In a recent order, the Securities Appellate Tribunal ("SAT") made this striking remark- “It must be remembered that it is in public interest that a statutory regulator like the Board (read SEBI) should be consistent in its approach as that would send the right signals to the capital market and would also insulate the Board from the charge of discrimination.”
This remark was made in the concluding paragraph of its order in an appeal from a SEBI’s order (“Impugned Order”). Through the Impugned Order, SEBI refused to grant exemption to a promoter group from making a public offer to the existing shareholders to acquire further shares in the company under Regulations 10 and 11(1) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997 (“Takeover Regulations”). The appellants in the appeal pointed out to the SAT a few earlier orders passed by SEBI wherein SEBI had granted exemption from Regulations 10 and 11 of the Takeover Regulations in a similar factual matrix of appellant’s case.
Briefly stated, the facts of this case were that a listed company (the "Company/Target Company") required finance for expanding its business for which it approached the banks. The banks agreed to sanction the required loan with a pre-disbursement condition that the company raises an upfront equity of Rs. 50 crores (to comply with the debt-equity ratio norms). To raise this amount the company decided to do a preferential issue to its promoters and another entity (whose holding post the issue was to be 13.82% of the shares of the Target Company) who agreed to subscribe to the requisite number of shares. The Company got the necessary shareholders approval through a postal ballot, wherein the resolution for this purpose was passed by 99.1% (7586 postal ballots received out of 71589 shareholders). In the explanatory statement sent to the shareholders, all the necessary details of this issue were brought to the notice of the shareholders including inter-alia the fact that there will be no change in the management or control of the company; and that a rights issue is not being resorted to by the Company as it would delay the process. Since this preferential issue was to increase the holding of the promoters/promoters acting in concert group from 25.32% to 45.91%, the proposed acquirers made an application for exemption from Regulations 10, 11(1) and 12 of the Takeover Regulations. This application was rejected by SEBI against which an appeal was filed in SAT, which reversing the order of SEBI, granted the exemption to the appellants.
SEBI was of the view that the method of preferential allotment denied to the shareholders an equal opportunity in the fund raising exercise, and being denied this equal opportunity, they should be given an exit option through an open offer by declining an exemption.
SAT termed this order of SEBI as ‘wrong in approach and perception of the shareholders’ interest’ and observed that “….. it is not for the Board (read SEBI) to advise or insist on any company as to how and in what manner it should raise its further equity capital when the law gives the aforesaid three options [i.e. a Further Public Offer/ Rights Issue/Preferential Allotment] to a company. Of course, it must ensure that whichever method a company may adopt for raising equity capital, the procedure prescribed by law for that method has been followed in letter and spirit.”
It was argued by SEBI that only 10 per cent of the shareholders had participated in the postal ballot and that this percentage does not represent the majority of the shareholders. This argument was rejected by the SAT on the premise that the majority had been provided with an opportunity to caste their vote and those who did not caste their votes were in silent agreement with the proposed resolution for the preferential allotment. In this regard, the SAT opined that- “Their silence cannot be taken otherwise in the absence of any statutory provision to the contrary. The matter would have been different if the majority had not been provided with an opportunity to cast their votes.”
The most important observation made by the SAT in the matter was this- “we cannot forget that the primary object of the acquisition was to provide additional financial assistance to the target company for its new project.” This order of SAT has some interesting aspects. In a way it can be seen as laying down the proposition that if the funds are required to meet the expansion activities and the objective of acquisition of shares is to provide financial assistance then the exemption under Regulation 3(l) of the Takeover Regulations should be granted. Of course this will be with the rider of ‘no change in control’.
To raise an upfront equity, a company has three options- it can go to public and ask for funds or it could approach the existing shareholders with a rights issue or it can do a preferential allotment to a select group of persons. A company can opt for any of these options as per its requirements. SAT agreed with the appellant's submission that preferential allotment was not only the quickest but also the surest way of raising equity. SAT appears to be highlighting the benefits of a preferential allotment in this order!
This remark was made in the concluding paragraph of its order in an appeal from a SEBI’s order (“Impugned Order”). Through the Impugned Order, SEBI refused to grant exemption to a promoter group from making a public offer to the existing shareholders to acquire further shares in the company under Regulations 10 and 11(1) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997 (“Takeover Regulations”). The appellants in the appeal pointed out to the SAT a few earlier orders passed by SEBI wherein SEBI had granted exemption from Regulations 10 and 11 of the Takeover Regulations in a similar factual matrix of appellant’s case.
Briefly stated, the facts of this case were that a listed company (the "Company/Target Company") required finance for expanding its business for which it approached the banks. The banks agreed to sanction the required loan with a pre-disbursement condition that the company raises an upfront equity of Rs. 50 crores (to comply with the debt-equity ratio norms). To raise this amount the company decided to do a preferential issue to its promoters and another entity (whose holding post the issue was to be 13.82% of the shares of the Target Company) who agreed to subscribe to the requisite number of shares. The Company got the necessary shareholders approval through a postal ballot, wherein the resolution for this purpose was passed by 99.1% (7586 postal ballots received out of 71589 shareholders). In the explanatory statement sent to the shareholders, all the necessary details of this issue were brought to the notice of the shareholders including inter-alia the fact that there will be no change in the management or control of the company; and that a rights issue is not being resorted to by the Company as it would delay the process. Since this preferential issue was to increase the holding of the promoters/promoters acting in concert group from 25.32% to 45.91%, the proposed acquirers made an application for exemption from Regulations 10, 11(1) and 12 of the Takeover Regulations. This application was rejected by SEBI against which an appeal was filed in SAT, which reversing the order of SEBI, granted the exemption to the appellants.
SEBI was of the view that the method of preferential allotment denied to the shareholders an equal opportunity in the fund raising exercise, and being denied this equal opportunity, they should be given an exit option through an open offer by declining an exemption.
SAT termed this order of SEBI as ‘wrong in approach and perception of the shareholders’ interest’ and observed that “….. it is not for the Board (read SEBI) to advise or insist on any company as to how and in what manner it should raise its further equity capital when the law gives the aforesaid three options [i.e. a Further Public Offer/ Rights Issue/Preferential Allotment] to a company. Of course, it must ensure that whichever method a company may adopt for raising equity capital, the procedure prescribed by law for that method has been followed in letter and spirit.”
It was argued by SEBI that only 10 per cent of the shareholders had participated in the postal ballot and that this percentage does not represent the majority of the shareholders. This argument was rejected by the SAT on the premise that the majority had been provided with an opportunity to caste their vote and those who did not caste their votes were in silent agreement with the proposed resolution for the preferential allotment. In this regard, the SAT opined that- “Their silence cannot be taken otherwise in the absence of any statutory provision to the contrary. The matter would have been different if the majority had not been provided with an opportunity to cast their votes.”
The most important observation made by the SAT in the matter was this- “we cannot forget that the primary object of the acquisition was to provide additional financial assistance to the target company for its new project.” This order of SAT has some interesting aspects. In a way it can be seen as laying down the proposition that if the funds are required to meet the expansion activities and the objective of acquisition of shares is to provide financial assistance then the exemption under Regulation 3(l) of the Takeover Regulations should be granted. Of course this will be with the rider of ‘no change in control’.
To raise an upfront equity, a company has three options- it can go to public and ask for funds or it could approach the existing shareholders with a rights issue or it can do a preferential allotment to a select group of persons. A company can opt for any of these options as per its requirements. SAT agreed with the appellant's submission that preferential allotment was not only the quickest but also the surest way of raising equity. SAT appears to be highlighting the benefits of a preferential allotment in this order!
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