India – Usage Of Public Funds And Exit Offers.

2 March, 2016

 

 

The Securities and Exchange Board of India (‘SEBI’) had, at its board meeting held on January 11, 2016, considered, inter alia, a framework for provision of an exit opportunity to shareholders of a company dissenting to any proposal, which varies the terms of contracts or objects referred to in a prospectus. Prior to the meeting, SEBI had on December 1, 2015 also issued a discussion paper inviting public comments on the suggested framework for providing an exit offer to dissenting shareholders (“Discussion Paper”).

 

Subsequently, on February 17, 2016, the SEBI (Issue of Capital and Disclosure Requirements) (Second Amendment) Regulations, 2016 (“ICDR Second Amendment”) were issued, amending the provisions of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 by including Chapter VI-A, which provides for certain conditions and the manner of providing an exit opportunity to dissenting shareholders.

 

Criteria:

 

1. Exit offers are required to be made by promoters or shareholders in control of a listed company to shareholders of such company who dissent to any proposal to vary the terms of contracts1 or change in objects referred to in a prospectus. This is not applicable if there are no identifiable promoters or shareholders in control of a listed company;
2. Applicable to listed companies whose public issues opened after April 1, 2014;
3. The proposal for change in the objects or variation in terms of contracts is dissented to by at least 10% of the shareholders who voted in the general meeting
4. where such change / variation was proposed;
5. Of the total proceeds of the public issue, less than 75% has been utilised towards
6. the objects of the public issue – Based on our review of the Discussion Paper, we understand that the intent of the ICDR Second Amendment was to exclude instances wherein a majority of the proceeds of the public issue had been utilised towards its stated objects. Therefore, if 75% or more of the total proceeds of the public issue has been utilised towards the objects of the public issue, an exit offer would not be required to be undertaken. However, this position is not reflected in the ICDR Second Amendment, which implies that in order for an exit offer to be required to be undertaken, of the total proceeds of the public issue, less than 75% of the proceeds of the public issue is still to be utilised towards the objects of the public issue, which appears to be the opposite of the intention expressed in the Discussion Paper. Further clarification may be needed from SEBI in this regard; and
7. Only dissenting shareholders who hold shares on the relevant date2 are eligible to avail of the exit offer.

 

Exit Offer Process

 

1. Notice to the shareholders proposing special resolution for change in objects or varying terms of contracts must contain information about the exit offer to dissenting shareholders;
2. In addition to the requirements of the Companies Act, 2013, the explanatory statement to such notice must contain a statement that an exit opportunity to the dissenting shareholders must be provided by the promoters or shareholders in control;
3. The voting results of the shareholders’ meeting shall be submitted to the stock exchange(s) along with a list of dissenting shareholders, which must be certified by the compliance officer;
4. Appointment of a merchant banker and finalisation of the exit price3; 
5. Intimation to stock exchange(s) of exit offer and exit price, which must be disseminated by the stock exchange(s) within one working day of receipt;
6. An escrow account must be set up by the promoters or shareholders in control for deposit of the entire consideration for the exit offer at least two working days prior to opening of the tendering period;
7. The tendering period must commence within seven working days from the date of the shareholders’ resolution approving the change in objects and shall remain open for 10 working days;
8. The promoters or shareholders in control are required to facilitate the tendering of shares and settlement through the stock exchange mechanism specified by SEBI for the purposes of open offers, buy-back offers and delisting offers;
9. Dissenting shareholders offering their equity shares in the exit offer have the option to withdraw till the closure of the tendering period;
10. Payment must be made to the shareholders who accepted the exit offer within 10 working days from the last date of the tendering period; and
11. Within two working days of such payment, the listed company is required to submit relevant details of the exit offer to the stock exchange(s) together with a report from the merchant banker that payment to all dissenting shareholders whose equity shares were accepted has been made.

 

Acquisitions Pursuant to an Exit Offer

 

1. On February 17, 2016, the SEBI (Substantial Acquisition of Shares and Takeovers) (Amendment) Regulations, 2016 was issued, exempting an acquisition of shares or voting rights of a listed company pursuant to an exit offer under the ICDR Second Amendment from the requirement of making an open offer under Regulation 3 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Regulations”), which pertains to direct acquisition of shares and voting rights.
2. If the shareholding of promoters or shareholders in control, together with any person acting in concert with them, exceeds 75% pursuant to an exit offer, such shareholding is required to be reduced to 75% within a period of 12 months.
3. The press release issued pursuant to the SEBI board meeting on January 11, 2016 indicated certain salient features of the exit offer process and, inter alia, included an exemption from contra trade restrictions on promoters / controlling shareholders / dissenting shareholders, under the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”). However, as of date, no such amendment to the PIT Regulations has been notified by SEBI. As a result, in the absence of such an amendment, the contra trade restrictions prescribed under the PIT Regulations would need to be taken into consideration in relation to an exit offer. 

 

1  There currently exists an ambiguity as to what would amount to “terms of contracts… referred to in the prospectus”. While the Discussion Paper sought to restrict this understanding to contracts which substantially affect the main line of business or revenue generation of the company, this understanding is not reflected in the ICDR Second Amendment. 

2  The date of the board meeting on which the change in objects / variation in terms of contract was approved (prior to seeking shareholders’ approval for such change / variation). 

3  The exit price will be the highest of: 

the volume-weighted average price paid, or payable, for acquisitions by promoters or shareholders having control or any person acting in concert with them, during the 52 weeks immediately preceding the relevant date;  the highest price paid, or payable, for any acquisition, by promoters or shareholders having control or any person acting in concert with them, during the 26 weeks immediately preceding the relevant date; the volume-weighted average market price of such shares for a period of 60 trading days immediately preceding the relevant date as traded on the recognised stock exchange where the maximum volume of trading in the

shares of the company are recorded during such period;
d. if the shares are not frequently traded, the price determined by the promoters or shareholders having control and the merchant banker taking into account valuation parameters including book value, comparable trading multiples, and such other parameters as are customary for valuation of shares of such companies. 

For further information, please contact:

 

Zia Mody, Partner, AZB & Partners

zia.mody@azbpartners.com