Two separate but recent developments underscore the need to treat the banking sector differently when it comes to compliance with the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the “Takeover Regulations”). While the first relates to the applicability of the Takeover Regulations to capitalization of banks, the second relates to restructuring debts of borrower companies that might trigger the Takeover Regulations in relation to those companies.
Exemption for Bank Capitalization
By way of an order dated September 12, 2016, the Securities and Exchange Board of India (“SEBI”) granted an exemption to the capitalization of Syndicate Bank (the target) whereby the Government of India (being the controlling shareholder of the target) was dispensed with any obligation to make a mandatory offer to the minority shareholders on account of an increase in the Government’s stake in the target by way of a creeping acquisition.
On April 1, 2016, the Government of India held 65.17% shares in Syndicate Bank. On May 5, 2016, the Government subscribed to additional shares in the target that increased its shareholding to 69.32%. No mandatory offer was required as the acquisition was within the 5% creeping acquisition threshold for controlling shareholders as prescribed in regulation 3(2) of the Takeover Regulations. Now, however, the Government intends to subscribe to additional shares in order to increase its stake to 72.92%. This would constitute an increase of the Government’s stake by more than the 5% creeping acquisition threshold for the current financial year as prescribed in regulation 3(2). Hence, the target preferred an application to SEBI for exempting the Government from the open offer requirements.
SEBI granted an exemption order permitting the Government to acquire shares beyond the 5% creeping acquisition threshold without making an open offer to the minority shareholders. This is essentially because the Government’s acquisition is part of its effort to capitalize all public sector banks to comply with the Basel III norms.
Proposal for Exemption for Distressed Companies
A report in today’s Economic Times indicates that the lending community in India has approached SEBI seeking an addition exemption to enable companies that are in distress to be taken over by potential acquirers thereby resulting in a change of control and management. Currently, the Takeover Regulations permit banks, financial institutions or other secured lenders to convert their loans into equity shares of their listed borrowers without attracting the mandatory open offer requirements. This is by virtue of an automatic exemption under regulation 10(1)(i) of the SEBI Takeover Regulations, a provision that was inserted in May 2015. That only allows for conversion of loans into equity by the lenders, but it does not permit others to take over management of distressed targets. This perceived gap is sought to be filled through the proposal that is before SEBI.
If enacted, the new exemption would allow potential investors to take over the management of distressed companies without making an open offer. This will enhance the possibility of recovery by banks of their monies lent to the target. It will also enable outside investors to take over distressed companies, and infuse funds to turn around the business, rather than to spend monies on providing exit opportunities to minority shareholders through the open offer. This may also have the effect of addressing minority concerns, as they may be better off remaining in the company with a higher chance of enjoying value in due course, as opposed to facing an open offer at relative low prices given the distressed situation faced by the targets.
Although such a mechanism would increase the prospects of recover for distressed companies, it remains to be seen as to what conditions SEBI will impose even if it does decide to introduce the exemption that the lending community has sought for.