Tuesday, November 4, 2008

Exercise of Share Warrants and triggering of open offer - whether? when? at what offer price? - SAT decides

SAT has recently decided here on the issue on whether, when and at what price would an open offer have to be made when Share Warrants are exercised. I am highlighting here just some interesting facts and decisions, simplifying them a little, to emphasize some interesting issues.

The Promoter of the target company, Genesis International Corporation Limited, was issued 3530000 Share Warrants therein at an Exercise Price of Rs. 19 per share in early 2007. The Promoter exercised Share Warrants in 2008 whereby his holding increased from 50.48% to 60.48%. He made a public announcement for open offer but there were disputes with SEBI regarding pricing. The Promoter submitted that the offer price should be Rs. 19 being the Exercise Price and also for this purpose calculating the price with reference of the date of allotment of Share Warrants. SEBI argued that the reference date should the date of allotment of the equity shares on exercise of the Share Warrants or the date of the public announcement for the open offer (it actually held to be the latter though the difference was of a few days only).

The difference between the open offer consideration as per these two prices, as per the Promoter, was Rs. 24 crores, apparently apart from interest that may arise. (the price determined by SEBI is not known but I did some back of the envelope reverse calculations and this price appears, assuming I am right, to be about Rs. 102 as compared to Rs. 19).

It appears that there was no dispute on whether an open offer arises in such facts or not (although this issue otherwise also appears to be well accepted, this decision is a good reference of record of this point).

The issue rather was whether the open offer arises when the Share Warrants were allotted or when the shares were allotted on their exercise. SAT held that it is when the shares, which carry the voting rights, are allotted that the open offer gets triggered. SAT observed, We agree with the learned senior counsel for respondent no.1 that it is the acquisition of voting rights that triggers the provisions regarding public announcements and public offers contained in the Regulations. Acquisition of securities without voting rights, including convertible warrants as in the present appeal, will not, by itself, necessitate any public announcement or public offer.

SAT further referred to various provisions and concluded Therefore, in the present case, the requirement of public announcement arises only with the allotment of shares and not with the allotment of warrants.

The answer to the issue of pricing then would logically follow and SAT held accordingly that Therefore, the reference date for computing the offer price should be 28.6.2008, the date of the BoD meeting when the shares were allotted and not 16.12.2006, as the appellant has taken nor 21.6.2008, the date of the public announcement, as decided by respondent no.1

Note the fine distinction, though of few days, drawn by SAT. It held that it is the date of the Board Meeting where the shares were allotted that would be the reference point and not the date of the public announcement for the open offer. With due respect, I am not sure how right this view is but see the decision where SAT has given detailed reasoning in paragraph 7 for this view.

SAT finally held that SEBI should issue a fresh communication within 2 weeks and allow a reasonable time for opening the offer and thereafter only provide for interest. With due respect, I submit as follows. The decision of SAT is dated 15th October 2008. Let us say that the offer starts on 1st January 2009. If one compares with the date held by SAT of June 2008, then shareholders would receive almost Rs. 30 crores (again as per rough back of the envelope calculations) after six months because the acquirer chose to litigate the issue and which was decided against him. Even at the 10% interest rate decided by SEBI (which the Honble SAT does not appear to have changed), the interest comes to Rs. 1.50 crores. With due respect, I submit that such interest, which is not costs that are awarded or not awarded as per facts, should have been required to be paid in the circumstances. I am not saying at all that the appellant was wrong in pursuing the matter in appeal I am asking why should the shareholders suffer on this account? Also, surely, the appellant had full use of the money and, perhaps, as a cautious person, put it in interest bearing fixed deposit.

Having said the above, it is possible that, in this particular case, though exact facts are not available, the shareholders may not have really suffered. This is because, as per statement of the appellant recorded in the decision, the higher price was on account of substantial increase in the price recently. However, open offer pricing usually applies the average price of an earlier period and therefore, possibly, the recent price could have been much more  than the higher open offer price held by SAT (yes, I admit my laziness in not looking up the price tables of this period - J). In that case, they had opportunity to exit at such higher market price and so in reality may not have reason to argue that they have suffered a lot, I respectfully submit again that the issue of interest remains a matter of concern.

All in all, I think the decision settles for the record some issues that are regularly faced by listed companies and Promoters.

© Jayant Thakur, CA