I. SEBI rules on acquisition of "control"
The Securities and Exchange Board of India ("SEBI") in the matter of Kamat Hotels (India) Limited ("KHIL") passed an order on March 31, 2017 on, inter alia, the issue of acquisition of control.
Background
Foreign Currency Convertible Bonds issued by KHIL were subscribed by Clearwater Capital Partners (Cyprus) Ltd. and Clearwater Capital Partners Singapore Fund III Private Limited (collectively, the "Investors") with an option to convert the same into equity shares. The conversion price for conversion of bonds was later revised by the Board of Directors to INR 135/- per equity share. An inter-se agreement came to be executed amongst KHIL, its promoters and the Investors on August 13, 2010.
Bonds were converted on January 11, 2012 pursuant to the exercise of conversion rights by the Investors. The said conversion lead to an increase in the shareholding of the Investors in KHIL from 24.50% to 32.23%. Public announcement of open offer was made by the Investors on the same day for acquisition of 26% shares of KHIL from the public shareholders as was required to be made under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 ("2011 Takeover Code").
When SEBI was forwarded the draft letter of offer, SEBI made certain observations on the same and noted that public announcement under Regulation 12 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 ("1997 Takeover Code") was required to be made by the Investors as SEBI took the view that the Investors had acquired control in KHIL as per certain clauses under the said inter-se agreement dated August 13, 2010. Appropriate amendment in the draft offer document was advised.
In the final letter of offer, observations of SEBI were incorporated and it was mentioned that SEBI's view was to be challenged before the Securities Appellate Tribunal ("SAT"). Pursuant to the order of SAT, show cause notice was issued by SEBI with respect to non-compliance with its directions. Certain clauses under the said inter se agreement must be noted here as were pointed out by SEBI:
a) KHIL and certain promoters could not enter into any agreement or arrangement conflicting with or restricting the rights of the Investors.
b) Prior approval of the Investors was required for altering the share capital, creating any new subsidiaries, entering into any joint ventures, merger or demerger, etc.
c) The Investors had the right to nominate one director on the board of KHIL.
Therefore, SEBI took the stand that such clauses showed that the Investors had a right to control the policy decisions of KHIL and thus had acquired "control" over KHIL as defined under the 1997 Takeover Code. As the Investors failed to follow the instructions of SEBI to make public announcement of open offer as per Regulation 12 of the 1997 Takeover Code, it was alleged that the Investors were in breach of the same. Further, SEBI alleged that the Investors were in breach of Regulation 16(4) of the 2011 Takeover Code as the Investors had not incorporated the changes advised by SEBI in the letter of offer.
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