[Aayush Ambasht, Param Kailash and Sudiksha Moorthi are 4th Year BBA LLB (Hons.) students at Symbiosis Law School, Pune]
The 16-month long takeover saga of Religare Enterprise Limited (REL) reached its much-awaited conclusion on 14 February 2025 by way of an order of the Securities and Exchange Board of India (SEBI) following Supreme Court directions.
The controversy unfolded in early 2024 when the target company’s board had publicly expressed its opposition to the transaction. This resistance subsequently manifested in substantial delays by the board; moreover, additional disputes arose when Danny Gaekwad Developments & Investments, Florida proposed a competing offer. These complications significantly unsettled shareholders, culminating in legal challenges before the Delhi High Court and the Supreme Court.
This takeover battle has cast a spotlight on the grey areas of the extant public mergers and acquisitions (M&A) framework and the consequences of board mismanagement during such transactions. Through this post, the authors shall examine the takeover of REL, decisions of SEBI and the Supreme Court, evaluate governance concerns, and suggest mechanisms to enhance the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (SAST) in light of the issues raised.
The Religare Takeover
On 25 September 2023 the Burman Group proposed a purchase of equity shares of REL increasing their shareholding to 26%, thereby triggering an open offer under SAST. In pursuance of such trigger, a detailed public statement for acquiring the shares was made.
As a non-banking finance company (NBFC), REL required the approval of the Reserve Bank of India (RBI) for a change in control, the onus of which was on the target company. The board of the RBI refused, citing ‘fit and proper’ concerns, but SEBI intervened, and the Securities Appellate Tribunal (SAT) upheld its orders for cooperation.
The next hurdle surfaced when Gaekwad submitted a letter to SEBI for an exemption from strict enforcement of the competing offer provisions under regulation 20 of SAST. SEBI declined this application in its entirety. In a renewed attempt, an application under regulation 11(1) of SAST was filed. During the pendency of SEBI’s adjudication, shareholders approached the High Court and the Supreme Court seeking a stay on the Burman Group’s open offer.
Supreme Court’s Order
The High Court directed SEBI to reach a definitive determination on Gaekwad’s application while clarifying that no stay would be granted on the Burman Group’s open offer. The Supreme Court upheld the High Court’s decision and directed Gaekwad to deposit Rs. 600 Crore in furtherance of his offer. Additionally, SEBI was instructed to clarify the relevant date for the public announcement, determine the requisite offer price for the shares, and render a decision on Gaekwad’s application.
Key Takeaways: SEBI’s Order
SEBI’s order clarified interpretative aspects of SAST while concluding the tumultuous battle for REL. Firstly, SEBI reaffirmed that Gaekwad’s application for a relaxation of enforcement of regulation 20 was a position unsupported by SAST. The exemption under regulation 11 of SAST is limited to relief from the obligation to make an open offer, and does not extend to exemptions from the application of other provisions.
Secondly, SEBI clarified that the date of public announcement of an open offer must correspond with the date of execution of the agreement to acquire shares of the target company. Gaekwad’s contention that the date of the dispatch of the offer letter should be the date of public announcement was deemed untenable.
Thirdly, the regulator provided interpretative guidance on regulation 20(8) of SAST, emphasizing that both the original and competing offer must run concurrently to enable shareholders to exercise their choice effectively. Accommodating Gaekwad’s application would have led to an indefinite process, nullifying the intention behind regulation 20(8).
Concluding its assessment, SEBI found Gaekwad’s competing offer to be frivolous, lacking in due diligence and unsupported by adequate financial resources, characterizing it as a deliberate attempt to obstruct the open offer process.
Analysis
A Missed Distinction? Supreme Court’s take on SAST Regulations
SEBI’s order reflects a straightforward interpretation of SAST, leaving little room for confusion. The ambiguity surrounding the determination of the date of public announcement is, therefore, quite obscure. A plain reading of regulation 13(1) of SAST unequivocally indicates that the date of the public announcement must coincide with the date on which the acquirer agrees to acquire the shares. The Supreme Court failed to delineate between the date of public announcement and dispatch of the offer letter despite the regulations exhibiting no ambiguity in this regard. This omission by the Court raises doubts regarding its approach to the regulatory framework.
Furthermore, the Court’s directive requiring Mr. Gaekwad to deposit Rs. 600 crores, coupled with its implicit suggestion to SEBI to entertain his application despite it being prima facie in violation of SAST, appears incongruent with the essence of the regulations. The misinterpretation in this matter risks establishing precedents that could dilute the efficacy of the regulatory framework.
Regulatory Bottlenecks and Shareholder Democracy in Takeovers
Competing offers in the Indian takeover landscape have remained limited despite the underlying intent of SAST to promote shareholder democracy. As highlighted by the SEBI Whole-Time Member (WTM):
“Even if the applications are made by the applicant for such approvals, there is no certainty that the approvals would be granted in the first place. Further it is noted that in case the Applicant applies for various regulatory approvals, the processing of such applications is likely to take time.”
This challenge is exacerbated in cases involving approvals from multiple regulators, where delays become inevitable due to conflicting regulatory philosophies, akin to the one seen in the current matter between RBI and SEBI.
A critical question, which has recently garnered significant media attention and sparked unnecessary speculation, is whether SEBI prioritized procedural compliance over the broader objective of maximizing shareholder value. We believe that this approach is inherently misplaced owing to the fact that Mr. Gaekwad’s offer lacked commitment, financial capacity, and regulatory compliance, thereby ultimately undermining its credibility. While his offer did hinge on a higher price, this alone is insufficient to guard shareholder’s interests.
Governance Challenges in Open Offers
The REL board’s actions during the takeover process were emblematic of poor corporate governance. Instead of facilitating a fair cash-out opportunity for shareholders, the board’s actions resulted in the takeover to proceed at a 7% discount to the market value.
As highlighted by the WTM, the absence of an explicit provision imposing responsibility on the target company to file for regulatory approvals has proven to be a significant lacuna in the SAST framework. While this obligation is not explicitly outlined, it is implicitly embedded in Chapter -IV of SAST and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, which require boards to act in a manner that prioritizes shareholder interests.
Despite this obligation, REL’s board exploited regulatory gaps, extending the average T+50 timeline to a nearly two-year ordeal. On this note, imposing greater responsibility on target companies during open offers becomes imperative. Although SEBI has clarified that the absence of an explicit provision does not grant target companies discretionary authority to obstruct the process, it is crucial for more nuanced guidelines pertaining to such obligations. Provisions akin to regulation 18(11) of SAST could be introduced to formalize this obligation and prevent the process from devolving into a power struggle between the acquirer and the board.
Offer Pricing and Delays
Regulation 8 of SAST calculates the open offer price by relying on the highest price derived from specified calculations over a short period of time preceding the offer. While this is effective for timely offers, it falters during delays, thereby leading to a significantly undervalued price. This undermines the very purpose of open offers – to provide the shareholders the option to exit at a market-competitive price.
Although regulation 18(11) imposes a “no-fault liability” on acquirers to pay 10% interest to shareholders for a delay, the SAT in Sterlite Opportunities and Ventures Limited v. SEBI exempted delays beyond the acquirer’s control. Although REL’s case did involve approvals beyond the acquirer’s control, the delays stemmed from board inaction. Unlike the delay in the above case which was due to lack of approvals by non-resident shareholders, the crux of the REL issue boils down to the board’s fiduciary duties.
The REL saga exposes a critical gap in SAST – its failure to hold boards accountable for obstruction owing to promoter interests’. While regulation 18(11) burdens acquirers with penalty for delays, it overlooks board-induced disruptions, enabling unchecked discretionary powers. Consequently, the pricing mechanism under regulation 8 should be revised to allow for revaluation in cases of significant delays to reflect market value.
The Way Forward
The conclusion of the REL Takeover marks not an end, but rather a critical juncture in the evolution of India’s public M&A framework. The Supreme Court’s and SEBI’s intervention, while ultimately leading to the last chapter of the open offer, highlighted ambiguities within the Regulations. Global frameworks like Singapore which offers a centralized “one-stop shop” system, or a longer timeframe to finalize competing offers mirroring the 60-day framework under the UK’s Takeover Code could prove beneficial to balance flexibility for potentially higher bids while maintaining a structured process.
Furthermore, this saga, far from being a mere corporate squabble, has unveiled vulnerabilities within the M&A ecosystem – vulnerabilities that, if left unaddressed, threaten to undermine shareholder confidence. The most glaring deficiency lies in the inadequacy of corporate governance mechanisms to prevent boards from neglecting the sacrosanct rights of shareholders. REL board’s conduct resulted in a prolonged ordeal that resulted in a lackluster market response, showcasing the urgent need to safeguard shareholders during takeovers.
Going forward, a multi-pronged approach is vital to address the exposed shortcomings. This necessitates a fundamental refocus on enhancing the transparency and efficiency of the open offer process, fortifying corporate governance standards, and ensuring that boards are held accountable for their conduct during a takeover process.
– Aayush Ambasht, Param Kailash & Sudiksha Moorthi
