Today(25th
June 2020) is a big day for Small shareholders. Interest to all the
shareholders is about a 2 decades old fight which I fought on many occasions
with SEBI even at SAT level- in the case of SHREE RAMA MULTI-TECH, POLO HOTELS and GOLDEN
TOBACCO. See copy of my suggestions dated Feb 03, 2020, major suggestions
have been accepted by SEBI
Discussion Paper on
proposed amendments in SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011,
Feb 03, 2020
Sh. Rajesh Gujjar
General Manager
Corporation Finance
Department
Securities and Exchange
Board of India
SEBI Bhavan
Plot No. C4-A,
"G" Block
Bandra Kurla Complex
Bandra (East), Mumbai -
400 051
5. Public Comments
5.1 Public comments are
invited on the aforesaid proposals in the following format:
|
Name of entity/ person/ intermediary: CA Arun Goenka
|
|||
|
Name of organization (if applicable): SMALL
INVESTORS’ WELFARE ASSOCIATION
|
|||
|
Contact details: Address, Mobile No. etc. 9323091348
|
|||
|
|
|
|
|
|
|
|||
|
Sr.
No.
|
Proposals
Page
No. Para No.
|
Proposed/
suggested
changes
|
Rationale
|
|
1.
|
Page 6 Para 2.14
2.14 The following is proposed:
i. We may allow completion of acquisition through stock
exchange settlement process for all types of transactions including bulk
deals and block deals.
|
SUGGESTED
CHANGE IN REGULATION 22(2A)
Notwithstanding
anything contained in sub-regulation (1), an acquirer may acquire shares of
the target company through preferential issue or through the stock exchange
settlement process,
|
We
agree with the concept. There is no harm in allowing completion
of acquisition through stock exchange settlement process for all types of
transactions including bulk deals and block deals, especially when the
acquirer is not allowed the voting rights.
|
|
2.
|
Page
8 Para3.14
In
view of the above, it is proposed that in case of indirect acquisitions PA of
an open offer is made in terms of Regulation 13(2)(e) of Takeover
Regulations, an amount of
100%
of the consideration payable under the open offer must be deposited 2 days
before the date of DPS.
|
SUGGESTED
CHANGE IN REGULATION 13(2)(e)
in the case of indirect acquisition of
shares or voting rights in, or control over the target company where none of
the parameters referred to in sub-regulation (2) of regulation 5 are met, may
be made at any time within four working days from the earlier of, the date on
which the primary acquisition is contracted, and the date on which the
intention or the decision to make the primary acquisition is announced in the
public domain;
ADD A PROVISO:
PROVIDED an amount of
100%
of the consideration payable under the open offer is deposited 2 days before
the date of DPS.
|
It
is strongly felt that providing for 100% deposit is absolutely
necessary especially in view of the fact that the acquirer has already got
control over the target company and further in case of default, it is all the
more difficult to implement the offer if the party is overseas.
See the example o Federal Mogul, of course the acquirer was a
reputed party and completed the offer, but he was fully in control of the
target company before completing the offer.
|
|
3.
|
Page 12 para 4.13 Considering the above, it is proposed that the
revised open offer price may be calculated after addition of interest (10%)
and the revised offer price is paid to all the shareholders (in line with the
approach currently followed for indirect acquisitions and delays on account
of non-receipt of statutory approvals).
|
SUGGESTED
CHANGE IN REGULATION
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
At a revised open offer price
enhanced by addition of interest @ 10% p.a. for the period of delay. Such
revised offer price is payable to all the shareholders
|
This
has been a very long standing demand of investors. A detailed note is
attached. This will ensure share market integrity and compensation to all
original shareholders, because the new shareholder will pay the accumulated
interest to the original shareholder when buying the shares, just like
cum-dividend.
|
DETAILED
NOTE ON INTEREST
THE
RATIONALE OF PAYMENT OF INTEREST
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 recent 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."
CASE
FOR SEBI FIRMINGUP ITS STAND ON PAYMENT OF INTEREST UNDER SEBI TAKEOVER CODE
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, annually compounded for a longer
period. 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. SEBI can check this from
its data base.
HISTORY
OF PAYMENT OF INTEREST UNDER SAST
History
of Interest payment to investors in the case of Open offers, dates back to the
year 2001 when SEBI FIRST directed Rhodia S.A., BP, Luxottica and Clariant
(being the more prominent cases) in the cases of takeover of Albright &
Wilson, Castrol, Rayban and Colour Chem respectively. They were asked to pay
15% interest.
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%. The SEBI order in case of ClourChem said:
“13.1In
view of the findings made above, in exercise of the powers conferred upon me
under sub-section (3)
of
Section 4 read with Section 11B SEBI Act 1992 read with regulations 44 and 45
of the said
Regulations,
I hereby direct the Acquirer to make public announcement as required under
Chapter
III
of the said Regulations in terms of regulations 10 & 12 taking 21.11.97 as
the reference date for
calculation
of offer price. The public announcement shall be made within 45 days of passing
of this
order.
13.2Further,
in terms of sub regulation (12) of regulation 22, the payment of consideration
to the
shareholders
of the Target company has to be made within 30 days of the closure of the
offer. The
maximum
time period provided in the said Regulations for completing the offer
formalities in
respect
of an open offer, is 120 days from the date of public announcement. The public
announcement
in the instant case ought to have been made taking 21.11.97 as a reference date
and
thus the entire offer process would have been completed latest by 21.3.98.
Since no public
announcement
for acquisition of shares of the Target company has been made, which has
adversely
affected interest of shareholders of Target Company, it would be just and
equitable to
direct
the Acquirer to pay interest @ 15 % per annum on the offer price. the Acquirer
is hereby
accordingly
directed to pay interest @ 15 % per annum to the shareholders for the loss of
interest
caused
to the shareholders from 22.3.98 till the date of actual payment of
consideration for the
shares
to be tendered in the offer directed to be made by the Acquirer.”
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 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 those shareholders who
were continuously holding the shares and who tender in the open offer will be
paid interest under the Open offer, then the acquirer must be directed to
distribute the so unpaid interest to such shareholders.
14.
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
drafted and passed this regulation 44 (i) with the intention of
protecting he nterest f the shareholders n view of the adverse decision of
Supreme Court in the case of RHODIA, but unfortunately Supreme court discussed
44(i) in Clariant case and gave an adverse interpretation. Apparently ,
Hon’ble Supreme Court had rightfully commented in the Clariant case that no one
should be unjustly enriched and compensation should be paid to persons who have
actually suffered the loss. SEBI, failed to impress upon the Hon’ble Supreme
Court that the compensation to all the actual sufferers can flow to them only
if the Holders in due course are given the interest. Interest to the
holder is due course is in fact the payment to the original shareholder.
Payment of interest to the last holder who is tendering the shares in the offer
will not benefit him, but it will be to the benefit of the original
shareholder. By denying interest to the ultimate holder of the shares who has
tendered them in the offer, the interest has been denied to the original shareholder
who has suffered a great loss and the defaulter gets unjustly enriched.
As we
all know there is a huge difference in the price of shares on “Cum” and
“ex”basis. The new buyer, although will get the dividend or Bonus shares but
that does not mean that this benefit has accrued to the new buyer. The benefit
has actually been paid for to the original shareholder in terms of higher
purchase price. Similarly if the interest was to be paid to the new buyer, the
real beneficiary would have been the original shareholder only as the original
shareholder would have been able to sell his shares at a higher price. For
example, of two case study of
(i)
Ingersol Rand declared a dividend of Rs.208 per share for which the Ex date was
24.05.18. The shares were traded as cum divined till 23.05.18 and the rate was
Rs.873.70 whereas Ex Dividend rate on 24.05.18 was 628.60. Such a heavy fall in
the price similar to the dividend being paid was mainly because of the share
becoming Ex Dividend.
(ii)
Bonus in the Ratio of 1:1 (one held by the investor will automatically become
two by issue of one bonus or free share) was declared by Infosys. The Ex date
was 04.09.18. The closing rate on 03.09.18 was Rs. 1,434.25 and the
opening rate on 04.09.18 was Rs.722, almost half because one share held became
2 shares.
(iii)
In case of Polo Hotels Ltd. the accumulated interest is about Rs.70, but the
share price is hovering around Rs.5/- because the buyers will not be entitled
to get interest. Contrary to the Hon’ble Apex Court’s desire, the defaulters
are getting unjustly enriched. This incentivises default.
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.
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 providedunderRegulation 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.
Thus
the regulation makes it mandatory for the acquirer to complete all procedures
and payment. If the acquirer fails to do that, it will be taken as a willful
default. The only situation when delay is allowed, that too
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.
SEBI
NEEDS TO COME OUT OF THE SHACKLES OF SUPREME COURT JUDGEMENT IN COLOUR CHEM
CASE
The
Supreme Court order in the ClariantCase[(2004) 8 SCC 524] wherein only the
original shareholders were to be compensated is analyzed below:
•
Since the background of SC order is the order of SEBI and SAT it is
important to study all 3 together.
•
The trigger date (PA date) for this Open offer was 21.11.97. SAST was
amended on 09.09.02 to include 44 (i). SEBI order is dated Oct.16,2002.
•
SEBI directed to pay interest under section 11B (4)(3) of SEBI Act 1992 read with
Regulations 44 and 45 of SAST.
•
it was on "just and equitable" grounds the SEBI wanted the Appellants
to pay interest @ 15% to the shareholders to compensate the loss of interest
due to delay involved in making public offer.
•
SAT Opined in the case of Rhodia case (4th last para of the order dated Nov 7,
2001) “..regulation 44 itself arms SEBI to issue the impugned direction, it is
not necessary to seek assistance from section 11B of the Act. Therefore I do
not consider it necessary to examine the scope of section 11B for the purpose.”
•
In BP Plc case SAT said about interest “In fact it is nothing but a sale
consideration payable by the appellants to the shareholders.” This is quoted in
Clariant case.
•
Regulation 44 of 1997, empowered SEBI to issue directions only in the interest
of the securities market. The expression “ in the interest of investors” was
added on 09.09.02.
•
SC observed “Both the Board and the Tribunal have proceeded on the basis that
the interest is to be paid with a view to recompense the shareholders and not
by way of penalty or damages. Such a direction, therefore, was for the purpose
of protecting the interest of the investors and not ‘ in the interest of the securities
market’ ”
It is
the onerous duty of SEBI to maintain market integrity. However it did not
impress upon the Tribunal or the Supreme Court the fact that one of the
objective of directing to pay interest is ‘ in the interest of the
securities market’ . The full impact and wide coverage of the regulation
44 after its amendment in 2002 was never examined in detail by any Tribunal or
Court. Without any such examination, SEBI on its own has accepted this SC order
in the case of Clariant as an omnibus order and has not been directing payment
of interest to all the shareholders. Investors are paying a very heavy price
for this indifferent attitude of SEBI while the defaulters are laughing their
way to the bank.
No comments:
Post a Comment