RESEARCH
PAPER BY CA. ARUN GOENKA- INTEREST PAYMENT UNDER TAKEOVER CODE
BACKGROUND- PAYMENT OF INTEREST UNDER SEBI TAKEOVER
CODE
Directing
a person to pay interest for the period of delay is the first step towards
ensuring timely payment and compliance with law. This is prescribed in all
statues. If payment of Income tax, Sales tax etc. is delayed, interest will
have to be paid at a rate which is higher than the normal rate. This is to
discourage any delay.
In last
few years, Government has also promulgated several strong financial
legislations such as Interest on Delayed Payments to Small Scale and
Ancillary Industrial Undertakings Act, 1993, Micro, Small And Medium
Enterprises Development Act, 2006, SARFAESI Act etc., wherein high rate of
interest, with even monthly compounding, has been stipulated so as to enforce
timely compliance and also deter defaulters from unnecessarily delaying the
payment.
Supreme
Court, in a Judgment dated 15.04.2010 (
Civil Appeal Nos. 3305-3306 of 2010, M/s. Modern
Industries versus M/s. Steel Authority of India Ltd.
&Ors. ),at para no. 8, stated that " It was felt that the buyers,
if required under law to pay interest, would refrain from withholding payments
to small scale and ancillary industrial undertakings."
TYPES OF DELAY CALLING FOR PAYMENT OF
INTEREST IN CASE OF TAKEOVERS
There
are 2 types of situation in case of delay in takeovers that require payment of
interest.
1.
Delay in announcing the Open offer
2.
After having announced the Open offer,
payment is delayed.
The
cases of first type of default are covered under 44(i) whereas second type is
covered under 22(12). It must be noted here that SAST 1997 44(i) seeks to
compensate the investors for delay whereas 22(12) imposes a cost on default and
is penal in nature. There are 2 distinct and separate causes of payment of
interest and can be argued that both must be applied separately and
simultaneously if someone has committed both the defaults. For example NIRMA
could have triggered an Open offer, say in the year 2002 but came out with an
open offer only in 2005 but subsequently delayed it further, in this case it
can invite payment of interest u/r 44(i) as well as 22(12) of SAST 1997.
SEBI
always had the powers to direct payment of interest under the SAST 1997 in the
second types of cases, i.e. after having announced the Open offer, payment has
not been made. These cases are covered under Regulation 22 (12)
The
relevant Regulations 22 (12) reproduced below: (emphasis supplied)
22 (12) The acquirer shall, within a period
of fifteen days from the date of the closure of the offer, complete all
procedures relating to the offer including payment of consideration to the shareholders who have accepted the
offer and for the purpose open a special account as provided under Regulation 29.
Provided that where the acquirer is unable
to make the payment to the shareholders
who have accepted the offer before the said period of fifteen days due to
non-receipt of requisite statutory approvals, the Board may, if satisfied that
non-receipt of requisite statutory approvals was not due to any wilful default
or neglect of the acquirer or failure of the acquirer to diligently pursue the
applications for such approvals, grant extension of time for the purpose, subject to the acquirer agreeing to pay
interest to the shareholders for delay beyond fifteen days, as may be
specified by the Board from time to time.
The
Regulation nowhere discriminates between the original and new shareholder. It
says u/r 44(i) “whose shares have been
accepted in the public offer”. The very purpose of this amendment was to
fortify SEBI directives of paying interest to all the shareholders. Any other
position is quite irrational and against the SEBI stand of payment of interest
to all.
Regulation
22(12) says “to the shareholders who have
accepted the offer”
In the
New SAST 2011 the provisions for interest are appearing at the following
places:
A)
18 (11)
The acquirer shall be responsible to pursue all statutory approvals required by
the acquirer in order to complete the open
offer without any default, neglect or delay:
Provided that where the acquirer is unable to make
the payment to
the shareholders who have accepted the open
offer within such period owing to
non-receipt of statutory approvals required
by the acquirer, the Board may,
where it is satisfied that such non-receipt
was not attributable to any willful
default, failure or neglect on the part of
the acquirer to diligently pursue such
approvals, grant extension of time for
making payments, subject to the acquirer
agreeing
to pay interest to the shareholders for
the delay at such rate as may be
specified:
B)
32(1)
(h) directing the acquirer who has failed to make an open offer or has delayed
the
making of an open offer, to make the open
offer and to pay interest at such rate
as
considered appropriate by the Board along with the offer price;
C)
32(1)
(j) directing the acquirer who has made an open offer but has delayed making
payment of the open offer consideration to
shareholders, to pay interest at such
rate as considered appropriate by the Board
for the delayed period;
In none
of the above provisions or anywhere in the takeover code, there is any mention or
indication that interest will be paid only to the Original shareholders or
that there are 2 types of Shareholders,
one who will get interest and the other who will not. Rather --
·
SAST 1997-In Reg 44 (i) it is clearly
written “to pay to the shareholders,
whose shares have been accepted in
the public offer made after the delay, the consideration amount along
with interest”
·
SAST 1997-In Reg. 22 (12) it says “to
the shareholders who have accepted the offer”
·
SAST 2011 Similar
emphasis on “interest to the shareholders” “along with the offer price” is
found in regulation 18(11)& 32 (1)
·
The emphasis on “the
consideration amount along with interest”
makes interest an integral part of the consideration and cannot be
separated. Denying interest to a section
of shareholders would mean that the offer has been allowed at 2 differential
prices for different section of shareholders.
CASE FOR SEBI FIRMINGUP ITS STAND ON
PAYMENT OF INTEREST UNDER SEBI TAKEOVER CODE
History
of Interest payment to investors in the case of Open offers, dates back to the
year 2001 when SEBI directed Rhodia S.A. on 19.7.2001, under section 11B of the
Securities and Exchange Board of India Act, 1992 (the Act) and regulation 10,
12 and 44 of SAST 1997 to pay interest @ 15% to the shareholders of Albright
& Wilson Chemicals India Ltd.
Subsequently similar orders were passed against BP, Luxottica and
Clariant in the cases of takeover of Castrol, Rayban and Colour Chem
respectively.
In case of Castrol
all investors did get 15% interest. BP (Castrol) had challenged this in SAT who
dismissed its appeal on 5 September 2001. BP filed an appeal in Hon’ble Bombay
High Court and lost there as well by a judgment dated 2 May 2002 and paid
interest to all the shareholders on the shares accepted in the Open offer @
15%. Even though by this time SAT order for payment of interest only to
original shareholders had come.
Earlier, the powers
of SEBI to direct payment of interest was challenged. In Rhodia case “..the
learned Senior Counsel submitted that SEBI is an administrative authority with
regulatory powers and not plenary ones, ……..that there is no inherent power in
an administrative body to direct payment of interest, unless such power is
specifically statutorily granted. ………”
SEBI took a stand
that it is only a means of compensating the shareholders for the loss that they
have suffered because of delay in payment. In a counter argument, the Courts
were told that no loss was suffered by the person who was not a shareholder as
on the trigger date. Where is the question of compensation to such a person? Hence
it was directed that interest be paid only to "continuous
shareholders"- persons holding shares on the trigger date& continue to
hold them without any break and tendering his shares in the Open offer. SEBI
failed to convince the SC even in its review petition that this is absolutely
irrational and against the set market concept & practice.
Capital
market/share market is one of the most matured market in the world and
everything/incident-past, present & future gets discounted in the market
price. Some key features are given below:
1.
As per law and capital
market practice, all shares should rank paripassu, i.e. all shares are
equal and no share would get an advantage or preference over another
within the same class of shares.
2.
One can buy the share just before the
record date and is entitled to receive – Dividend or Bonus etc. without having
to hold it for the whole year.
3.
It can be argued that if a person has not
held the share for the whole year, he cannot be entitled to the share of profit
earned during that year.
4.
Similarly there can be a counter argument
that if a person held the share for the whole year, the profit of that year
must be paid out to him immediately without he being asked to hold the shares
till record date.
5.
If interest is denied on the ratio of "continuous
shareholding" why the same person
should not be denied the opportunity to participate in the Open offer on the
same ground that he was not holding shares on the trigger date.
6.
In case of loss- say SATYAM type fraud, the
shareholders who were not holding the shares on the dates when the fraud was
committed, must not be asked to bear the brunt. The loss must be recovered from
the shareholders holding the shares as on the fraud/loss dates.
7.
Why would someone simply lose his
entitlement if there has been a death of his parents because of this the
holders name got changed due to succession?
8.
Why would someone simply lose his
entitlement because there has been reorganization of multiple DP A/cs or family
holding transposing the names of husband & wife etc.?
9.
Any company holding shares can lose the
benefit because of merger or change in name etc. UTI was able to get special exemption
but what about others?
10. Why
would a small shareholder lose his right to sell his shares and use the funds
for his pressing needs- might be marriage or sickness, simply because a rogue
is delaying discharge of his obligation?
11. If SEBI
fails to ensure equal right to all shareholders, it is distortion of capital
market price discovery process. It is discrimination - one set of shareholders
gets interest and another set holding the very same shares does not get any
interest.
12. Why
should the defaulters be allowed to enrich themselves with the ill-gotten
wealth that belongs to the shareholders?
13. Why the
shareholders who could not hold on to their shares be deprived of their money? Against
the market norm, it is decided that only the continuous shareholders will be paid interest under the Open offer,
then the acquirer must be directed to distribute the so unpaid interest to such
shareholders.
14. The entire
amount payable as interest under the offer must be either distributed amongst
the participating continuous shareholders or the balance amount not paid out
should be distributed amongst the non participating continuous shareholders or
else it should be deposited in Investors Protection Fund.
15. SEBI had
already done a remarkable work of disgorging & distributing profit in case
of IPO scam, why not here?
SEBI realized the
flaw in its Takeover regulation and amended it.
Regulation
44 ( i ) regarding interest was inserted vide Second Amendment
Regulations w.e.f. 09.09.2002.(emphasis
supplied)
“44 (i) directing the person
concerned, who has failed to make a public offer or delayed the making of a
public offer in terms of these Regulations, to pay to the shareholders, whose shares have been accepted in
the public offer made after the delay, the consideration amount along with
interest at the rate not less than the applicable rate of interest
payable by banks on fixed deposits.”
SEBI NEEDS TO COME OUT OF THE SHACKLES OF
SUPREME COURT JUDGEMENT IN COLOUR CHEM CASE
Can you imagine citing & following the Supreme
Court (SC) decision in Vodafone even after the amendment specifically carried
out to overcome this decision? Well this is happening in the capital markets
under SEBI.
This relates back to acquisition of Colour Chem by
Clariant in 1997. In the then prevailing legal context SC ruled that in case of
defaults by acquirer interest needs to be paid only to “ continuous
shareholders” defined as those who were the shareholders on the trigger date,
continued to hold them without any break and tendering in the offer. After
the debacle at SC, SEBI realized that it
needs to fortify its Takeover regulations to ensure capital market integrity
and equal treatment to all shareholders
and amended it Regulation w.e.f. 09.09.02 by inserting Reg.44(i) as discussed
above. However, the Colour Chem judgement is yet being blindly followed by SEBI
although it is not applicable at all.
Examine
the following points:
1.
Open offer of Colour chem was triggered
much earlier than 09.09.02, the date on which 44(i) was inserted in SAST 1997
2.
The very reason of inserting 44(i) was to
fortify SEBI’s stand that interest must be paid to all the shareholders. Not
enforcing it makes the entire exercise futile.
3.
44
(i) of SAST 1997 has never been challenged and judgement based on a legal
position prior to the birth of
44(i) cannot be applied after its birth.
4.
Even if, for argument’s sake, it is
accepted that ColurChem judgement will be applicable in cases of interest under
44(i), it cannot be extended to Interest u/r 22(12). These 2 are absolutely
different in nature
5. The
omnibus Colour Chem judgement, overriding the laws & regulations cannot be
followed in SRMTL case. It became redundant and inapplicable after SAST Regulations 1997 was changed w.e.f. 09.09.02.
Interest obligation on NIRMA falls u/r 22(12) being type (B) default. Even
NIRMA said it does not fall under (A). SC never decided on type (B) cases which
are independent of losses to shareholders, yet SEBI seems to be blindly
following it
6.
Regulation 44(i) & 22(12) are very much
part of the statute book. These have not been challenged or been pronounced
invalid by any Court. Both stipulate interest payment to all.
7. The existing legal provisions must be
honoured by implementing them. Hon’ble Supreme Court can only interpret the
existing law. Any past judgement cannot nullify a new law, much less a law
enacted especially to overcome the short coming of the old law.
All the cases
where Supreme Court had allowed interest to be paid only to Shareholders who
were continuously holding the shares were pertaining to takeovers
triggered prior to 09.09.2002, (though the P A might have been announced
much later). There has been no instance where SEBI has directed payment
of interest ‘to all the shareholders who have accepted the offer’ and it has
been rejected by any tribunal or Court. SEBI on its own refuses to come out of
Shackles of SC judgment prior to 09.09.02 amendment. Investors are paying a
very heavy price for this indifferent attitude of SEBI while the defaulters are
laughing their way to the bank.
SOME RECENT CASES WHERE INTEREST WAS PAID
TO ALL THE SHAREHOLDERS
Some
cases of payment of interest to all u/r 22(12) are given below:
THOMAS COOK June 2008
In case of Thomas Cook the delay was because of getting RBI approval.- SEBI directed the Acquirer to pay Interest u/r 22(12) to all the shareholders. SEBI did not allow adjustment of Dividend.
In case of Thomas Cook the delay was because of getting RBI approval.- SEBI directed the Acquirer to pay Interest u/r 22(12) to all the shareholders. SEBI did not allow adjustment of Dividend.
RANBAXY Reg 22(12) Extract from PA (interest to all)
Interest
at 10% (as directed by SEBI vide letter dated October 07, 2008) from September
20, 2008 till October 14, 2008 (i.e. for 25 days) on the Offer consideration
has also been paid to the shareholders who validly tendered their equity shares
and whose shares have been accepted under the offer.
KAMAT HOTELS (INDIA) LIMITED January 11,
2012
Extracts from P.A.(Interest to all)
SEBI, in
its observation letter dated November 30, 2012 (“Observation Letter”), has
inter-alia made the
following
observations:
The
price calculated assuming the execution of the Inter-se Agreement triggered an
open offer under Regulation 12 of the Old Regulations along with interest @ 10%
per annum for delay thereon i.e., from August 13, 2010 (being the date of
execution of the Inter-se Agreement) until January 11, 2012 (“Delayed Period”);
STI India Limited -- Extracts from P.A. dated
27 Jun 2012 (interest to all)
Interest
is being paid on the Offer Price for delay beyond the original scheduled date
of opening. Pursuant to the same, interest of 49 paise (calculated at the rate
of 10% p.a. from April 30, 2012 (proposed date of opening the offer) to June
30, 2012 (actual date of opening of the offer) is payable to the Shareholders
whose Equity Shares have been validly tendered and accepted
United Spirits Limited- interest to all
As
described in the announcement dated February 10, 2013, the Offer Price would be
paid together with interest computed at the rate of 10 per cent per annum on
the Offer Price from March 19, 2013 till the date of actual payment to all the
Public Shareholders who successfully tender their Equity Shares in the Offer.
It is
the onerous duty of SEBI to maintain market integrity. SEBI must ensure the
very basic tenets of the share market that all shares that are bought come with
all the benefits that have accrued thereon.
The
current disposition of SEBI incentivizes delays and defaults under Open
offers/Takeovers. The more a defaulter delays the payout under an Open offer,
the lesser is his cost or rather higher is his profits. This happens on 2
counts:
1.
Firstly he gets to use the Funds for years
at unimaginably cheap rate -10% flat. This is lower than yield on G-Sec,
(currently at 8.87%) annually compounded for 5 years. Whereas the defaulters’ might
have to pay otherwise 12 to 24% compounded/payable monthly/quarterly/half
yearly or annually.
2.
Secondly the more he delays, lesser will be
the no. of persons to whom he will have to make payment. Interest payment in respect of
"continuous shareholders" will gradually, but definitely,
diminish owing to efflux of time as well as market dynamics. This saving could
be 70% to 90%.
3.
Table showing
extent of undue enrichment by the defaulting Acquirers at the cost of Investors
is given below:
|
NAME OF THE TARGET COMPANY
|
|||
|
PARTICULARS
|
COLOUR-CHEM
|
RAYBAN
SUN OPTICS
|
FALCON
TYRES
|
|
OFFER PRICE WITHOUT INTEREST
|
318.00
|
104.30
|
151.71
|
|
INTEREST PAYABLE PER SHARE
|
149.62
|
80.95
|
37.51
|
|
TOTAL PRICE PER SHARES
|
467.62
|
185.25
|
189.22
|
|
INTEREST AS % OF OFFER PRICE
|
47.05%
|
77.61%
|
24.72%
|
|
OFFER SIZE-NO. OF SHARES
|
23.30
|
75.45
|
11.36
|
|
NO. OF SHARES ACQUIRED
|
23.30
|
64.54
|
6.60
|
|
TOTAL INTEREST LIABILITY
|
3,486.15
|
6,107.68
|
426.11
|
|
ACTUAL INTEREST PAID
|
2,291.55
|
394.81
|
43.86
|
|
INTEREST DENIED
|
1,194.60
|
5,712.87
|
382.25
|
|
INTEREST ACTUALLY PAID / TOTAL INTEREST LIABILITY
|
65.73%
|
6.46%
|
10.29%
|
|
INTEREST DENIED / TOTAL INTEREST LIABILITY
|
34.27%
|
92.44%
|
82.27%
|
|
TRIGGER DATE
|
24-Feb-98
|
27-Aug-99
|
2-Jun-06
|
|
OFFER CLOSING DATE
|
27-Jun-05
|
14-May-07
|
10-Jun-09
|
Figures in Lacs (except per share)
THE CURRENT
CASE OF NIRMA’S OPEN OFFER OF SHREE RAMAMULTITECH(SRMTL)
As discussed above the basic difference between 44(i)
& 22(12) of SAST 1997 is, 44(i) seeks to compensate the investors for delay
whereas 22(12) is penal in nature.
In a written reply to your writer’s complaint, the
Acquirer has vide its Merchant Banker’s letter dated September 6, 2013 inter
alia stated that regulation 44(i) is not applicable in this case. Payment of
interest only to original shareholders was justified citing Colour chem case
and subsequent SEBI order in cases of Khaitan Electricals, FAL Industries &
Saurastra Cement. This is a self defeating reply. The proverbial “Self Goal”.
On the one hand they say 44 (i) is not applicable in this case and yet they
take shelter under all cases of first kind of default that are covered under
SAST 1997 reg.44(i).
The background of the case is given below:
1.
NIRMA had announced the PA for Open Offer
of Shree Rama Multitech Ltd. on 27 July 2005 and thereafter sought to withdraw
it on the flimsy ground of discovery of embezzlement of funds of SRMTL.
2.
The Clariant International Ltd. /
Colour Chem case can apply only to those takeovers triggered prior to
09.09.2002 and not to SRMTL case, as its takeover was triggered on
25.07.2005, i.e. much after the promulgation of Regulation 44 ( i
), which statutorily mandates payment of interest to ALL
SHAREHOLDERS WHOSE SHARES HAVE BEEN ACCEPTED IN THE OPEN OFFER.
3.
Although
NIRMA had contended before SAT that they were not even its ( SRMTL )
shareholders - pls
refer 10th / 11 th lines of para no.3 of SAT Order dated 05.06.2008 - but the fact is that the present
acquirers, Nirma Chemical Works Ltd. and Nirma Industries Ltd, were not
just ordinary shareholders but Promoters / Persons acting in Concert of
SRMTL, during the material and crucial period of 30.06.2003 to 30.09.2005, as
revealed by the quarterly shareholding patterns filed on BSE for the said
period.
|
4.
After the PA
for Open Offer was announced on 25.07.2005, the aforesaid shareholding
was re-classified from PROMOTER category to NON - PROMOTER, as
is evident from the BSE shareholding pattern as on 30.09.2005,
obviously with some mala fide intent.
5.
This fact
of NIRMA being Promoters / PAC of SRMTL was not cited in the
SAT Order dtd. 05.06.2008. NIRMA's statement of being unaware of the
financial condition of SRMTL and inadequate due diligence is devoid of any
credence. Further the fact of NIRMA being a PAC / Promoters of SRMTL, raises a doubt
on their possible collusion in siphoning of funds, as a Promoter /
PAC of SRMTL.
|
