Minority shareholders have alleged that Bharti Airtel got away by avoiding open offer of Rs30,000 crore thanks to SEBI’s flexible application of takeover norms

A few minority shareholders of Bharti Airtel Ltd have approached the Securities Appellate Tribunal (SAT) for taking action against the company for what they call violating takeover regulations of the Securities and Exchange Board of India (SEBI).

According to an appeal filed with the SAT, the minority shareholders allege that during June 2007 and September 2008, Bharti promoters, Pastel Ltd (a unit of SingTel), Bharti Telecom Ltd and Indian Continent Investment Ltd (ICIL) increased their stake to 67.03% from 60.91%, which violates takeover regulations.

As per SEBI's Regulation 11(2) (the takeover code), any acquisition of shares or voting rights by an acquirer already holding 55% or more but less than 75% of the shares or voting rights in a target company mandates a compulsory open offer.

Though this increase in stake-holding triggered an open offer requirement under SEBI Regulation 11(1) of the Takeover Code (as it stood at the time of the buyback in 2008-09 which allowed an acquirer, holding between 15% and 75% of shares or voting rights, to increase the shareholding by 5% in one financial year without trigger of an open offer), the promoters failed to make an open offer to acquire at least 20% of the voting capital of Bharti Airtel from its then existing public shareholders, mandatory under the Takeover Code, the minority shareholders said in their appeal.

According to the appeal filed before the SAT, the open offer would have been a bonanza for minority shareholders as promoters of Bharti Airtel will have to buy 20% additional stake at Rs400 to Rs500 per share (adjusted to stock split - the price during the relevant period was about Rs800-Rs900 per share). The open offer would cost about Rs30,000 crore to the promoters of Bharti Airtel, the minority shareholders estimate.

Earlier in April 2009, SEBI had sought clarification from Bharti Airtel, the country's largest telecom company, on alleged violations of its regulations by not publically announcing increase in promoter stake holding in the company. According to media reports, Bharti Airtel, at that time had said that ICIL bought these shares in two tranches of 4.99% and 1.28% and did not violate SEBI's takeover norms.

PROMOTERS OF BHARTI AIRTEL

As of September 2010, four companies, Bharti Telecom, Pastel, ICIL and Viridian Ltd, belong to 'promoter and promoter group' category and together hold 67.87% stake in Bharti Airtel.

Bharti Telecom, which holds 45.44% stake in Bharti Airtel, was delisted from the Bombay Stock Exchange in October 1999 by offering to buy back its shares at Rs95 per share, which was increased by one rupee subsequently. Bharti Enterprises, erstwhile Bharti Overseas Trading Co, is the holding firm of the Bharti group and holds majority stake in Bharti Telecom.

Pastel is an investment arm of Singapore Telecommunications (SingTel) and holds 15.57% stake in Bharti Airtel, as of end-September 2010. Earlier in July, SingTel's other unit Viridian bought 0.04% stake in Bharti Airtel from the open market for about Rs42.28 crore.
ICIL is a Bharti group company and holds 6.82% stake in Bharti Airtel. It is the same company, which is supposed to have brought the additional stake between 2007 and 2008.

SEBI RULINGS IN SIMILAR CASES

In a similar case, the promoters of OCL India Ltd effected a buyback of 11.84 lakh shares in 2003, subsequently increasing their stake to 75% from 62.56%, an increase of 12.44%. SEBI, on 17 June 2007, issued a show cause notice to the promoters of OCL inter alia alleging that they are liable for penal action under the Takeover Code and the SEBI Act, 1992. OCL promoters took the defence that the increase in shareholding or voting right pursuant to a buyback was not an 'acquisition' of shares or voting rights through an act of the shareholder, but was merely incidental to the buyback and that such an increase in shareholding or voting rights without an actual acquisition of shares will not trigger Regulation 11(1).

SEBI concluded that the promoters of OCL had acted in contravention of the Takeover Code by not making an open offer to provide exit opportunity to the public shareholders, however since the open offer price calculated as per the earlier share price was much lower than the prevailing share price at that time, the market regulator directed adjudication proceedings against the promoters of OCL.

In another case where there was alleged violation of the Takeover Code, the market regulator took a flexible approach and granted specific exemption to Ajanta Pharma Ltd. The promoters of Ajanta Pharma increased their stake in the company to 73.92% from 66.82%, an increase of 7.1% that would have triggered Regulation 11(2) of the Takeover Code mandating the promoters to make an open offer. However, Ajanta Pharma, on behalf of the buyers, filed an exemption application before SEBI seeking exemption from the open offer obligation.

SEBI, while concluding that the passive increase in shareholding and voting rights triggers the open offer, clarified that the entire increase by 7.1% does not constitute the trigger event.
According to the second proviso to Regulation 11(2) which came into effect on 30 October 2008, an acquirer is exempted from open offer obligation under Regulation 11(2) in case of an increase in shareholding or voting rights up to 5% if such increase is pursuant to a buyback of shares by the target company.

Further, SEBI, vide circular dated 6 August 2009, clarified that the 5% limit under proviso to Regulation 11(2) can be availed only once in the lifetime of the company and is not renewed each financial year as in the case of Regulation 11(1).
 
The rulings in above cases reflect that SEBI has been flexible enough to grant exemption to the acquirers on exemption applications when the acquisition is incidental to the buyback and there is no change in control of the company. In light of this trend, there is a need to consolidate the law on trigger of Takeover Code pursuant to buyback and specifically incorporate it in the Takeover Code rather than keeping it discretionary at SEBI's volition. On its part, the market regulator had appointed a Takeover Regulation Advisory Committee with C Achuthan, the former presiding officer of SAT, as its chairman. However, there is not much information available about the working of the committee on the SEBI website.

 — Moneylife Digital Team