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SEBI denies exemption from open offer under Takeover Code

Finsec Law Advisors

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In an order dated October 27, 2016, SEBI has directed Karvy Financial Services Limited (KFSL) to make an open offer under Regulation 3 of the Takeover Code, 2011. KFSL had provided a loan to the target company against a pledge of shares. On non-repayment of loan, KFSL invoked the pledge, increasing its shareholding in the target company from nil to 55.56%, triggering the open offer requirements. Regulation 3 prescribes the numerical thresholds, breach of which would require an open offer under the Takeover code.

SEBI rejected KSL’s contention that invocation of pledge did not cause any change in control, thereby not necessitating an open offer. SEBI held that Regulation 3 only deals with acquisition of shares or voting rights, regardless of actual exercise of such voting power or control by the acquirer. The open offer requirement may have been dispensed with only if KFSL was granted an exemption. SEBI denied an exemption under Regulation 10(1)(b)(viii) since it only governs scheduled commercial banks or public financial institutions invoking pledge, and not a non-banking financial company such as KFSL. Further, Regulation 11 empowers SEBI to grant an exemption on case-to-case basis. Although KFSL had applied for such an exemption, it was rejected because it was made after the acquisition of shares. SEBI held that this exemption can only be sought for a “proposed” acquisition, i.e. before the acquisition.

In the past it has been observed, such as in the acquisition of shares of Servotech Industries, that SEBI has taken a strong stance with respect to triggering of open offer on acquisition of shares beyond the prescribed limit, irrespective of the reasons for acquisition or actual exercise of voting rights pursuant to acquisition. This order maintains the earlier position.