Friday, March 10, 2017

SEBI’s Special Treatment to Public Sector Banks

[Guest post by Abhishek Borgikar, who is a Senior Associate at Dhaval Vussonji Alliance]

Violation of Minimum Public Shareholding Norms

The former chairman of the Securities and Exchange Board of India (SEBI), Mr. U. K. Sinha, while talking about minimum public shareholding in public sector companies said: “Our [SEBI’s] stand as a regulator is that all cos should be treated alike on all matters, not only public float on corporate governance and all and this is what we have been telling the government". But the same does not seem to be taken seriously either by Government or by SEBI in light of some recent exemption orders passed by SEBI.

SEBI has recently passed exemption orders in the matter of Indian Overseas Bank (‘IOB’) and United Bank of India (‘UBI’) whereby SEBI has exempted Government of India from making an open offer to the public shareholders of the Banks. The increase in the promoter shareholding (Government of India) to 79.56% from 73.58% and from 82% to 88.72% in case of IOB and UBI respectively is a clear-cut violation of the minimum public shareholding (MPS) norms provided under Rule 19A(1) of the Securities Contracts (Regulation) Rules (‘SCRR Rules’) and proviso to Regulation 3(2) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (‘SAST 2011’). The relevant SCRR Rule is reproduced below for ready reference:

19A (1) Every listed Company shall maintain public shareholding of at least twenty five per cent.”


Provided that such acquirer shall not be entitled to acquire of enter into any agreement to acquire shares or voting rights exceeding such number of shares as would take the aggregate shareholding pursuant to the acquisition above the maximum permissible non-public shareholding”

It is mentioned in the exemption order that SEBI sought clarification regarding compliance of MPS norms and that it was informed by Government of India through letter dated September 30, 2016 as under:

As per request of SEBI, Department of Financial Services, Ministry of Finance, Government of India, being promoter of the company declares that Indian Overseas Bank will comply with Minimum Public Shareholding (MPS) requirements in terms of Securities Contracts (Second Amendment) Rules, 2014.

In terms of the Securities Contracts (Second Amendment) Rules, 2014 (‘Rules’), those public sector companies whose public shareholding was less than 25% on August 22, 2014 (date of commencement of Rules) were allowed to increase their public shareholding to at least 25% within a period of 3 years in the manner specified by SEBI. At the time of commencement of Rules, the public shareholding of IOB was 26.20% and therefore such relaxation was not applicable to IOB. Therefore, as per Rule 19A (1) of Securities Contract Regulation Rules, IOB has to maintain minimum public shareholding of 25%. Considering the above provisions, IOB is only allowed to increase its promoter shareholding up to 75% and SEBI Takeover Regulations do not permit the Bank to increase its promoter shareholding beyond 75%.

In case of UBI, Regulation 3(2) of SAST 2011 is not applicable as the GOI is already holding more than permissible limit of 75% and the provision is applicable only to those acquirers who hold more than 25% but less than maximum permissible non-public shareholding. Consequently, the proviso to regulation 3(2) prohibiting such acquirer to acquire shares/voting rights exceeding the permissible non-public shareholding is not strictly attracted, though it impinges upon the listing condition of maintaining minimum public shareholding.

Therefore, in both the above cases, SEBI, while granting exemption to acquirers from making open offer, has either overstepped its powers or exercised its discretion which is not in the interest of public shareholders.

Open Offer Violations

Furthermore, Syndicate Bank, Dena Bank and Allahabad Bank have also made exemption applications to SEBI, and SEBI has overstepped its powers and passed an exemption order. In accordance with regulation 13 of SAST 2011, in respect of preferential allotment, an acquirer is under an obligation to make a public announcement of open offer on the date on which the board of directors of target company authorizes preferential issue of shares, if such acquisition triggers the open offer requirement. It means the triggering date of open offer is the date of board meeting. Syndicate Bank has passed board resolution on August 4, 2016 approving the preferential allotment to its promoter, i.e., Government of India (GOI) and GOI triggered the open offer on same day as it exceeded its creeping acquisition limit of 5% (increase from 65.17% to 72.92%). Instead of making an open offer, GOI filed an exemption application with SEBI on August 17, 2016, which was surprisingly approved by SEBI and exemption order was passed on September 12, 2016. SEBI has no powers whatsoever to exempt triggered open offers. In case of Allahabad Bank and Dena Bank also, though the open offer was triggered much earlier, an exemption application was filed at later date, and an exemption order was subsequently passed by SEBI. The details are as follows:

Name of the Target Company and Acquirer
Date of Board Resolution
Date of Application Filed
Date of disposal of Application
Approximate time
United Bank of India
August 09, 2016
August 10, 2016
October 03, 2016
Nearly two months
Indian Overseas Bank
August 16, 2016
August 18, 2016
September 30, 2016
Exemption granted
One and a half months
Syndicate Bank
August 04, 2016
August 17, 2016
September 12, 2016
Exemption granted
Less than a month
Dena Bank
August 12, 2016
September 01, 2016
September 21, 2016
Exemption granted
20 Days
Allahabad Bank
Not given
April 11, 2016
May 12, 2016
Exemption granted
One month

In all the cases, the exemption order was passed in a month’s time, while for disposing the other (non-public sector bank) exemption applications SEBI has been normally taking substantial time. The time taken by SEBI for disposing of some of the exemption applications is tabulated herein below (Exemption Orders passed in 2016):

 Name of the Target Company and Acquirer
Date of Application Filed
Date of disposal of Application
Approximate time
Asahi Songwon Colors Limited - Mrugesh Jaykrishna Family Trust
August 15, 2014
March 08, 2016
Exemption granted
One and a half years
Gravita India Limited- Agarwal
March 19, 2015
April 27, 2016
Exemption granted
one year
Wipro Limited - Hasham Investment and Trading Company Private Limited
August 20, 2014
February 03, 2016
Exemption granted
One and a half years
Diamond Power Infrastructure Limited – Mr. Amit Bhatnagar
July 14, 2015
March 23, 2016
Exemption granted
8 months
Lyka Labs Limited – Narendra Gandhi and others
February 05, 2015
March 31, 2016
Application Rejected
More than one year

This clearly demonstrates the special and different treatment provided to public sector undertakings (specifically banks) over the other applicants. There is no harm in granting exemption as public sector banks are under pressure and need capital. The Government ought to have filed such exemption applications much before the board meetings to comply with the SAST, 2011. An exemption application filed after triggering the open offer is not maintainable as has been held by SEBI in several earlier cases. There were no convincing reasons for SEBI to take a different stand in the matter of public sector banks when the intention of the regulations is to treat public and private sector companies at par.

- Abhishek Borgikar

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