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SEBI Takeover Code: Dispute Resolution and Penalties in the SAT Ruling on a Voluntary Open Offer Case

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In a recent decision, the Securities Appellate Tribunal (SAT) addressed a long-standing dispute relating to open offers, stemming from actions taken in 2007 and 2011. This case involved the promoters of a listed company who had initially announced their intention to launch a voluntary open offer for the acquisition of shares in the company.

An Open Offer is an offer made by an acquirer to the shareholders of the Target Company (TC) inviting them to tender their shares in the TC at a particular price. The idea is to provide an exit option to the shareholders due to change in control or substantial acquisition of shares, occurring in the TC. Typically a voluntary open offer made by an acquirer to increase its stake or to gain more control over the TC, it is often a strategic move. On the other hand a (compulsory) open offer is triggered on acquisition of certain % of shares or voting rights in the TC (for eg. 25% or 51% or 5% in a financial year). Withdrawal of open offer is subject to SEBIโ€™s discretion and has been the bone of contention in securities law.

SAT while setting aside the SEBI order made some interesting observations and propounded that SEBI WTM โ€˜lost sight of factsโ€™ by not considering the inordinate delay attributable to SEBI itself, impecuniosity of acquirer, change in circumstances and parity with other orders of SEBI for similar violations. In securities law it is often considered that an open offer once triggered or announced, cannot be withdrawn. This judgement deals with various concepts including requirement to make an open offer, conditions for withdrawal, regulatory delay and factors to consider for penalty.

Key Events and Legal Proceedings

Initial Announcement and Draft Offer (2007-2012): The promoters made their public announcement in 2007, and a draft offer letter was submitted in 2011. However, due to delays attributed to the SEBI, the draft offer letter was withdrawn in 2012.

SEBI’s Observation Letter (2012): In response to the delays, SEBI issued an observation letter in 2012, stating that open offer obligations were triggered in 2007 and 2011. This led to litigation, which reached the Supreme Court of India. The court in SEBI v. Akshya Infrastructure Pvt. Ltd. (Civil Appeal No. 6041 of 2013) ruled that a public offer could not be withdrawn irrespective of it becoming uneconomical to the acquirer, protecting the interests of shareholders and market integrity.

SEBI’s Response and Penalty (2015-2020): In 2015, the appellants requested that the open offer be allowed at the previously prevailing market price, but SEBI rejected this request. In 2016, SEBI issued a Show Cause Notice (SCN) for non-compliance with the voluntary open offer and in 2018 sought to impose a monetary penalty. In 2019, SEBI WTM Ms. Madhabi Puri Buch ordered a consolidated open offer at the highest price. In 2020, SEBI imposed a significant monetary penalty of INR 74 crores and initiated a second adjudication proceeding, imposing an additional penalty of INR 1 crore for non-compliance.

SAT’s Ruling

The SAT, in its judgment, made several notable decisions:

In line with the Supreme Court order in the matter of SEBI v. Sunil Krishna Khaitan and Ors [(2022) 2 SCC 643] it set aside the direction to make an open offer, emphasizing that SEBI’s power to mandate an open offer is discretionary, not mandatory. The discretion has to be judicious.

SAT stressed the obligation for SEBI to consider all relevant factors and circumstances before passing an appropriate order, based on the facts at hand. The delays on SEBI’s part were cited as a reason for the SEBIโ€™s arbitrariness frustrating their entire open offer process.

SAT overturned the adjudication order by SEBI, which imposed a penalty for non-compliance with SEBI’s order, holding that section 15HB couldn’t be invoked for non-compliance with post-inquiry and adjudication directions.

SAT noted SEBI’s failure to consider factors under Section 15J of the SEBI Act and observed that SEBI had imposed lower penalties in other cases of open offer non-compliance. Consequently, SAT reduced the penalty significantly, from INR 74.75 crores to 40 lakhs.

This ruling underscores the importance of a balanced and fact-based approach in regulatory actions, particularly concerning voluntary open offers and the imposition of penalties.

A copy of the SAT judgement is enclosedbelow.

Readers are welcome to share their views with Regstreet Law Advisors at info@regstreetlaw.com.

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