M/s R Systems International Limited, a listed entity, received an interpretative letter from SEBI on 8 January, 2014 under the Informal Guidance Scheme on the issue of whether Mr. Bhavook Tripathi would be classified as a public shareholder for the purpose of computing the Minimum Public Shareholding (MPS) requirements. Indian listed companies are required to have a minimum public float of 25% of their issued capital.
Mr. Tripathi, who is not a promoter of R Systems or a PAC with the promoters, had made an open offer on 15 December, 2011 for acquiring 26% of the share capital of R Systems. Post open offer and some later acquisitions, Mr. Tripathi held 34.82% of R Systems while the promoter entities held 50.17%.
Informal Guidance was sought on Regulation 7(4) of Takeover Regulations, 2011 which requires an acquirer to bring down the non-public shareholding in the event that the open offer results in an increase of non-public shareholding beyond 75% of the share capital of the target company. The application letter stated that the shareholding of Mr. Tripathi should be treated as non-public shareholding since he held a substantial stake of approximately 35% in the company and would be in a position to exercise significant influence over the affairs of the company. Since the promoter entities already held over 50% of share capital of the company, it was represented that the aggregate public shareholding in the company had been reduced to approximately 15%, lower than the minimum prescribed limit of 25%. Therefore, the application letter stated, in terms of Regulation 7(4), Mr. Tripathi ought to bring down his shareholding so that the public holding in the company is restored at a level above the statutory limit of 25%.
SEBI clarified that as per the Takeover Regulations, the term ‘acquirer’ did not make any distinction between promoter and public shareholding. An acquirer of substantial number of shares can either be a member of a promoter group or belong to the public category. Further, SEBI noted that the term ‘public’, as per the Securities Contracts (Regulation) Rules, 1957, referred to any persons other than ‘promoter or promoter group’ and ‘subsidiaries and associates of the company’ and since Mr. Tripathi was neither the promoter nor a part of the promoter group, he qualified as a ‘public shareholder’. This determination led SEBI to conclude that Mr. Tripathi’s shareholding should be construed as ‘public’ for the purpose of MPS requirements and he would not be required to bring down its shareholding in furtherance of Regulation 7(4).
A determination that the largest public shareholder’s holdings could be lumped with the promoter’s holdings to ascertain ‘non-public’ holding would open a Pandora’s Box, particularly where financial institutions hold large stakes in listed entities.
If the understanding that an ‘acquirer’s’ holdings, by default, are ‘non-public’ found credence with SEBI, it would lead to absurdities in situations where the acquisition of a company would not at all be possible when the promoter entities hold 74% of the shareholding of such company, since all acquirer holdings would be treated as ‘non-public’ which will lead to a breach of MPS requirements. This is therefore the correct and sensible legal view of the regulator.