[Guest
post by Abhishek Borgikar, who is a
Senior Associate at Dhaval Vussonji Alliance]
post by Abhishek Borgikar, who is a
Senior Associate at Dhaval Vussonji Alliance]
Violation of Minimum Public
Shareholding Norms
Shareholding Norms
The former chairman of the Securities and
Exchange Board of India (SEBI), Mr. U. K. Sinha, while talking
about minimum public shareholding in public sector companies said: “Our [SEBI’s] stand as a regulator is that
all cos should be treated alike on all matters, not only public float on
corporate governance and all and this is what we have been telling the
government”. But the same does not seem to be taken seriously either
by Government or by SEBI in light of some recent exemption orders passed by
SEBI.
Exchange Board of India (SEBI), Mr. U. K. Sinha, while talking
about minimum public shareholding in public sector companies said: “Our [SEBI’s] stand as a regulator is that
all cos should be treated alike on all matters, not only public float on
corporate governance and all and this is what we have been telling the
government”. But the same does not seem to be taken seriously either
by Government or by SEBI in light of some recent exemption orders passed by
SEBI.
SEBI has recently passed exemption orders in the
matter of Indian
Overseas Bank (‘IOB’) and United
Bank of India (‘UBI’) whereby
SEBI has exempted Government of India from making an open offer to the public
shareholders of the Banks. The increase in the promoter shareholding
(Government of India) to 79.56% from 73.58% and from 82% to 88.72% in case of
IOB and UBI respectively is a clear-cut violation of the minimum public
shareholding (MPS) norms provided under Rule 19A(1) of the Securities Contracts
(Regulation) Rules (‘SCRR Rules’)
and proviso to Regulation 3(2) of the SEBI (Substantial Acquisition of Shares
and Takeovers) Regulations, 2011 (‘SAST
2011’). The relevant SCRR Rule is reproduced below for ready reference:
matter of Indian
Overseas Bank (‘IOB’) and United
Bank of India (‘UBI’) whereby
SEBI has exempted Government of India from making an open offer to the public
shareholders of the Banks. The increase in the promoter shareholding
(Government of India) to 79.56% from 73.58% and from 82% to 88.72% in case of
IOB and UBI respectively is a clear-cut violation of the minimum public
shareholding (MPS) norms provided under Rule 19A(1) of the Securities Contracts
(Regulation) Rules (‘SCRR Rules’)
and proviso to Regulation 3(2) of the SEBI (Substantial Acquisition of Shares
and Takeovers) Regulations, 2011 (‘SAST
2011’). The relevant SCRR Rule is reproduced below for ready reference:
19A (1) Every listed Company shall maintain public shareholding of at least
twenty five per cent.”
twenty five per cent.”
3(2)……
Provided that such acquirer shall not be
entitled to acquire of enter into any agreement to acquire shares or voting
rights exceeding such number of shares as would take the aggregate shareholding
pursuant to the acquisition above the maximum permissible non-public
shareholding”
entitled to acquire of enter into any agreement to acquire shares or voting
rights exceeding such number of shares as would take the aggregate shareholding
pursuant to the acquisition above the maximum permissible non-public
shareholding”
It is mentioned in the exemption order that SEBI
sought clarification regarding compliance of MPS norms and that it was informed
by Government of India through letter dated September 30, 2016 as under:
sought clarification regarding compliance of MPS norms and that it was informed
by Government of India through letter dated September 30, 2016 as under:
As per request of SEBI, Department of
Financial Services, Ministry of Finance, Government of India, being promoter of
the company declares that Indian Overseas Bank will comply with Minimum Public
Shareholding (MPS) requirements in terms of Securities Contracts (Second
Amendment) Rules, 2014.
Financial Services, Ministry of Finance, Government of India, being promoter of
the company declares that Indian Overseas Bank will comply with Minimum Public
Shareholding (MPS) requirements in terms of Securities Contracts (Second
Amendment) Rules, 2014.
In terms of the Securities Contracts (Second
Amendment) Rules, 2014 (‘Rules’),
those public sector companies whose public shareholding was less than 25% on
August 22, 2014 (date of commencement of Rules) were allowed to increase their
public shareholding to at least 25% within a period of 3 years in the manner
specified by SEBI. At the time of commencement of Rules, the public
shareholding of IOB was 26.20% and therefore such relaxation was not applicable
to IOB. Therefore, as per Rule 19A (1) of Securities Contract Regulation Rules,
IOB has to maintain minimum public shareholding of 25%. Considering the above
provisions, IOB is only allowed to increase its promoter shareholding up to 75%
and SEBI Takeover Regulations do not permit the Bank to increase its promoter
shareholding beyond 75%.
Amendment) Rules, 2014 (‘Rules’),
those public sector companies whose public shareholding was less than 25% on
August 22, 2014 (date of commencement of Rules) were allowed to increase their
public shareholding to at least 25% within a period of 3 years in the manner
specified by SEBI. At the time of commencement of Rules, the public
shareholding of IOB was 26.20% and therefore such relaxation was not applicable
to IOB. Therefore, as per Rule 19A (1) of Securities Contract Regulation Rules,
IOB has to maintain minimum public shareholding of 25%. Considering the above
provisions, IOB is only allowed to increase its promoter shareholding up to 75%
and SEBI Takeover Regulations do not permit the Bank to increase its promoter
shareholding beyond 75%.
In case of UBI, Regulation 3(2) of SAST 2011 is
not applicable as the GOI is already holding more than permissible limit of 75%
and the provision is applicable only to those acquirers who hold more than 25%
but less than maximum permissible non-public shareholding. Consequently, the
proviso to regulation 3(2) prohibiting such acquirer to acquire shares/voting
rights exceeding the permissible non-public shareholding is not strictly
attracted, though it impinges upon the listing condition of maintaining minimum
public shareholding.
not applicable as the GOI is already holding more than permissible limit of 75%
and the provision is applicable only to those acquirers who hold more than 25%
but less than maximum permissible non-public shareholding. Consequently, the
proviso to regulation 3(2) prohibiting such acquirer to acquire shares/voting
rights exceeding the permissible non-public shareholding is not strictly
attracted, though it impinges upon the listing condition of maintaining minimum
public shareholding.
Therefore, in both the above cases, SEBI, while
granting exemption to acquirers from making open offer, has either overstepped
its powers or exercised its discretion which is not in the interest of public
shareholders.
granting exemption to acquirers from making open offer, has either overstepped
its powers or exercised its discretion which is not in the interest of public
shareholders.
Open
Offer Violations
Offer Violations
Furthermore, Syndicate
Bank, Dena
Bank and Allahabad
Bank have also made exemption applications to SEBI, and SEBI has
overstepped its powers and passed an exemption order. In accordance with regulation
13 of SAST 2011, in respect of preferential allotment, an acquirer is under an
obligation to make a public announcement of open offer on the date on which the
board of directors of target company authorizes preferential issue of shares,
if such acquisition triggers the open offer requirement. It means the
triggering date of open offer is the date of board meeting. Syndicate Bank has
passed board resolution on August 4, 2016 approving the preferential allotment
to its promoter, i.e., Government of India (GOI) and GOI triggered the open
offer on same day as it exceeded its creeping acquisition limit of 5% (increase
from 65.17% to 72.92%). Instead of making an open offer, GOI filed an exemption
application with SEBI on August 17, 2016, which was surprisingly approved by
SEBI and exemption order was passed on September 12, 2016. SEBI has no powers
whatsoever to exempt triggered open offers. In case of Allahabad Bank and Dena
Bank also, though the open offer was triggered much earlier, an exemption
application was filed at later date, and an exemption order was subsequently passed
by SEBI. The details are as follows:
Bank, Dena
Bank and Allahabad
Bank have also made exemption applications to SEBI, and SEBI has
overstepped its powers and passed an exemption order. In accordance with regulation
13 of SAST 2011, in respect of preferential allotment, an acquirer is under an
obligation to make a public announcement of open offer on the date on which the
board of directors of target company authorizes preferential issue of shares,
if such acquisition triggers the open offer requirement. It means the
triggering date of open offer is the date of board meeting. Syndicate Bank has
passed board resolution on August 4, 2016 approving the preferential allotment
to its promoter, i.e., Government of India (GOI) and GOI triggered the open
offer on same day as it exceeded its creeping acquisition limit of 5% (increase
from 65.17% to 72.92%). Instead of making an open offer, GOI filed an exemption
application with SEBI on August 17, 2016, which was surprisingly approved by
SEBI and exemption order was passed on September 12, 2016. SEBI has no powers
whatsoever to exempt triggered open offers. In case of Allahabad Bank and Dena
Bank also, though the open offer was triggered much earlier, an exemption
application was filed at later date, and an exemption order was subsequently passed
by SEBI. The details are as follows:
|
Name
of the Target Company and Acquirer |
Date
of Board Resolution |
Date
of Application Filed |
Date
of disposal of Application |
Approximate
time |
|
United Bank of India
|
August 09, 2016
|
August 10, 2016
|
October 03, 2016
|
Nearly two months
|
|
Indian Overseas Bank
|
August 16, 2016
|
August 18, 2016
|
September 30, 2016
Exemption granted
|
One and a half months
|
|
Syndicate Bank
|
August 04, 2016
|
August 17, 2016
|
September 12, 2016
Exemption granted
|
Less than a month
|
|
Dena Bank
|
August 12, 2016
|
September 01, 2016
|
September 21, 2016
Exemption granted
|
20 Days
|
|
Allahabad Bank
|
Not given
|
April 11, 2016
|
May 12, 2016
Exemption granted
|
One month
|
In all the cases, the exemption order was passed
in a month’s time, while for disposing the other (non-public sector bank) exemption
applications SEBI has been normally taking substantial time. The time taken by
SEBI for disposing of some of the exemption applications is tabulated herein
below (Exemption Orders passed in 2016):
in a month’s time, while for disposing the other (non-public sector bank) exemption
applications SEBI has been normally taking substantial time. The time taken by
SEBI for disposing of some of the exemption applications is tabulated herein
below (Exemption Orders passed in 2016):
|
Name of the Target Company and Acquirer
|
Date
of Application Filed |
Date
of disposal of Application |
Approximate
time |
|
Asahi Songwon Colors Limited – Mrugesh
Jaykrishna Family Trust |
August 15, 2014
|
March 08, 2016
Exemption granted
|
One and a half years
|
|
Gravita India Limited- Agarwal
|
March 19, 2015
|
April 27, 2016
Exemption granted
|
one year
|
|
Wipro Limited – Hasham Investment and Trading
Company Private Limited |
August 20, 2014
|
February 03, 2016
Exemption granted
|
One and a half years
|
|
Diamond Power Infrastructure Limited – Mr.
Amit Bhatnagar |
July 14, 2015
|
March 23, 2016
Exemption granted
|
8 months
|
|
Lyka Labs Limited – Narendra Gandhi and others
|
February 05, 2015
|
March 31, 2016
Application Rejected
|
More than one year
|
This clearly demonstrates the special and
different treatment provided to public sector undertakings (specifically banks)
over the other applicants. There is no harm in granting exemption as public
sector banks are under pressure and need capital. The Government ought to have filed
such exemption applications much before the board meetings to comply with the SAST,
2011. An exemption application filed after triggering the open offer is not
maintainable as has been held by SEBI in several earlier cases. There were no
convincing reasons for SEBI to take a different stand in the matter of public
sector banks when the intention of the regulations is to treat public and
private sector companies at par.
different treatment provided to public sector undertakings (specifically banks)
over the other applicants. There is no harm in granting exemption as public
sector banks are under pressure and need capital. The Government ought to have filed
such exemption applications much before the board meetings to comply with the SAST,
2011. An exemption application filed after triggering the open offer is not
maintainable as has been held by SEBI in several earlier cases. There were no
convincing reasons for SEBI to take a different stand in the matter of public
sector banks when the intention of the regulations is to treat public and
private sector companies at par.
– Abhishek Borgikar