Wednesday, June 28, 2017

Consolidation of Promoter Holdings: Exemptions from Takeover Offer

The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the “Takeover Regulations”) provide for a series of exemptions involving consolidation of promoter shareholdings whereby acquirers of shares in such consolidation efforts need not make a mandatory takeover offer to acquire the shares of the remaining shareholders. Apart from specific promoter-oriented exemptions, promoters can also avail of other general exemptions that are seemingly broader in nature. One such involves restructuring of shareholdings of a target company through a scheme of restructuring, which is exempt from mandatory offer requirements under regulation 10(1)(d)(iii) of the Takeover Regulations.

The above exemption applies when there is a transfer of shares in a target company that is occasioned by a scheme of arrangement or reconstruction (including amalgamation, demerger) not involving the target company pursuant to the order of a court or other competent authority pursuant to applicable law, so long as two conditions are satisfied: (i) the cash component of the transaction is no more than 25% of the consideration paid under the scheme, and (ii) following the transaction, those who held the entire voting rights prior to the scheme continue to hold at least 33% of the voting rights in the combined entity.

This exemption, while quite specific, is understandable. At the outset, it is available only when the transaction is undertaken through a scheme of arrangement that seeks the imprimatur of a court or other competent authority, which indicates an element of oversight. Moreover, the two conditions stipulated above would ensure that the transactions represent genuine consolidation or restructuring efforts within a group rather than those that seek to effect changes in control of the target company.

An interpretation of regulation 10(1)(d)(iii) was sought from the Securities and Exchange Board of India (“SEBI”) in the form of an informal guidance request from Rajdhani Investments & Agencies Private Limited, a shareholder holding 0.01% shares of DLF Limited, the target company. A total of 11 entities (including Rajdhani) hold 54.08% shares of DLF. It is proposed that 10 entities merge into Rajdhani by way of a scheme of arrangement, such that Rajdhani’s shareholding will increase from 0.01% to 54.08%. This is because the shares in DLF held by the 10 entities will be transferred by way of the scheme to Rajdhani. The 10 entities will cease to exist after the amalgamation, and as part of the transaction Rajdhani will issue shares to the shareholders of those entitles. All the 11 entities are controlled (either directly or indirectly) by the Singh Family Trust through its trustees, Mr. Rajiv Singh and Ms. Kavita Singh, who have been classified as promoters or promoter group of DLF since its initial public offering in 2007.

It is on these grounds that Rajdhani sought a clarification from SEBI on the applicability of regulation 10(1)(d)(iii), which SEBI responded to positively in its informal guidance letter, stating that the transaction will be exempt under the provision so long as the scheme is approved by the court or other appropriate authority. Moreover, Rajdhani has clearly asserted that the two conditions stipulated in regulation 10(1)(d)(iii) (as discussed earlier) stand satisfied on the facts of the present case.

In all, this case seems to be a straightforward one that encompassed the exemption requirements of regulation 10(1)(d)(iii) in their entirely, especially because both conditions stipulated therein have been satisfied. This seems to be a classic case that the exemption is intended for, i.e., consolidation of shareholdings (especially by promoters) through use of the scheme of arrangement mechanism. At one level, it is surprising why Rajdhani even needed to approach SEBI to seek a clarification given that the transaction complied on the face of it with all the requirements of the exemption, but the parties may have decided to mitigate any risk and avoid any potential disputes by seeking SEBI’s informal guidance.

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