares of their listed borrowers without attracting the mandatory open
offer requirements. This is by virtue of an automatic exemption under regulation
10(1)(i) of the SEBI Takeover Regulations, a provision that was inserted in May
2015. That only allows for conversion of loans into equity by the lenders, but
it does not permit others to take over management of distressed targets. This
perceived gap is sought to be filled through the proposal that is before SEBI.
If
enacted, the new exemption would allow potential investors to take over the
management of distressed companies without making an open offer. This will
enhance the possibility of recovery by banks of their monies lent to the
target. It will also enable outside investors to take over distressed
companies, and infuse funds to turn around the business, rather than to spend
monies on providing exit opportunities to minority shareholders through the
open offer. This may also have the effect of addressing minority concerns, as
they may be better off remaining in the company with a higher chance of enjoying
value in due course, as opposed to facing an open offer at relative low prices
given the distressed situation faced by the targets.
enacted, the new exemption would allow potential investors to take over the
management of distressed companies without making an open offer. This will
enhance the possibility of recovery by banks of their monies lent to the
target. It will also enable outside investors to take over distressed
companies, and infuse funds to turn around the business, rather than to spend
monies on providing exit opportunities to minority shareholders through the
open offer. This may also have the effect of addressing minority concerns, as
they may be better off remaining in the company with a higher chance of enjoying
value in due course, as opposed to facing an open offer at relative low prices
given the distressed situation faced by the targets.
Although
such a mechanism would increase the prospects of recover for distressed
companies, it remains to be seen as to what conditions SEBI will impose even if
it does decide to introduce the exemption that the lending community has sought
for.
such a mechanism would increase the prospects of recover for distressed
companies, it remains to be seen as to what conditions SEBI will impose even if
it does decide to introduce the exemption that the lending community has sought
for.
