Restraining the withdrawal of open offers

Written by Indu Bhan | Indu Bhan | Updated: May 9 2014, 09:42am hrs
In a landmark judgment that will have a major impact on India Inc, the Supreme Court has held that companies can no longer withdraw open offers that have become commercially unviable. Even any delay by market regulator Sebi in clearing an open offer cannot be a ground to back out, as such a delay cannot be equated to the refusal of approvals required from other independent bodies such as RBI and other regulatory statutes including foreign exchange regulations.

In a recent ruling Akshya Infrastructure vs Sebi, the apex court held that an open offer voluntarily made through a public announcement for purchase of shares of the target company cannot be permitted to be withdrawn at a time when the voluntary open offer has become uneconomical to be performed. Moreover, Regulation 27 of the Sebi Takeover Code makes it clear that there can be no distinction between a triggered public offer and a voluntary public offer. The two have to be considered on an equal footing, the apex court clarified in its judgment that will cheer investors who are stuck in similar litigations with companies such as Golden Tobacco, AP Paper, Goldstone Infratech, DISA India.

Experts feel that a public offer under the takeover code, once triggered voluntarily or otherwise, is the rule and its withdrawal an exception.

In this case, promoter entity Akshya Infra had made an open offer in October 2011 to the Chennai-based Marg shareholders so as to give them an opportunity to exit at the offer price of R91 per equity share. The open offer was made to acquire 20% stake (76.5 lakh shares) in Marg to consolidate the company's holdings.

Akshya filed the draft letter of offer with Sebi, along with relevant documents. The regulator detected violations of the takeover code that prevents acquisition of shares in excess of 5% a year. This had triggered the mandatory open offer.

However, due to the long lapse of time in securing Sebis approval for the open offer, the company had sought to withdraw the offer but that was not granted.

Sebi found that that permitting Akshya Infra to withdraw the public offer would be detrimental to the overall interest of the shareholders. Akshya challenged it before the SAT, which permitted Akshya Infra to withdraw open offer for acquiring stake in Marg in view of Sebis silence for months in approving the draft letter of the offer.

The judgment is in line with apex courts last years judgment, Nirma Industries Limited vs Securities and Exchange Board of India, that refused the companys request to withdraw an open offer for Shri Rama Multi Tech, an Ahmedabad-based firm.

The reasoning given by the top court is: If, on the ground of fall in prices, a public offer is allowed to be withdrawn, it could lead to frivolous offers being made and withdrawn. This would adversely affect the interests of shareholders of the target company and the integrity of the securities market, which is wholly contrary to the intent and purpose of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

However, a new ground inserted under Regulation 23(1)(c) for withdrawal of open offer offers some flexibility as far as commercial transactions are concerned.

While clause (a) has been omitted, the other three clauses (b), (c) and (d) are exceptions to the general rule. Clause (b) would permit a public offer to be withdrawn in case of legal impossibility when the statutory approval required has been refused. Clause (c) again provides for impossibility when the sole acquirer, being a natural person, has died. Clause (b) deals with a legal impossibility whereas clause (c) deals with a natural disaster.

The apex court came down heavily on the market regulator for the delay, saying such kind of delay is wholly inexcusable and needs to be avoided by adopting such a lackadaisical, if not callous attitude, the very object for which the regulations have been framed is diluted, if not frustrated. It must be remembered that SEBI is the guardian of the interest of the shareholders. It is the protective shield against unscrupulous practices in the securities market. Therefore, SEBI like any other body ought not to act in a lackadaisical manner in the performance of its duties. The time frame stipulated by the Act and the Takeover Regulations for performing certain functions is required to be maintained to establish the transparency in the functioning of SEBI.