Tuesday, October 7, 2008

Unique avoidance of Takeover Regulations in RIL?

How can Promoters hold shares in a listed company but still ensure that they are not counted as part of Promoters’ holding for purposes such as Takeover Regulations which place various limits over creeping acquisitions, maximum holding, etc.?

While there could be many ways, but to talk of something current, if one goes by comments (here) by CNBC’s correspondent Sajeet Manghat regarding RIL , it seems Reliance has as per this report done something that appears to achieve this.

Sajeet says:-

RIL has nearly 14% of its equity under treasury stock and classified under promoter and PAC. The treasury stock is held under petroleum trust and eight corporate bodies. RIL has converted eight corporate bodies into its subsidiaries. Subsidiaries lose promoter status and voting rights under regulations. . Promoter stake has fallen to 44.8% from over 51%. Post warrant conversion, RIL promoter stake has gone up to 49%. RIL promoter voting right also goes up to 52%.

The report talks of many things but one thing that is relevant is regarding conversion of certain corporate entities holding shares of RIL and forming part of the Promoters Group of RIL into subsidiaries of RIL. Thus, by doing this, such holding went out of the “legal” holding of the Promoters.

What does this mean in terms of basis of law and some consequences? Let us discuss this conceptually and academically, avoiding facts in RIL’s and their Promoters’ case which are not known.

The SEBI Takeover Regulations and other legal requirements consider the Promoters’ shareholding in a listed company and place various types of controls over them. Such Promoters Group may consist of corporate entities too.

Section 42 of the Companies Act, 1956 essentially deals with restrictions on holding of shares in the parent company by a subsidiary and also provides that shares already held by the subsidiary in the parent would not carry any voting rights.

Thus, if one of the companies forming part of the Promoters Group of a listed company becomes a subsidiary of such listed company, the shares held by such subsidiary lose voting rights in the manner stated in Section 42.

SEBI Takeover Regulations define shares as only those that carry voting rights. The argument possible therefore (though not without some weak points) is that the shares held by the corporate entity that is now a subsidiary of the parent would not carry any voting rights and therefore would not be counted as shares for the purposes of the Takeover Regulations.

Several questions arise from the above with interesting consequences. Can the Promoters hold more than 55% shares and thus avoiding the upper limit? Can the Promoters acquire shares through such subsidiary and thus avoid the 5% creeping acquisition limits? And so on.

It is interesting to see how two wholly unconnected provisions of law can join up to create a unique situation!

Jayant Thakur, CA



HOw the subsidiaries lost their promoter status. i feel because they hold shares in the parent company being companies
i request for clarification

Jayant Thakur, CA said...

Hi Apser,

You are right. When a subsidiary holds shares in the parent, then, under section 42, they lose their voting rights. Reading the Takeover Regulations and Section 42 together, therefore, they would lose, so the theory goes, their promoter status.

Jayant Thakur

Gauri Manglik said...

Jayant - The promoter status is irrespective of voting rights and thus, I would not agree with you when you state that the subsidiary will not be counted as part of the promoter group.

Jayant Thakur, CA said...

Yes, Gauri, you are right, Thanks!. In RIL's case, going purely by Sajeet comments, it appears though that the extra step to lose even the promoter status has been taken.