Thursday, May 9, 2013


1.         Exemption from Takeover Regulations for Gift of Shares to Family Trust

SEBI has granted an exemption to an acquirer from making an open offer under the SEBI Takeover Regulations in the case involving Gujarat Organics Limited (the company). In that case, the promoter Mr. Ashwin S. Dani, owns 71.15% shares in the company, and proposes to transfer it by way of a gift to a private trust HD Trust, of which he is one of the trustees. The beneficiaries of the trust are his family members. The acquirer, HD Trust, does not hold any shares in the company, while Mr. Dani has been shown as a promoter for more than 3 years. SEBI granted the exemption for the transfer because this was an inter se reorganization of holdings that does not alter the control of the company in any way. Moreover, it was a gift and merely a private family arrangement to facilitate succession planning.

This is understandable because there is no change of effective control of the company, and an exemption order was sought from SEBI only because the transaction may not have satisfied the technical requirements for an automatic exemption.

2.         Another SEBI Adjudication Order in the IPCL Insider Trading Case

Last month, we had discussed an adjudicating order of SEBI finding that the charges of insider trading were not established against Mr. Manoj H. Modi and Mrs. Smita M. Modi in relation to the trading of shares in Indian Petrochemicals Corporation Limited (IPCL). Now, on a related set of facts and circumstances, another adjudicating order of SEBI has found that a charge of insider trading is sustainable against Reliance Petroinvestments Limited (RPIL), the controlling shareholder of IPCL, and also imposed a fine of Rs. 11 crores on RPIL. The facts relating to the information and announcements are essentially the same as that contained in the previous post, and are not repeated here.

From a legal perspective, SEBI’s assertions are based on two grounds. The first is that RPIL is a “deemed connected person” and second that it is “reasonably expected to have access to unpublished price sensitive information” with respect to IPCL. This is necessary to establish RPIL as an insider with respect to IPCL. On the first count, SEBI found that RPIL and IPCL are companies under the same management as they are under the common control of Reliance Industries Limited, which is a fact-based determination. On the second count, SEBI found that as a controlling shareholder of IPCL, RPIL is naturally said to have access to unpublished price sensitive information (UPSI) relating to IPCL:

25. The above facts establish that RPIL was having control over IPCL. It may therefore, be concluded that by virtue of RPIL having control over IPCL, it was reasonably expected to have access to UPSI of IPCL. Noticee being the promoter having control over the company holding approx. 46% shares of IPCL is inherently expected to have access to UPSI. Noticee being in such a position it is unacceptable that the Noticee was not aware of such major/ important decisions of the company IPCL.

This conclusion suggests that any promoter entity that falls within the definition of a “deemed connected person” would generally have access to UPSI in relation to the investee company and that nothing more needs to be shown.

3.         Interpretation of the MAC Clause in Financing Documentation

The England and Wales High Court passed a ruling, which interprets the material adverse change (MAC) clause in financing documentation. In that case, the lender withheld further funding based, among other things, upon the occurrence of a MAC event that adversely affected the borrowing company. Although the judgment is quite long and involves ascertainment of detailed facts, the interpretation of the MAC clause is summarised in the judgment as follows:

364.     In summary, authority supports the following conclusions. The interpretation of a "material adverse change" clause depends on the terms of the clause construed according to well established principles. In the present case, the clause is in simple form, the borrower representing that there has been no material adverse change in its financial condition since the date of the loan agreement. Under such terms, the assessment of the financial condition of the borrower should normally begin with its financial information at the relevant times, and a lender seeking to demonstrate a MAC should show an adverse change over the period in question by reference to that information. However the enquiry is not necessarily limited to the financial information if there is other compelling evidence. The adverse change will be material if it significantly affects the borrower's ability to repay the loan in question. However, a lender cannot trigger such a clause on the basis of circumstances of which it was aware at the time of the agreement. Finally, it is up to the lender to prove the breach.

The MAC clause has been extensively litigated in the last few years following the financial crisis, especially in M&A that is supported by acquisition financing.


Vasudev Devadasan said...

Can you please provide the name of the case in Point no 3?

V. Umakanth said...

@Vasudev Devadasan. The details of the case and a link to the decision are available at