SEBI's flawed order on takeover regulations in buy back situations

SEBI has passed an order on the 5th Sept 08 where it exempts promoters of DLF (a listed Indian company) from complying with the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997 (takeover regulations). The facts in brief are that the listed company proposes a buy-back of its equity shares, and pursuant to the scheme shareholders would tender their shares to the full limit on offer (assuming all persons except the promoters tender their shares). On the buy-back, the voting rights of the acquirers would increase from the existing 88.16% to 89.32% of the outstanding equity share capital of the target company and the same would attract the provisions of Regulation 11(2) of the takeover regulations. In other words, the promoters' ownership in terms of number of shares would remain constant, while the proportion of their shareholding in the company's capital would increase (as the other shareholders' equity has been bought back) - thus triggering a compulsory tender offer requirement.

The promoters had sought exemption from complying with the provisions of the takeover regulations which prescribes that the acquisition of any voting rights (once the acquirers already own 55% shareholding) would cause a tender offer of 20% to be triggered (in this case the quantum would be lower as the public float is only around 11%). Such applications go to an independent takeover panel, which in this case has recommended an exemption. Based on the recommendation, the whole time member of SEBI has allowed the exemption.

The order gives the exemption by concluding "The acquirers are also in control of the target company. I note that, even after the proposed buy back, the shareholding of the acquirers in terms of numbers would remain the same and that the increase in the shareholding (in terms of percentage) is only incidental to the proposed buy back plan of the target company. The acquirers have undertaken that they would not participate in the buy back offer of the target company. I further note that, pursuant to the proposed buy back, there would not be any change in control over the target company, as the acquirers (part of the promoter group) are already in control over the target company."

This is a non sequitur. The increase in shareholding is not incidental to the buy back program. The increase is occurring because the promoters are choosing not to tender their shares into the buyback program - had they chosen to tender, their shareholding would have fallen. That's not a typo - it would actually have fallen as the promoter would have tendered the number of shares announced while many non-promoters would not have tendered, ensuring the promoter shareholding was guaranteed to fall. Only because of the exercise of the volition of the promoters is the acquisition occurring rather than as an incidental occurrence.

The last sentence quoted above 'there would not be any change in control over the target company, as the acquirers (part of the promoter group) are already in control' is a challenge to the very spirit of the takeover regulations. Regulations 11(2) mandates that acquisition of even one share beyond 55% would attract the compulsory tender offer requirement. Then following this order, shouldn't all acquisitions over say 50% or 67% not require a compulsory tender offer - as the person is already in control? Unfortunately, this flawed order will remain, for many to exploit as a precedent, as neither the persons granted the exemption nor SEBI will appeal against it.

PS: While, SEBI had in the past allowed exemptions where the promoters held below 55% and their buy back induced acquisition would not exceed 5% as the exemption was in the nature of creeping acquisition which was allowed under Reg. 11(1) and was in a way equitable. That fact pattern is however a gray area and open to debate - but contrast it with the present one.