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Exemption from open offer granted in the larger interest of the Target Company and shareholders

Finsec Law Advisors

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Open offers provide an essential exit route to investors, and are generally triggered on account of acquisition of shareholding above a certain threshold or on acquisition of control in a listed company. In light of their relevance to public shareholders, SEBI views compliance with open offer obligations to be of utmost importance.

However, on a few occasions, SEBI has granted exemptions to acquirers from making open offers on account of pressing circumstances. In one such order, on September 14, 2020, SEBI granted an exemption from open offer obligations under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Regulations) to Saravana Global Holdings Limited (Acquirer) in the matter of proposed acquisition of shares and voting rights in Indo Asia Finance Limited (Target Company), by taking into account the larger interest of the Target Company and its shareholders.

The Target Company is a registered NBFC with RBI, whose registration certificate was cancelled by RBI on account of non-compliance with the minimum Net Owned Funds (NOF) requirement. The Target Company was unable to maintain the NOF requirement on account of economic slowdown and poor recoveries. To fulfill this requirement, the Acquirer, which is part of the promoter group and holds 0.01% of the current shareholding in the Target Company, proposes to infuse equity capital of Rs. 6 crores through preferential allotment. This preferential allotment was approved by the shareholders of the Target Company through a special resolution.

This acquisition will take the Acquirer’s shareholding to 40% and trigger the open offer requirements under the Takeover Regulations. In its exemption application under Regulation 11 of the Takeover Regulations, the Acquirer stated that it was pumping in additional capital to fulfil the NOF requirements and ensure that the Target Company’s registration is restored, which is a pre-requisite for the Target Company to revive its operations and stop irreversible damages. Further, the Acquirer stated that even though the current market price of the Target Company is around Rs. 3.5 per share, the preferential allotment will happen at Rs. 10 per share as the allotment cannot happen at a price less than the face value of the shares. Under the Takeover Regulations, the price of the mandatory open offer cannot be below the price of the preferential allotment. In view of this, the open offer would entail a huge further financial obligation on the Acquirer, which the Acquirer does not have the wherewithal to undertake.

In examining the exemption application, SEBI considered the fact that the preferential allotment is undertaken primarily to infuse capital to meet the NOF requirements, which is vital to revive the Target Company’s certificate of registration with RBI. SEBI took note of the fact that non-revival of the certificate will jeopardize the functioning of the Target Company, which will not be in the interests of the public shareholders. Further, it was noted that the proposed preferential allotment will not lead to a change in control of the Target Company. In light of these factors, SEBI granted an exemption to the Acquirer from the obligation to make an open offer pursuant to the proposed acquisition.

The exemption bespeaks of SEBI’s balanced approach in enforcing the securities law while protecting the interests of the public shareholders.