[Guest post by Shashank Prabhakar, who is a lawyer with Finsec Law Advisors]
The Whole Time Member of the Securities and Exchange Board of India (SEBI) recently passed an order relating to an application under Regulation 11(5) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the Takeover Regulations) for exemption from making an open offer under Regulation 3(2).
The facts are that Gokul Agro Resources Limited (GARL), the target company, was controlled by two groups of shareholders, namely, the Thakkar family and the Rajput family, who were named as promoters of the target company. Between them, they held about 72% of the equity shares in the target company. The shares of the target company were listed on the stock exchange in September 2015, pursuant to a composite scheme of arrangement sanctioned by the High Court whereby the windmill business of the parent, Gokul Refoils & Solvents Limited (GRSL), was demerged and transferred to the target. Thereafter, in 2016, the Thakkar family, which held about 41% equity in the target and the Rajput family, which held about 31% of the equity in the target, reached an understanding whereby it was decided that the Thakkar family would control the target, while the Rajput family would control the parent.
To implement this arrangement, one Mr. Thakkar who held 20.74% of equity, wished to acquire 31% equity from the Rajput family. For this purpose, Mr. Thakkar made an application to SEBI under Regulation 11(1), seeking relaxation of the conditions laid down in Regulation 10(1)(a)(ii) which provides an exemption for acquisitions by “persons named as promoters in the shareholding pattern filed by the target company in terms of the listing agreement or these regulations for not less than three years prior to the proposed acquisition.” Technically, he was not eligible for seeking an exemption under this provision, since the shares of the target company were only listed in 2015 and the promoters are required to be named as such in the shareholding pattern for at least three years to avail the exemption. He submitted that both the families owned shares in the parent company for well over eight years, and once the composite scheme of arrangement came into effect the families were allotted shares in the target in the same proportion. He also cited the treatment that would be given under the Income Tax Act where, in this instance, the date of acquisition of the shares in the parent company would be considered for the purpose of calculating capital gains for sale of shares allotted pursuant to the scheme of arrangement. Interestingly, the parties would have been eligible for an exemption Regulation 10(1)(a)(ii) if the same arrangement was to be implemented for the shares of the parent company. The only technicality that prevented Mr. Thakkar from availing the exemption was the fact that he was not named promoter in the shareholding pattern filed by the company for more than three years.
SEBI referred the matter to the Takeover Panel, which noted that the criteria for availing an exemption under the 2011 Takeover Regulations was much stricter and clearer compared to the exemption provisions under the earlier 1997 version of the Takeover Regulations. The relevant provision for seeking such an exemption under the 1997 Regulations would have been Regulation 3(1)(e)(iii)(b), which exempted inter-se transfers amongst “qualifying promoters.” The 1997 Regulations then provided an elaborate definition of “qualifying promoters”, which left a lot of room for interpretation and structuring transactions and inter se transfers between promoters. The 2011 Regulations did away with all that and instead made it simpler and leaner in the form of Regulation 10(1)(a)(ii). According to the Takeover Panel, the regulatory intent was that only those parties who had been disclosed as promoters were eligible for exemption and, since the parties did not meet the criteria, they were not eligible to seek the exemption. The Takeover Regulations Advisory Committee (TRAC) Report, which came out in 2010, recommended a pre-existing relationship of at least three years between parties seeking exemption so as to “…curb the abuse of introduction of new entities as qualifying parties….” Taking all this into consideration, the Whole Time Member of SEBI rejected the application and denied exemption from making an open offer under Regulation 3(2).
The scope for structuring transactions to qualify for the exemption has been vastly reduced under the 2011 Regulations. Although SEBI has discretionary powers to provide relaxation from strict compliance with procedural requirements, this order confirms that it is unlikely that it would use such powers to grant exemption for inter-se transfers where parties do not meet the three year requirement.
- Shashank Prabhakar