Thursday, March 21, 2013

Acquisitions Beyond 75% Shares in a Company: SEBI’s No-Action Letter

[The following is a guest post from Yogesh Chande. Yogesh is a Consultant with Economic Laws Practice, Advocates & Solicitors. The views expressed by the author are personal.]

Recently, the Corporation Finance Department of SEBI issued a “no-action letter” in terms of SEBI (Informal Guidance) Scheme, 2003 for proposed acquisition by the promoters/promoter group of the target company up to 75% (from the existing shareholding of 50.32%) of the shares carrying voting rights, while the request for “no-action letter” was actually for acquiring shares with voting rights which would take the promoter/promoter group shareholding in the target company beyond 75%.

It may be noted that, an informal guidance in the form of a “no-action letter” or an “interpretive letter” is issued by a department of SEBI and constitutes the view of the department, and is not binding on SEBI, though SEBI may generally act in accordance with such a letter. An informal guidance cannot be construed as an order of SEBI and is not appealable before the Securities Appellate Tribunal under section 15T of the SEBI Act, 1992.

In the present facts, the application for “no-action letter” was made because, while the proposed acquisition was a permitted and an exempted [from an open offer] acquisition under regulation 10(4)(f) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Regulations), the same was not in terms of the proviso to regulation 3(2) of the Takeover Regulations.

In terms of regulation 10(4)(f) of the Takeover Regulations, acquisition of shares in a target company from a venture capital fund (VCF) or category I Alternative Investment Fund (AIF) or a foreign venture capital fund investor (FVCFI) registered with SEBI, by promoters pursuant to an agreement between such VCF and AIF or FVCFI and such promoters, is exempted from the obligation to make an open offer under regulation 3 and regulation 4 of the Takeover Regulations, subject to fulfilment of certain conditions.

In terms of the proviso to regulation 3(2) of the Takeover Regulations, an acquirer falling under regulation 3(2) of the Takeover Regulations, is not entitled to acquire or enter into any agreement to acquire shares or voting rights exceeding the maximum permissible non-public shareholding i.e. 75%.

The term “no action letter” as described in clause 5(i) of the SEBI (Informal Guidance) Scheme, 2003 reads as follows:

No-action letters: in which a Department of SEBI indicates that the Department would or would not recommend any action under any Act, Rules, Regulations, Guidelines, Circulars or other legal provisions administered by SEBI to the Board if the proposed transaction described in a request made under para 6 is consummated.

Considering that the applicant had specifically sought a “no-action letter” from the department of SEBI, one would ideally expect a response from the department stating that it would either recommend or not recommend any action to SEBI if the proposed acquisition was consummated i.e. acquisition from 50.32% to 95.15% (being more than 75%), instead of issuing the present “no-action letter” for acquiring up to 75% [clause 4(iv) of the response to the applicant], which never warranted seeking a “no-action letter” under the SEBI (Informal Guidance) Scheme, 2003, as acquisition from 50.32% to 75% is in any event permitted and exempted in terms of regulation 10(4)(f) of the Takeover Regulations, read with the proviso to regulation 3(2) of the Takeover Regulations.

This informal guidance effectively means that, the department would have recommended an action, if the proposed acquisition by the promoter/promoter group beyond 75% was consummated.

- Yogesh Chande

3 comments:

vswami said...

Impromptu

The impression gathered is that ‘no action letter’ (NAL) is not conclusive by itself; for, it is left to the ‘discretion’ of the Departmental authority to decide whether or not to recommend any action in accordance with the guidelines contained therein

On that premise, anyone having a concern even remotely, is most likely to be left bewildered, -

as to what really is the concept of ‘ no action letter’ or its intended useful purpose; and

in any view, why it is supportable on moral or ethical grounds.

On a quick reaction, one is driven to believe that this is one of those bizarre instances, commonly come-across in other regimes e.g. the law on income-tax, where the deciding authority is vested with the so-called ‘discretionary power’; creating a sort of ‘cat-on-the wall’ situation.As, going by one’s experience, instances are not wanting, in which any such discretion, if not ‘justly’ exercised, have led to socially unpalatable repercussions / consequences- (intend to add on).

The learned author of the write-up, obviously knowledgeable in such SEBI related matters, should, in one's belief, be able to throw more light / air his views on following:-

a) Desirability or acceptability of the concept of ‘NOL’ itself; and
b)in any event, will not, depending on the final decision,- to recommend action or no-action.-or that by itself be appealable to the tribunal.

Open to be corrected, in case the implications of the concept of NAL and/or its ramifications have to be understood from a different perspective!

vswami said...

Add-on

1. Old saying,- discretion is the better part of valour . That, however, is not to be confused with power (s) of ‘discretion’ vested in any ‘authority’, to be exercised for discharging his duties and responsibilities as expected of him by an enactment or rule, or the like.

Even while vesting any such power, it needs to be ensured that it is circumscribed / reasonably limited through appropriate in-built checks and balances, clearly spelt out; lest, is bound to be potent with and result in deleterious consequences.

For an appreciation,recommended to look up:

"Discretion: Root cause of Corruption " - @taxguru.in

Expert essay - @http://www.studymode.com/essays/Discretionar

2. Having said that CFC is a department of SEBI, has been further noted that any informal guidance in the form of NAL or ‘interpretive letter’ issued by the former is, not being an order of, not ‘binding’ on the latter. Unable to reconcile the two mutually contradicting observations, seemingly lacking in clarity. Unless, to put it in a jugular vein, one is expected to be convinced that wagging the dog by its tail is no less natural than dog wagging its tail.

Beg to be excused, if not being on the same wave length is the cause for one’s confusion.

Arjun Menon said...

agreed