Marg Ltd (Rs.22.60): Issues and Ruling

In arriving at its conclusion, the Supreme Court considered several issues pertaining the Takeover Regulations, with the key among them discussed below:

Voluntary vs. Mandatory Offer

Akshya contended that Reg. 27 of the Takeover Regulations that deals with withdrawal of a takeover offer (and which was subjected to a restrictive interpretation of by the Supreme Court in the Nirma Case as discussed HERE) applies only to mandatory offers and not to voluntary offers. The Supreme Court did not accept this contention because it amounts to “reconstructing” the said provision, which refers to “public offer” without expressly restricting it to mandatory offers. In that sense, there “can be no distinction between a triggered public offer and a voluntary public offer”.

Applicablity of Nirma Industries

Akshya also raised the argument that Nirma Industries is inapplicable to the present case (also due to the nature of the offer as discussed above), and also that the decision of the Supreme Court in that case itself requires reconsideration. However, the Supreme Court refused to accept the argument and relied extensively on the ruling in Nirma Industries to interpret Reg. 27 again in a restricted manner so as to limit the circumstances in which with an open offer, once made, can be withdrawn. The court did not find that the present case fit within the circumstances that deserved permission for a withdrawal.

Delay in SEBI’s Response

Akshya’s main plank of argument was that the delay in the open offer (that in the end made it uneconomical) was caused by SEBI, and hence SEBI cannot enforce the offer obligations. The Supreme Court adopted a rather balanced approach in dealing with the delay argument. While it came down heavily on SEBI for the cause of the delay, it was found that such delay by itself was insufficient as a justification to allow Akshya to withdraw the offer, and that the delay “will not result in nullifying the action taken by SEBI, even though belated”.

Analysis

The decision of the Supreme Court is significant in as much as it reiterates the sanctity of a takeover offer, and considerably limits the circumstances when an offeror can renege on its obligations. By refusing to deviate from its previous ruling in Nirma Industries, it has introduced clarity and certainty on the matter. 

This recognizes the fact that open offers are made for the benefit of the shareholders of the target, and hence they must be pursued to their logical conclusion without any hindrances.

From a takeover structuring perspective, however, it considerably enhances the risk to the offeror. Hence, the offeror must be committed to the offer, and must be convinced as to the commercial viability of the offer and be prepared to accept the risk of intervening events, changes in business, in the economic environment and other factors, unless they are elevated to the extent recognised in Reg. 27 of the Takeover Regulations (and Reg. 23 of the present version of the Takeover Regulations of 2011). This imposes a significant onus on offerors. 

It does not matter whether the offer is voluntary or mandatory – both stand on the same footing. It is not as if the voluntary nature of the offer will provide any leeway to the offer. Once the offer is made, the offeror effectively reaches a point of no return.

While the delay on the part of SEBI was not permitted to be used by the offeror in this case as an excuse to withdraw the offer, the Supreme Court’s observations on delays in the regulatory oversight of takeovers are relevant and seem to make a larger point:

It is a matter of record that the comments were not offered for 13 months. Such kind of delay is wholly inexcusable and needs to be avoided. It can lead to avoidable controversy with regard to whether such belated action is bona fide exercise of statutory power by SEBI. 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 watchdog of the Securities Market. It 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, which is established as a watchdog, 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.

As these observations of the Supreme Court reemphasize, time is of the essence in takeovers. Nevertheless, there have been several instances whereby takeover offers have opened several months after the draft offer document has been filed with SEBI, often due to disagreements between the offeror and the regulator. 

In the process, it is the offeree shareholders who suffer. It is with this in mind that regulators in other jurisdictions such as the UK and Singapore [with the Takeover Panel and the Securities Industry Council (SIC) respectively] follow a more informal approach towards takeover regulation whereby the regulators adopt a more practical attitude to ensure efficiency and timely progress of the takeover offer. Similarly, it would augur well for takeover offers in India to be completed within a tight timeframe from their announcement, without any delays, particularly from the regulatory standpoint. 

Courtesy: IndiaCorpLaw