Friday, October 21, 2016

Withdrawal of Open Offer: A Debate Rekindled?

[The following post is contributed by Saumya Bhargava & Prateek Suri, who are Associates at AZB & Partners, New Delhi. Views expressed are personal.]

[In an earlier post dated August 5, 2016, we had discussed an order relating to the open offer of Jyoti Limited in the context of circumstances under which an open offer is allowed to be withdrawn in India]

Public announcement of an open offer often leads to a frenzy in the securities market. Stock prices are likely to surge and investors are seen closing strategic transactions. However, not all open offers end up being successful. In the last three years, India Inc. has witnessed the failure of some open offers and attempts at withdrawal of some others. Instances of the latter have led to unique consequences as the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“2011 Regulations”) provide for very limited circumstances under which an open offer may be withdrawn. The rule is that open offers are sacrosanct except in exceptional circumstances, like death of an acquirer or refusal of statutory approvals, which are situations specifically carved out in the 2011 Regulations.[1] This is because such withdrawals have an adverse impact on the market and on the interest of investors. The securities market regulator, Securities and Exchange Board of India (“SEBI”), with its twin objectives of protection of interests of investors and promotion of growth of the securities market, has residual discretionary power under the 2011 Regulations to decide which cases merit withdrawal.

The Supreme Court of India and the Securities Appellate Tribunal (“SAT”) have consistently taken the view that the exercise of such discretionary power is restricted to cases similar to the specific exceptions in the 2011 Regulations and the 1997 Regulations (like the ones enumerated above) which fall under the ambit of “impossibility”. SEBI has followed such interpretation in its order issued on August 1, 2016 in the case of Jyoti Limited. Such an interpretation may have harsh ramifications on the atmosphere for mergers and acquisitions in India. The interpretation forces acquirers to bear risks attached with an open offer despite occurrence of circumstances beyond its control, for example, discovery of fraud after the public announcement, which appears to have transpired in the case of Nirma Industries Limited (in 2013), where the Supreme Court did not permit withdrawal. Such an interpretation also effectively leaves acquirers stranded, when the objectives of proposed takeover offer become futile, owing again to reasons outside the control of the acquirer, like delay caused by SEBI in granting approval required for the open offer to succeed. This has especially proved true in cases of voluntary offers. In this context, this post discusses the legal position adopted by the Supreme Court in its interpretation of sub-regulation 27(1)(d) of the 1997 Regulations (and its parallel, being sub-regulation 23(1)(d) of the 2011 Regulations), which deal with SEBI’s discretionary power to approve withdrawals of open offers.

In the matter of Jyoti Limited, SEBI has squarely applied the Supreme Court’s interpretation expressed in the case of Nirma Industries Limited (in 2013) and Akshya Infrastructure Limited (in 2014) (which relates to the 1997 Regulations) to the matter of Jyoti Limited (which relates to the 2011 Regulations). The fundamental question is whether situations where circumstances beyond the control of the acquirer render the offer meaningless can be considered by SEBI under the umbrella of “such circumstances which in the opinion of SEBI merit withdrawal”? For instance, in the case of Pramod Jain decided by SAT (in 2014), SEBI had delayed the approval of the draft letter of offer by two years. During such period, not only did the health of the company decline significantly (which could have been possibly revived by a timely takeover as pointed in the minority opinion of SAT), but the promoters of the target company also squandered its valuable assets and siphoned funds. Another example is the case of Nirma Industries Limited where, after the public announcement for takeover was made by the acquirer, a brazen fraud was discovered by a special investigative audit, which arguably could not have otherwise been discovered by the acquirer. In both these situations the objectives of the acquirer(s) behind making the offers were rendered meaningless, leading to a virtual defeat of the proposed offer.

However, the Supreme Court (Nirma Industries Limited and Akshya Infrastructure Limited), the SAT (Pramod Jain) and now SEBI (Jyoti Limited) refused withdrawal of the respective open offers. They reasoned that such situations would not be covered by the sub-regulation because of a statutory rule of interpretation, ejusdem generis, which essentially means that when a general word/phrase follows a list of specific words/phrases, the general word/phrase would be interpreted to include only items of the same class as those listed before it, unless there is an indication of a different legislative intent. If there is such an indication, the principle is not applicable. The Supreme Court, in Nirma Industries Limited, observed that the first two sub-regulations of the 1997 Regulations form a common genus of impossibility: i.e. (i) the statutory approval(s) required have been refused and (ii) the sole acquirer, being a natural person, has died. The Supreme Court therefore reasoned that the principle of esjudem generis applies and consequently the expression in the sub-regulation was construed to be restricted only to situations that make it impossible for the acquirer to fulfill the public offer.

The Supreme Court may have failed to take note of the possibility of a different legislative intent behind Regulation 27. The Regulation 27 (as part of the 1997 Regulations) was amended in 2002 pursuant to a recommendation to delete a sub-regulation 27(1)(a) (that permitted withdrawal of an open offer consequent upon a competitive bid) by the Bhagwati Committee to ensure effective protection of interest of the shareholders. It is well settled that, before applying the principle of ejusdem generis, the whole text must be taken into consideration to scrutinize any possibility of a different legislative intent. If one considers Regulation 27 as it originally existed prior to the amendment, it would be clear that a common genus of impossibility did not exist in the sub-regulation. This is because the deleted sub-regulation does not qualify the criteria of “impossibility” so as to indicate existence of a common genus of impossibility in the regulation. Therefore, the application of the principle of ejusdem generis to this sub-regulation dealing with SEBI’s residuary power (to approve withdrawal of open offer) seems to be misguided. Such interpretation adopted by the Supreme Court also contradicts another well settled rule of statutory interpretation which states that, where two interpretations are possible, that interpretation ought to be taken which would not render any provision of a statute otiose. In conclusion, such a restricted interpretation through the application of ejusdem generis renders the sub-regulation granting power to SEBI effectively meaningless.

As a result of the restriction imposed on SEBI’s power to grant approval for withdrawal of open offers, acquirers are forced to assume full risks related to open offers and delays caused by SEBI or fraud by promoters of the target company are not recognized as valid grounds for withdrawal of open offers. Even if a fraud is discovered by way of a special investigative audit after public announcement of an open offer, a request for withdrawal may be rejected on the pretext of improper due diligence by the acquirer. The current position of law continues to cause prejudice to the business interests of the acquirers/ investors, whose interest is also required to be taken care of by SEBI.

Frivolous withdrawal of open offer can lead to severe consequences for investors and the securities market. However, a balance must be achieved such that SEBI is able to consider situations where, due to change in circumstances beyond the control of the acquirer, the open offers may be permitted to be withdrawn to protect the interests of the acquirer. Therefore, from a commercial perspective, it makes sense to not restrict the exercise of discretion by SEBI. SEBI must freely form its opinion about the merits of every case, which is a power that is also granted to SEBI for exempting open offers in a takeover. In conclusion, it can only be hoped that the Supreme Court reconsiders the issue afresh and the roadblocks for India Inc. relating to ease of business are effectively eliminated.

- Saumya Bhargava & Prateek Suri

[1] Withdrawal of offers was previously governed under Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (“1997 Regulations”) as well.

1 comment:

vswami said...

Tentative thoughts :

"The fundamental question is whether situations where circumstances beyond the control of the acquirer render the offer meaningless can be considered by SEBI under the umbrella of “such circumstances which in the opinion of SEBI merit withdrawal”?"

Thus, in the whole of the discussion, as read and personally understood by one, the main , rather the exclusive, focus has been on the stance taken by the SEBI, and the view the SC has taken in the matter. That is, on the only aspect whether or not, any 'open offer' once announced (taken to be 'sacrosanct' so as to be legally binding on the promoters) must be allowed to be withdrawn by the promoters, and if so, in what circumstances.

SEBI has, in its wisdom, following its own philosophy and line of reasoning, chosen to, and come out with a prescription of, specifying, the circumstances in which a withdrawal should be permitted; which are, admittedly, restricted and limted.
In doing so, however, one fundamental aspect of the matter appears to have been blatantly overlooked.

Briefly stated, in doing so, the matter of concern has been confined to the angle of the promoter. On the flip side, however, the proposition calling for a much more serious consideration is from the viewpoint of so called 'investor protection'. The point is, should not SEBI, being the regulatory authority, as the guardian angel of the investing public, strive the utmost and ensure that the totality of the circumstances, not just the specified ones, are duly considered and taken into account before giving its green signal for the promoter to go ahead with the offer; that is, before its acceptance by the investing public.

To be precise, SEBI 's real concern , instead of being narrow and one-sided) need to be whether the promoter should be asked to withdraw the offer, if so warranted, having regard to all those circumstances, in totality, in which it is satisfied that the investors' interests would otherwise be impaired and imperiled.

Over to the competent law cum economic experts for due deliberation on the indicated lines, if not without merits.

(May have more thoughts to share, if any regarded worth doing so)