India: Tender Offers In 2018: The Year That Was

January to December 2018 was a more active year compared to 2017 for tender offers made under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Regulations).

Non-banking financial companies (NBFCs) saw a particularly high number of tender offers. These included tender offers for Tourism Finance Corporation of India Limited, Pranami Credits Limited and LKP Finance Limited. But while the NBFC space may have had the greatest number of tender offers, the highest tender offers in terms of size/value were in banking (IDBI Bank Limited), healthcare (Fortis Healthcare Limited), pharmaceuticals (Merck Limited), and cable & broadband (Hathway Cable and Datacom Limited and Den Networks Limited) sectors.

A snapshot of tender offers for the years 2017 and 2018 is as follows:

Tender Offers by Financial Investors

Certain financial investors made tender offers in 2018 to acquire control. These were Redkite Capital Limited and SSG's tender offer for Tourism Finance Corporation of India Limited and True North Fund's tender offer to acquire control of Shree Digvijay Cement Company Limited.

Time Taken for SEBI Observations

The time taken to complete an open offer is mainly a function of the time taken to receive the SEBI observations on the draft letter of offer and other regulatory approvals, as the rest of the process typically moves in an auto-pilot mode. In 2018, the time taken by SEBI to issue its final observations ranged from 28 days (in the case of Vishvprabha Trading Limited) to 243 days (in the case of Worth Investment and Trading Company Limited).

Voluntary Open Offers

Two critical instances this year where voluntary open offers were made pursuant to an inter-se arrangement between the acquirer and persons acting in concert were tender offers for KPIT Technologies Limited and Tourism Finance Corporation of India Limited.

Open Offers made after SEBI's Directions

Five tender offers were made as a result of orders passed/informal guidance issued by SEBI. Three out of these tender offers were made under the erstwhile Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 viz., Golden Tobacco Limited, TCM Limited and Tirrihannah Company Limited. Tender offers for Linde India Limited and Regallia Realty Limited were made under the Takeover Regulations.

Amendments to the Takeover Regulations

Takeover Regulations were amended in 2018 to mainly cover the following:

1. For providing exemption from tender offers to acquisitions pursuant to a resolution plan approved under Section 31 of the Insolvency and Bankruptcy Code, 2016
2. Prohibiting fugitive economic offenders from making open offers
3. Allowing revisions to the tender offer price until one working day before the general public starts tendering the shares (this duration was previously three working days)

Veto Rights: Important Judgements relating to Takeover Regulations

The concept of veto rights assumes significance as SEBI may treat certain veto rights as acquisition of control triggering a mandatory tender offer. Please see summary of important developments below:

SEBI WTM Order in the matter of United Spirits Limited¹

The SEBI Whole Time Member (WTM) while dealing with a show cause notice against Diageo entities for failure to make a tender offer for United Spirits Limited (USL) held that limited veto rights given to a minority shareholder don't provide operational control over the target company.

The SEBI order makes it clear that affirmative veto rights over the following matters do not constitute control: (a) any pre-emptive issue of shares at a considerable discount; (b) voluntary winding up of the company; (c) voluntary delisting of the company; and (d) alteration of the terms of the shares held by the minority group in exclusion to other shareholders of the same class.

Supreme Court Judgement in the case of ArcelorMittal India Pvt. Ltd. v. Satish Kumar Gupta^2]/em>

The Supreme Court, while dealing with the interpretation of the word 'control' under Section 29A of the Insolvency and Bankruptcy Code, 2016 (IBC) stated that mere power to block special resolutions cannot amount to control. The court relied upon the Securities Appellate Tribunal's (SAT) order in the case of Subhkam Ventures^3]/em> (Subhkam Order) and held that the expression 'control', in Section 29A (c) of the IBC denotes only positive control and that control as contrasted with management, means de facto control of management or policy decisions that can be or are in fact taken.

It would be now interesting to see how SEBI looks at this decision of the Supreme Court as SEBI had appealed against the Subhkam Order before the Supreme Court but the matter was then disposed of due to factual developments.

SEBI could argue that this Supreme Court order is in the context of the IBC (which gives priority to creditors) and not of Takeover Regulations (which gives priority to the exit of public shareholders) and hence, it would not like to follow the principles of control as explained in this Supreme Court order. As of now, the chance of winning the argument that affirmative voting rights simpliciter are protective covenants and should not be understood as acquisition of control appears to be better in a higher forum.

2019

Sectors that are likely to see a lot of M&A activity in 2019 (irrespective of whether a tender offer is triggered) are technology, healthcare, financial services and retail.

Footnotes

[1] SEBI Whole Time Member order dated September 6, 2018 having reference number WTM/GM/EFD/ 54 / 2018-19

[2] CA Nos. 9402-9405, 9582, 10204 and 10208 of 2018

[3] Subhkam Ventures (I) Private Limited v. The Securities and Exchange Board of India, Appeal No. 8 of 2009

Authors were assisted by Gagan Sharma, Principal Associate

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