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Background
In terms of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Regulations”), acquiring control and/or shares/voting rights of a listed company beyond the specified quantitative thresholds (i.e. initial acquisition of 25% or more of the voting rights; or subsequent acquisition by a person holding at least 25%, of more than the creeping acquisition limit of 5% voting rights in a financial year) can trigger an obligation to make an open offer to its shareholders (“Open Offer”).
The Takeover Regulations contemplate two methods for availing exemptions from the requirement to make an Open Offer- general exemptions and specific exemptions. General exemptions under Regulation 10 of the Takeover Regulations are available for certain specific instances that do not warrant provision of an exit opportunity to the public shareholders, subject to satisfaction of the prescribed eligibility conditions and disclosure requirements. These include certain inter se transfers between qualifying persons, increase in voting rights due to buy-back of shares and rights issues, among others.
The focus of this piece is on the case-specific exemptions granted by SEBI under Regulation 11 of the Takeover Regulations. SEBI is empowered under Regulation 11(1) to grant an exemption from making an Open Offer upon receiving an application in the prescribed format, subject to the conditions it deems fit to impose in the interests of investors and the securities market. Based on a review of more than 150 exemption orders passed by SEBI since 2011,[1] this blog categorises the various scenarios where case specific exemptions are typically sought into four buckets, and briefly touches upon SEBI’s approach in granting or rejecting such exemption applications.
Acquisition by private family trusts
The majority of the exemptions have been sought and granted in cases where private family trusts have acquired the direct and/or indirect holdings of the promoters/promoter group of a listed company as part of an internal restructuring/private family arrangement or settlement of the promoter family’s holdings.[2] In 2017, SEBI, vide a circular dated December 22, 2017 crystallised the conditions (that had formed the basis of grant of exemption in such cases until then), which, if met, would expedite the processing time of exemption applications filed by the applicant private family trust.[3] Some of these conditions are set out below:
- the trust is in substance, only a mirror image of the promoters’ holdings and consequently, there is no change of ownership or control of the shares/voting rights in the target company;
- only individual promoters or their immediate relatives or lineal descendants are trustees and beneficiaries;
- the trustees would not be entitled to transfer or delegate any of their powers to any person other than one or more of themselves;
- any change in the trustees / beneficiaries and any change in ownership or control of shares or voting rights held by the trust are required to be disclosed within 2 (two) days to the concerned stock exchanges with a copy endorsed to SEBI for its record; and
- the transferors are disclosed as promoters in the shareholding pattern filed with the stock exchanges for a period of at least 3 (three) years prior to transfer (except for holding on account of inheritance).
SEBI’s approach continues to be to grant exemptions in case of transfers stemming from private family arrangements, provided that the prescribed conditions are met. The focus is on the fact that the acquisitions by family trusts are non-commercial and private in nature, wherein substantially there is no change in ownership/control of shares/voting rights in the listed company.
That said, a typical scenario where SEBI has been unwilling to grant an exemption to family trust acquisitions is when the transferor(s), i.e., promoters and promoter group, have not been disclosed as such in the shareholding pattern filed by the listed company with the stock exchanges for at least 3 (three) years prior to the proposed acquisition.[4] SEBI has also rejected an exemption application on account of certain clauses in the trust deed of the acquirer trust, in that (i) the trust deed provided for a private company as a trustee, i.e., the trustee was not a promoter/immediate relative/linear descendant; and (ii) it contained an arbitration clause, which was considered an issue since trust disputes have been held to be non-arbitrable by the Supreme Court[5].[6]
Acquisition by the Government
The second major category where specific exemptions are sought is in the case of acquisition by the Central Government / state governments. Typically, in these cases, an exemption is sought in relation to breach of the creeping acquisition limit of 5% per financial year, pursuant to proposed infusion of funds by the government in listed public sector banks, with the objective of either providing growth capital, meeting regulatory capital/capital adequacy requirements or for providing additional leverage for raising further capital.[7] For instance, the recapitalisation of Jammu and Kashmir Bank Limited by the Government of Jammu and Kashmir to meet long term and regulatory capital requirements was approved by SEBI.[8] In addition to public sector banks, exemption was also sought in the case of Industrial Finance Corporation of India Limited (“IFCI”), a statutory corporation, where the conversion of optionally convertible debentures of IFCI was done to acquire a majority stake and convert IFCI into a government company.[9]
Public policy and public interest considerations underlying the Government of India’s investment in a company have also been considered by SEBI while granting an exemption. For instance, an exemption was granted in the matter of Vodafone Idea Limited,[10] where the conversion of statutory dues (spectrum interest and AGR) into equity to the Government of India was intended to provide relief by easing liquidity and cash flow of telecom service providers, which served the public interest. A few cases involving divestment by the Central Government of its stake in listed companies have also been the subject of exemption orders.[11] Interestingly, in one of these cases, the SEBI order granting the exemption was challenged by a small investor before the Securities Appellate Tribunal, which upheld the SEBI order.[12]
Capital raising and debt restructuring in financially weak companies
SEBI has also granted exemptions in several cases where additional capital was proposed to be raised by listed companies facing severe financial crunch.[13] In cases where existing promoters with substantial shareholding[14] have infused additional capital, the exemptions have usually been sought for breach of the creeping acquisition limit. Here, the capital infusion was proposed to be undertaken pursuant to inter alia a rights issue to meet working capital and other requirements with promoters subscribing to the unsubscribed portion,[15] capital infusion through a preferential allotment by promoters to meet RBI’s NOF (Net Owned Funds) requirements,[16] settlement of obligations with lenders[17] or when borrowing from banks/financial institutions was not feasible.[18]
In several cases, acquisitions in connection with debt restructuring schemes have also been considered for exemptions. In the matter of Sturdy Industries Limited,[19] an exemption was granted where a strategic investor proposed to acquire 26% shares from the lenders of the company, who were required to disinvest their holdings in accordance with the guidelines of a Strategic Debt Restructuring scheme. SEBI has also granted an exemption in a case where the proceeds of the sale of shares were proposed to be used to meet the financial liabilities of the listed promoter company under a scheme of compromise and arrangement with the creditors.[20] Some cases entailing conversion of debt (on account of financial assistance by promoters) to equity under RBI schemes for corporate debt restructuring/resolution of stressed assets have also been exempted.[21]
However, SEBI has also rejected exemption applications in certain cases of capital infusion by promoters. In one such instance, involving a loss-making company where the acquisition was not pursuant to a formal debt restructuring scheme, and was carried out through conversion of warrants by promoters, the exemption application was rejected since the proposed conversion price of warrants to be issued on a preferential basis was significantly lower than the market price.[22] Another instance of rejection concerned an application for post facto approval where the trigger transaction (i.e. conversion of warrants allotted to promoters for capital infusion) had already taken place, as a post-facto exemption is considered favourably by SEBI only in exceptional circ*mstances.[23]
Miscellaneous
There are a few cases that have been considered by SEBI, which do not neatly fall into any of the above buckets. For example, SEBI granted an exemption to an existing promoter of United Breweries Limited for a proposed acquisition of the company’s shares from the Recovery Officer considering inter alia, public interest and public policy grounds and steps taken over the years to recover dues of public sector banks/financial institutions.[24] In another case, an exemption was granted when the promoter’s voting rights increased on account of forfeiture of shares of certain other shareholders.[25] Another instance where an exemption was granted by SEBI was where the acquisition was on account of a promoter being returned its shares pledged with a lender (the pledge on which shares had been invoked but which had remained unsold) pursuant to partial repayment.[26]
On the other hand, an exemption application was rejected in case of an inter se transfer of shares between promoters, since the transferors and transferees had not been disclosed as promoters in the shareholding pattern filed by the listed company for the last three years.[27] In another case, in the matter of Ashok Alco-Chem Limited,[28] SEBI had rejected the exemption sought regarding the proposed acquisition of majority stake of a promoter holding company, which held approximately 49.8% of a listed company.
Conclusion
Under Regulation 11(1) of the Takeover Regulations, SEBI enjoys and exercises wide discretion in deciding on exemption applications. While the grounds and conditions for granting an exemption seem to have been crystallised in the case of acquisitions by the government and to some extent, by family trusts, this does not hold true for other categories. As such, before approaching SEBI under Regulation 11(1), an analysis of the exemption orders passed by SEBI till date may help in assessing the probability of a favourable outcome, the time typically taken by SEBI in passing its order and putting forth exemption applications better aligned with regulatory expectations.
[1] The orders passed by SEBI are available here: https://www.sebi.gov.in/sebiweb/home/HomeAction.do?doListing=yes&sid=2&ssid=9&smid=2 (last accessed on April 5, 2024).
[2] For instance, see Exemption order dated November 30, 2023 in the matter of Shakti Pumps (India) Limited, Exemption order dated February 14, 2020 in the matter of MPS Limited, and Exemption order dated June 14, 2019 in the matter of Suzlon Energy Limited.
[3] See Informal Guidance dated November 30, 2023 in the matter of Thejo Engineering Limited.
[4] See Exemption order dated July 10, 2018 in the matter of Max Ventures and Industries Limited, Exemption order dated July 10, 2018 in the matter of Max India Limited, Exemption order dated June 28, 2018 in the matter of KIFS Financial Services, and Exemption order dated April 26, 2018 in the matter of SH Kelkar Company Limited.
[5] Vimal Kishor Shah v. Jayesh Dinesh Shah [2016 (8) SCALE 116].
[6] Exemption order dated July 31, 2018 in the matter of Apar Industries Limited.
[7] For instance, see Exemption order dated November 28, 2019 in the matter of Canara Bank, Exemption order dated March 22, 2019 in the matter of Union Bank of India, Exemption order dated October 20, 2018 in the matter of Punjab National Bank, Exemption order dated March 28, 2018 in the matter of Bank of India, and Exemption order dated May 17, 2017 in the matter of Andhra Bank.
[8] Exemption order dated August 3, 2021 in the matter of Jammu and Kashmir Bank Limited.
[9] Exemption order dated September 24, 2012 in the matter of IFCI.
[10] Exemption order dated May 25, 2022 in the matter of Vodafone Idea Limited.
[11] See Exemption order dated February 28, 2019 in the matter of Dredging Corporation of India Limited and Exemption order dated February 23, 2021 in the matter of Tata Communications Limited.
[12] Rajagopal Viswanathan v. SEBI, Order dated January 22, 2020 of the Hon’ble Securities Appellate Tribunal in Appeal no. 290/2019.
[13] Also see Exemption order dated April 21, 2023 in the matter of Bhandari Hosiery Exports Limited where an exemption had been sought for capital raising to fund previously planned capacity addition.
[14] For an instance where the acquisition of shares was by persons other than the existing promoters, see Exemption order dated April 16, 2020 in the matter of Sturdy Industries Limited.
[15] See Exemption order dated July 15, 2021 in the matter of Som Distilleries and Breweries Limited, and Exemption order dated August 9, 2019 in the matter of Patel Engineering Limited.
[16] Exemption order dated September 14, 2020 in the matter of Indo Asia Finance Limited.
[17] Exemption order dated May 23, 2014 in the matter of Sibar Autoparts Limited.
[18] Exemption order dated February 22, 2013 in the matter of Southern Petrochemical Industries Corporation Limited.
[19] Exemption order dated April 16, 2020 in the matter of Sturdy Industries Limited.
[20] Exemption order dated September 6, 2013 in the matter of SPEL Semiconductor Limited and Exemption order dated February 22, 2013 in the matter of Southern Petrochemical Industries Corporation Limited.
[21] See Exemption order dated February 25, 2014 in the matter of Blue Coast Hotels and Resorts Limited, Exemption order dated March 23, 2016 in the matter of Diamond Power Infrastructure Limited and Exemption order dated August 9, 2019 in the matter of Patel Engineering Limited.
[22] Exemption order dated March 31, 2016 in the matter of Lyka Labs Limited.
[23] Exemption order dated October 23, 2020 in the matter of Art Nirman Limited.
[24] Exemption order dated June 22, 2021 in the matter of United Breweries Limited.
[25] Exemption order dated March 11, 2013 in the matter of Prima Industries Limited.
[26] Exemption order dated May 21, 2013 in the matter of Educomp Solutions Limited.
[27] Exemption order dated March 3, 2017 in the matter of Gokul Agro Resources Limited.
[28] Exemption order dated January 1, 2015 in the matter of Ashok Alco-Chem Limited.
