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SAT and SEBI rulings on Takeover Regulations

Finsec Law Advisors

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Recently, SEBI and Securities Appellate Tribunal (SAT) had occasion to consider issues of “control” and interpretation of provisions relating to exemption from making open offers under the SEBI Takeover Code.

In the matter of Kamat Hotels (India) Limited before the Whole-time Member of SEBI – Issue of “Control”


The facts are that in 2007, Clearwater Capital Partners (Cyprus) Limited and Clearwater Capital Partners Singapore Fund III Private Limited (collectively, Acquirers) had subscribed to FCCBs issued by Kamat Hotels (Target Company) with an option to convert the same into equity. The Acquirers also held about 24.50% equity in the Target Company.

In 2010, the Acquirers along with the Target Company and its promoters re-structured the FCCBs and all the three parties entered into an inter-se agreement laying down mutual rights and obligations. The inter-se agreement provided the Acquirers with certain protective rights against the promoters and the Target Company. It restrained the promoters from entering into agreements which would be in conflict with their obligations under the inter-se agreement; it also required the Target Company and the promoters to obtain prior approval of the Acquirers before altering the capital structure, creating new subsidiaries, entering into new JVs, mergers or demergers, acquiring or disposing of assets, etc. It also granted the Acquirers the right to appoint one director on the board of the Target Company.

In 2012, the Acquirers exercised the option to convert the FCCBs into equity and this increased their shareholding in the Target Company to 32.23%, triggering the mandatory open offer requirement under Regulation 3(1) of the 2011 SEBI Takeover Code. The Acquirers made the public announcement of the open offer to acquire 26% equity from the public shareholders of the Target Company and filed the draft letter of offer with SEBI as required under the 2011 Takeover Code.

It was at this juncture that SEBI raised an objection stating that the Acquirers had already acquired control when the inter-se agreement was executed and argued that the inter-se agreement triggered Regulation 12 of the 1997 SEBI Takeover Code. Regulation 12, which is similar to Regulation 4 of the 2011 SEBI Takeover Code, states that irrespective of whether or not there has been an acquisition of shares or voting rights in a company, no acquirer shall acquire control unless such acquirer makes a public announcement to make an open offer. The issue before the Wholetime Member of SEBI (WTM) was whether the Acquirers had acquired control over the Target Company when the inter-se agreement was executed.

Analysis and Conclusion

The WTM in his order dated March 31, 2017 held that the rights conferred on the Acquirers in the inter-se agreement were similar to the rights conferred on the investors in Subhkam Ventures (I) Private Limited v. SEBI, wherein the SAT had held that such rights did not amount to acquisition of control under the provisions of the 1997 SEBI Takeover Code. The WTM also held that the scope of the rights under the inter-se agreement was to enable the Acquirers to protect their investments rather than formulating policies to run the affairs of the Target Company.

This order shows that SEBI is ready to treat certain protective rights that investors seek in order to safeguard their investments as not amounting to acquisition of control under the Takeover Code. While some may interpret this order as an instance of the regulator loosening its stance on what amounts to control, it should also be noted that the order was based on the facts and circumstances that arose in this matter. Different facts may yield a totally different conclusion.

"SEBI has held that existence of protective rights to safeguard one’s investments cannot be construed to be acquisition of “control”.

SEBI has held that provisions relating to exemption from making an open offer under the Takeover Code must be interpreted literally.

SAT has held that informal guidance issued by SEBI is not binding and cannot be used to dilute the statute and / or regulations."

Arbutus Consultancy LLP v. SEBI before the Securities Appellate Tribunal –Exemption from making an open offer


In Arbutus, the target company, India Bulls Infrastructure and Power Limited (IBIPL), was incorporated as a wholly owned subsidiary of India Bulls Real Estate Limited in 2007. IBIPL was listed on the stock exchanges in July, 2012. During the financial year 2013-14, through a series of transactions, the promoters of IBIPL (Acquirers) acquired certain equity shares of IBIPL from their co-promoters, without making an open offer, under the impression that they were exempt from open offer obligations by virtue of Regulation 10(1)(a)(ii) of the 2011 SEBI Takeover Code. Regulation 10(1)(a)(ii) provides that an inter se transfer of shares between persons named as promoters in the shareholding pattern filed by the target company in terms of the listing agreement for not less than three years prior to the proposed acquisition will be exempt from the open offer obligations.

The Appellants had allegedly relied on the Informal Guidance issued by SEBI in October, 2012, in the matter of Weizmann Forex Ltd. where based on similar facts, the SEBI official had taken a purposive interpretation of Regulation 10(1)(a)(ii) and had exempted the transaction from open offer obligations. The issue before the SAT was whether one had to literally interpret the exemption provision or whether a purposive interpretation, which would enable the Acquirers to avail the exemption, would suffice. Another issue that came up for consideration in this case was the legal sanctity given to the informal guidance issued by SEBI and whether the same is binding on the regulator.

Analysis and Conclusion

The SAT discussed as to whether the fact that the acquirers were named as promoters of IBIPL prior to its listing on the stock exchanges, could also be considered to satisfy the 3 year rule in Regulation 10(1)(a)(ii). While answering the question in the negative, SAT held that taking into consideration the position prior to listing is not tenable and that it would defeat the purpose of the regulation which is to prevent “potential abuse of new promoters getting in soon after a company is listed”. The SAT preferred a literal interpretation of Regulation 10(1)(a)(ii) and held that since the Acquirers had not satisfied the 3 year rule they could not avail of the exemption from making an open offer under the 2011 SEBI Takeover Code.

As regards the legal sanctity of the informal guidance issued by SEBI, the SAT held that where the language of the regulations is clear, informal guidance should not be relied on and that an informal guidance cannot be used to reduce the language of the regulations. It further held that an informal guidance issued by a department of SEBI will not be binding on SEBI and the same should not be construed to be a conclusive decision or determination of any question of law or fact by SEBI. Further, it also held that an informal guidance issued by SEBI cannot be construed to be an “order” passed by SEBI and the same was not appealable.

While the interpretation of SAT on the legal sanctity to be given to informal guidance appears to be correct and on point, we may not yet have heard the last word on the interpretation of Regulation 10(1)(a)(ii) especially because the Appellants have declared their desire to appeal the decision. The language of the exemption provisions under the erstwhile 1997 SEBI Takeover Code allowed sufficient room for interpretation and indeed the SAT had, on several occasions, chosen to move away from a literal interpretation of the provisions. However, barring the informal guidance in Weizmann Forex Ltd., SEBI has consistently followed a literal interpretation of Regulation 10(1)(a)(ii) as shown in the recent decision issued by the WTM in the matter of Gokul Agro Resources Limited.