The decision by the board of the Securities and Exchange Board of India (Sebi), on Friday, to discontinue automatic exemption in respect of persons other than lenders, from making an open offer for acquisitions under debt restructuring schemes has been taken in a bid to protect the interest of minority shareholders, say regulatory sources.
While relevant exemptions including open offer obligations are already available under the SEBI Regulations for acquisitions pursuant to a resolution plan approved under Insolvency and Bankruptcy Code (IBC), a source close to the development said that the withdrawal of exemptions are in relation to pre-IBC resolution where the “resolution may be dominated by lenders and strategic investors to the detriment of minority shareholders,” and thus it is important to safeguard their interest.
“An automatic exemption from open offer obligations in the pre-IBC resolution could be viewed as taking minority investors for granted making them vulnerable. There is also a risk of mis-governance issues, if any, in the target company, which can also escape public attention in case of automatic exemptions from open offer obligations,” said a regulatory source.
While in 2015, Sebi provided exemption for debt restructuring scheme under Strategic Debt Restructuring (SDR) and applicable to consortium of banks, financial institutions and other secured lenders under SDR, in 2017, exemption was extended to lenders and also to new investors acquiring shares in distressed firms, for all restructuring schemes where RBI norms prescribe a pricing formula.
However, in February 2018, RBI issued a circular repealing all previously existing schemes/circulars on corporate debt restructuring. In respect of large exposures, while the RBI February 12 circular provides for filing of application for insolvency under IBC (which is already exempt from open offer obligations), it has, however, provided 180 days transition window for working out a resolution.
A source said that, since the RBI has already withdrawn certain scheme of arrangement through its circular in February 2018, it was only logical that Sebi also changed its regulations. It may also be noted that in the previous RBI frameworks prior to the February circular, there was well defined role of Indian Banks’ Association (IBA) and the RBI in the previous frameworks, through various expert committees like independent evaluation committee, overseeing committee, etc. ,which is apparently missing in the February 12 circular.
Exemptions provided by the Sebi in the Takeover Regulations and ICDR Regulations were given based on the debt restructuring frameworks of RBI that were existent during the amendment by Sebi in 2017, which have since been repealed and therefore the main basis for granting exemptions is no longer there. Therefore, Sebi has now amended Takeover Regulations and ICDR Regulation more to reflect the correct picture, said the source.
“These exemptions will continue to be available to lenders and other entities under the IBC process which is well defined and has a statutory backing. It is important to note that in a pre-IBC phase in specific cases, Sebi can be approached under Regulation 11 of Takeover Regulations for seeking exemptions from the requirements of making an open offer. Similarly under ICDR Regulations, 2018, on an application made, Sebi has the power to relax strict enforcement of regulations,” the source said. Protection of minority investors is one of the parameters World Bank takes into account for ranking nations on ease of doing business. India is ranked 7th in Protection of Minority shareholders.