A recent informal guidance issued by the Securities and Exchange Board of India deals with the questions pertaining to the intersection of the SEBI Takeover Regulations of 2011 and the process of complying with the minimum public shareholding in listed companies. In the case involving R Systems International Limited, the acquirer made an open offer and acquired certain shares of the target company so as to hold 34.82% shares. On the other hand, the promoters of the company held 50.17%, thereby leaving the public shareholding at 15%, which is less than the required minimum of 25%. In this case, an additional fact of relevance was that the acquirer was not in any way connected with or acting in concert with the promoters.
The question that arose was whether pursuant to Reg. 7(4) of the SEBI Takeover Regulations, the acquirer was required to reduce its shareholding so as to ensure that the target company complies with the minimum public shareholding norms. After a consideration of the various legal provisions (which are discussed in detail in SEBI’s informal guidance letter), SEBI came to the conclusion that the acquirer was to be treated as part of the “public”, thereby fulfilling the minimum public shareholding norms. The acquirer was therefore not required to reduce its shareholding in the target.
While this ruling favours potential acquirers, it leaves some possibilities and questions open. For example, it may be possible for a single investor to hold a significant percentage (in this case nearly 35%) and still be treated as part of the “public”. Moreover, the question as to whether such a large shareholding (through which negative control can be exercised by blocking special resolutions) would amount to “control” has not been specifically answered, although one can deduce from the result of the informal guidance that SEBI does not believe this to amount to “control”. This appears to depart to some extent from its stance in other cases such as Subhkam Investments, but that may also be relatable to the facts of the specific case where the promoters held 50%. In other words, the implication is that a shareholder holding a significant percentage of shares may not have much control if that person’s shares are held in the shadow of a much larger group of shareholders such as the promoters.