SAT ‘Strictly’ Interprets Takeover Code, Strikes Down Application Of SEBI’s Informal Guidance

Takeover Code has been one of the most contentious Regulations under the Securities Law. The Code deals with ‘control’ over the listed company, disclosures and public announcements by acquirers and persons acting in concert, triggering of open offer, disclosures by promoters of the company listed, etc. The practical application of the Code is very ‘strategic decision-making process’ and the Code has greater significance in cases of merger and amalgamation, acquisition or strategic investment. Recently, Securities Appellate Tribunal (‘SAT’) in Arbutus Consultancy LLP Vs SEBI, decoded the provisions of the Takeover Code in light of the exemptions under the Code read with SEBI’s Informal Guidance Scheme, 2003. This article is an analysis of the SAT judgment.

Factual Matrix:

India Bulls Real Estate Ltd. (‘IBREL’) is a company that is listed on BSE and NSE. India Bulls Infrastructure and Power Ltd. (‘Target Co.)’ was incorporated on November 9, 2010 as a wholly owned subsidiary of IBREL. Scheme of demerger was filed with Delhi HC by IBREL and Target Co. for consolidating the power business of IBREL and thereafter to demerge into Target Co. as a separate undertaking. The said scheme was sanctioned by Delhi HC. Target Co. was listed on the BSE and NSE and accordingly the documents relating to promoter’s shareholding pattern were filed with the stock exchanges.

Laurel Energetics Pvt. Ltd. (one of Co-promoter of IBREL and Target Co., ‘Laurel’) acquired various quantities of equity shares from 3 other co-promoters of IBREL and Target Co. Laurel acquired various quantities of the equity shares of Target Co. from 4 other co-promoters of IBREL and Target Co. All the said acquisitions were duly disclosed to the stock exchanges under Takeover Code.

The Appellants along with persons acting in concert (‘PAC’) made a public announcement for acquisition of 35.95 crore equity shares of Target Co. The draft letter of offer was filed with SEBI by Manager to the issue. However, SEBI issued an order asking the Manager to the issue to revise the price of the open offer as inter-se promoter transfers are not exempt from open offer obligations under Takeover Code.

Question of law being was “Whether inter-se promoter transfers made prior to completion of 3-years of listing Target Co. are eligible for general exemption from open offer under Regulation 10(1)(a)(ii) of Takeover Code?”

Background of relevant provisions of Securities Law:

Pursuant to the provisions of Regulation 3(2) of Takeover Code, if an acquirer (along with PAC) holds shares or voting rights in Target Co. entitling him to exercise 25% to 75% of voting rights, and proposes to acquire more than 5% of voting rights, then such acquirer shall make a public announcement of an open offer for acquiring shares.

Regulation 10 of Takeover Code relates to “General Exemptions”, which enlists certain acquisitions or transactions that are exempted from the obligation to make an open offer under Reg. 3 and Reg. 4 of Takeover Code. With reference to the present case, an acquisition relating to the inter-se transfer of shares amongst qualifying persons i.e. persons named as ‘promoters’ in the shareholding pattern filed by the Target Co. in terms of the Listing Agreement or Takeover Code for not less than 3 years prior to the proposed acquisition.

Under the Informal Guidance, Scheme, 2003, SEBI-registered intermediary, listed company, Mutual Fund Trustee and acquirer / proposed acquirer under Takeover Code can seek SEBI informal guidance in following form:

• No-action letters: In which SEBI’s Department indicates that Department would or would not recommend any action under any Act, Rules, Regulations, Guidelines, Circulars or other legal provisions administered by SEBI,

• Interpretive letters: In which SEBI’s Department provides an interpretation of a specific provision of any Act, Rules, Regulations, Guidelines, Circulars or other legal provision being administered by SEBI in the context of proposed transaction in securities or specific factual situation.

Summary and Analysis of SAT’s observations – Exemptions from Takeover Code compliance:

SAT observed that the “Reg. 10(1)(a)(ii) clearly states that in order to be eligible for exemption from making an open offer inter-se transfers of shares amongst persons named as promoters in the shareholding pattern by the target company in terms of its listing agreement has to be for not less than 3 years prior to the proposed acquisition” SAT rejected the argument that promoters have to be named in the listing agreement for minimum period of 3 years overall, not necessarily 3 years subsequent to the signing of the listing agreement. With respect to such argument, SAT observed that “If such an interpretation is accepted a company listed today with an unchanged promoter holding for more than 3 years prior to listing becomes eligible for exemption from making an open offer for inter-se promoter transfers even tomorrow. This is not the intention behind the amended law (SAST/Takeover Regulations, 2011)”.

SAT stated that SEBI’s order clearly mentioned that inter-se transfers amongst promoters were not exempted from the open offer obligations.  With reference to SEBI’s order, SAT opined that “There is no ambiguity in the order as the provision relating to exemption of inter-se promoter transfers from the open offer obligations is available only under Reg. 10(1)(a)(ii) of SAST/Takeover Regulations, 2011”

SAT rejected the following contentions of Appellant for claiming exemption from making an open offer:

• All relevant filings to SEBI / Stock Exchanges under relevant provisions of Takeover Code were made regarding inter-se promoter transfers;


• No ‘alien entity’ has come in as promoter / promoters in the Target Company ever.

SAT observed that “The law is not interpreted such that because nothing untoward has happened the benefit of law should be available to an entity. Compliance of law has to be the starting point, not the end result”.

Summary and Analysis of SAT’s observations on SEBI’s Informal Guidance:

The promoters cited SEBI’s Informal Guidance dated October 25, 2012, which was issued to Weizmann Forex Ltd. The promoters argued that the situation is exactly similar to that in Weizmann Forex Ltd. However, SAT stated that “When the statute is clear, informal guidance should not be relied on. Informal guidance scheme cannot be used to reduce the importance of the statute itself”. SAT observed that “Straight forward reading of Reg. 10 of Takeover Regulations 2011 unambiguously shows that Appellants were not eligible for exemption. When a straight forward reading of Regulation/law is available that is the only way it should be read. In the instant matter no other interpretation is actually possible”. With reference to the SEBI’s Informal Guidance given to Weizmann, SAT stated that the SEBI official has erred by inadvertently providing an interpretation in the spirit of the Takeover Code, 1997 oblivious of the changes happened in terms of Takeover Code, 2011. SAT stated that “Such a mistake made by an officer of the respondent cannot be used to furtherance of the mistake.”

SAT stated that under SEBI’s Informal Guidance Scheme, 2003, the guidance is the view of SEBI’s concerned department and will not be binding on SEBI. It held that “The letter issued by Department under this scheme should not be construed as a conclusive decision or determination of any question of law or fact by SEBI. Such a letter cannot be construed as an order of the Board u/s 15T of SEBI Act, 1992”. Since SEBI’s Informal Guidance are not ‘orders’, SAT held that they are not be appealable. SAT also observed that SEBI’s Informal Guidance cannot be used as an estoppel against law.

Impact of the SAT ruling on Securities Market:

With reference to the ‘Exemption from Takeover Code compliance’, SAT has applied the literal rule of interpretation to the provisions of Takeover Code and has rightly concluded that “When the statute is clear, informal guidance should not be relied on.” SAT also made a very interesting observation that letter issued by SEBI’s Department under Informal Guidance Scheme should not be construed as a conclusive decision and the letter cannot be construed as SEBI’s order u/s 15T of SEBI Act, 1992. Therefore, such informal guidance would amount ‘administrative circular’. Recently, the Supreme Court in NSDL Vs SEBI held that SAT has no jurisdiction to adjudicate on SEBI’s ‘Administrative Circulars’.

In the recent Interpretive Letters, SEBI’s department give an exhaustive disclaimer (though not under particular heading of ‘disclaimer’) that different facts or conditions might lead to a different result and the Interpretive letter does not express a decision of SEBI on the question referred. After into consideration the recent Interpretive Letters issued by SEBI and requisite ‘Disclaimer’ given in the Letters, I am of the view that such letters issued by SEBI’s Dept. may not be binding on the company which has made an application to SEBI. However, in such cases it is necessary to ensure that the provisions of Securities Law are interpreted strictly.

[The opinions expressed in this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of LiveLaw and LiveLaw does not assume any responsibility or liability for the same].