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Monday, June 14, 2021

Explained: Why BPCL might seek a SEBI exemption before divestment

SEBI regulations require that any acquirer taking a promoter or controlling stake in a firm, make an open offer for an additional 26 per cent of the shares held by minority shareholders. The regulation is aimed at giving minority shareholders a right to exit when ownership changes hands.

Written by Karunjit Singh , Edited by Explained Desk | New Delhi |
Updated: May 29, 2021 3:13:28 pm
The government is planning to sell its 52.98 per cent stake in BPCL this fiscal. (Representational Photo)

The new owner of divestment-bound Bharat Petroleum Corporation Ltd. may have to make an open offer to minority shareholders of two companies — Petronet LNG and Indraprastha Gas Ltd — in which BPCL is a promoter. While BPCL has said that it is not planning to cut its stake in either of the two companies to avoid triggering the open offer requirement, officials have indicated that the government may seek an exemption to the regulation for this transaction. The government is planning to sell its 52.98 per cent stake in BPCL this fiscal.

We examine the regulation and why SEBI may find it difficult to grant an exemption for the transaction.

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Why would regulations require BPCL’s acquire to make an open offer to minority shareholders of Petronet LNG and IGL?

SEBI regulations require that any acquirer taking a promoter or controlling stake in a firm, make an open offer for an additional 26 per cent of the shares held by minority shareholders.

The regulation is aimed at giving minority shareholders a right to exit when ownership changes hands.

While BPCL holds only 12.5 per cent stake in Petronet LNG and only 22.5 per cent stake in IGL, it is a promoter for both companies which means that a new owner would also have to make an open offer to purchase 26 per cent stake in the two companies.

A 26 per cent stake in both companies would cost BPCL’s new owner a total Rs 18,800 crore at current market prices in addition to the cost of acquiring BPCL.

On what basis can BPCL seek an exemption from this regulation?

SEBI has in the past exempted certain transactions from this regulation including the acquisition of Hindustan Petroleum Corporation Ltd by ONGC. Experts note however that an exemption may be more difficult to justify in this case as in previous cases including that of the acquisition of HPCL by ONGC, the ultimate control remained with the same owner – the central government even after the transaction.

“Although SEBI has the powers to exempt an acquisition from such a requirement, the fact that the winning bidder and BPCL may not have common promoters may make the proposition challenging,” said Prashaant Vikram Rajput, partner, White & Brief Advocates and Solicitors.

Neeraj Dubey, partner at law firm Singh & Associates, noted that an exemption may raise the issue of the rights of minority shareholders and fairness. “Such exemptions deny minority shareholders the right to exit and raises the question of fairness as to why exemptions are given to government entities and not to others,” Dubey said.

How could this impact the BPCL divestment process?

BPCL officials have noted that the government and BPCL management are in the process of addressing queries by three bidders — Vedanta group, Apollo Global, and I Squared Capital’s arm Think Gas. Experts noted that resolving the issue of an exemption for the transaction from SEBI regulations requiring an open offer to minority shareholders could delay the transaction which is a key part of the government’s plan to raise Rs 1.75 lakh crore from disinvestment this fiscal.

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