Monday, March 18, 2013

Special Circumstances for Exemption from Takeover Offers

In the last few days, SEBI issued two exemption orders and one informal guidance based on requests made by acquirers not to be obligated to make mandatory open offers under the SEBI Takeover Regulations due to the existence of special circumstances. This post briefly discusses each of these situations and the rationale for SEBI’s views.

Forfeiture of Shares

In an application in the case of Prima Industries Limited, the company sought exemption on account of increase in the promoters’ shareholding from 60.13% to 71.36% due to a forfeiture of shares by the company. SEBI granted the exemption. This was largely due to the presence of certain specific factors that warranted such exemption.

First, there was no “acquisition” of shares by any shareholder. The increase in the promoters’ shareholding was an incidental result of the forfeiture of shares. Although this is akin to buyback of shares, the automatic exemption under Reg. 10(4)(c) is available only to a buyback and not forfeiture; hence the specific exemption request.

Second, the forfeiture was the result of notice given to shareholders, to which no response was received. It was found that the company had duly complied with the process of forfeiture.

Third, there was no change in control of the target company.

There are valid reasons for grant of exemption, and it is understandable that SEBI accepted the company’s request.

Increase in Government Shareholding

The second exemption order pertains to Central Bank of India. A request was made on behalf of the Government of India (GOI) to increase its shareholding in Central Bank of India from 79.15% to 85.31% without the requirement of making an open offer to the other shareholders. The purpose of increase in the bank’s capital was to ensure that it was able to maintain the required Tier 1 capital to risk-weighted assets ratio (CRAR) in accordance with the Basel II norms. The issue of shares to GOI was approved by the board and shareholders of Central Bank of India.

SEBI found it fit to grant GOI an exemption from making the open offer as:

the infusion of funds by the GOI would enable the Target Company to achieve the 8% Tier I CRAR in accordance with the BASEL II guidelines. Higher CRAR is a factor that represents that a bank or a financial institution has sufficient capital in order to keep it out of financial difficulty and protect the interest of its depositors and in turn the economy.

Of course, in this case too, there was no change in the control of the company. Nevertheless, SEBI’s reasoning seems to have been motivated by the nature of the entity, being a public-sector bank, and the financial difficulties that it may face without the exemption, rather than the on the merits from a takeover perspective keeping in mind the interests of the minority shareholders.

Gift of Shares

In the case of OCL Iron & Steel Limited, an application was made to SEBI for informal guidance. This case involved a transfer of shares by two sisters in unlisted companies (that in turn held shares in the listed target company). The shares were transferred by a way of a gift to their brother who was not part of the promoter group. This could result in a takeover of the target company through the application of the chain principle.

SEBI found that this scenario was within the exemption under Reg. 10(a)(i) as it was an inter se transfer between “immediate relatives”. Moreover, being a gift, there was no acquisition price involved. However, SEBI confirmed the exemption subject to compliance with the requisite disclosure norms under sub-regulations (5), (6) and (7) of Reg. 10.

In this case, the informal guidance confirming the exemption is justified, particularly because the transfer is among immediate relatives.

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