Consolidation of Promoter Holdings: Exemptions from Takeover Offer

The SEBI (Substantial Acquisition
of Shares and Takeovers) Regulations, 2011 (the “Takeover Regulations”) provide
for a series of exemptions involving consolidation of promoter shareholdings
whereby acquirers of shares in such consolidation efforts need not make a
mandatory takeover offer to acquire the shares of the remaining shareholders.
Apart from specific promoter-oriented exemptions, promoters can also avail of
other general exemptions that are seemingly broader in nature. One such
involves restructuring of shareholdings of a target company through a scheme of
restructuring, which is exempt from mandatory offer requirements under
regulation 10(1)(d)(iii) of the Takeover Regulations.
The above exemption applies when there
is a transfer of shares in a target company that is occasioned by a scheme of
arrangement or reconstruction (including amalgamation, demerger) not involving
the target company pursuant to the order of a court or other competent
authority pursuant to applicable law, so long as two conditions are satisfied:
(i) the cash component of the transaction is no more than 25% of the
consideration paid under the scheme, and (ii) following the transaction, those
who held the entire voting rights prior to the scheme continue to hold at least
33% of the voting rights in the combined entity.
This exemption, while quite
specific, is understandable. At the outset, it is available only when the
transaction is undertaken through a scheme of arrangement that seeks the
imprimatur of a court or other competent authority, which indicates an element
of oversight. Moreover, the two conditions stipulated above would ensure that the
transactions represent genuine consolidation or restructuring efforts within a
group rather than those that seek to effect changes in control of the target
An interpretation of regulation 10(1)(d)(iii)
was sought from the Securities and Exchange Board of India (“SEBI”) in the form
of an informal
guidance request
from Rajdhani Investments & Agencies Private Limited,
a shareholder holding 0.01% shares of DLF Limited, the target company. A total
of 11 entities (including Rajdhani) hold 54.08% shares of DLF. It is proposed
that 10 entities merge into Rajdhani by way of a scheme of arrangement, such
that Rajdhani’s shareholding will increase from 0.01% to 54.08%. This is
because the shares in DLF held by the 10 entities will be transferred by way of
the scheme to Rajdhani. The 10 entities will cease to exist after the amalgamation,
and as part of the transaction Rajdhani will issue shares to the shareholders
of those entitles. All the 11 entities are controlled (either directly or
indirectly) by the Singh Family Trust through its trustees, Mr. Rajiv Singh and
Ms. Kavita Singh, who have been classified as promoters or promoter group of
DLF since its initial public offering in 2007.
It is on these grounds that Rajdhani
sought a clarification from SEBI on the applicability of regulation 10(1)(d)(iii),
which SEBI responded to positively in its informal
guidance letter
, stating that the transaction will be exempt under the
provision so long as the scheme is approved by the court or other appropriate
authority. Moreover, Rajdhani has clearly asserted that the two conditions
stipulated in regulation 10(1)(d)(iii) (as discussed earlier) stand satisfied
on the facts of the present case.
In all, this case seems to be a
straightforward one that encompassed the exemption requirements of regulation 10(1)(d)(iii)
in their entirely, especially because both conditions stipulated therein have
been satisfied. This seems to be a classic case that the exemption is intended for,
i.e., consolidation of shareholdings (especially by promoters) through use of
the scheme of arrangement mechanism. At one level, it is surprising why
Rajdhani even needed to approach SEBI to seek a clarification given that the transaction
complied on the face of it with all the requirements of the exemption, but the
parties may have decided to mitigate any risk and avoid any potential disputes
by seeking SEBI’s informal guidance.

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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