Sebi challenges SAT order on Takeover Code

Market watchdog the Securities and Exchange Board of India (Sebi) today moved the Supreme Court challenging the decision of the appellate tribunal SAT that held that financial investors like PEs and VCs do not acquire controlling stake in a company by just picking up more equity.

The Securities Appellate Tribunal (SAT) had in January this year set aside a Sebi direction that held that the veto rights acquired by a financial investor in a target company cannot be construed as a controlling stake.

An apex court bench comprising the new chief justice SH Kapadia and justices KS Radhakrishnan and Swatanter Kumar directed both the parties to file their written submissions.

The Sebi was represented by Attorney General GE Vahanvati.

The case assumes significant as it will provide clarity on the nature of investments made by financial investors such as private equity funds and venture capital investors which typically seek protective interest in their target companies.

The apex court decision will also have implications for the Sebi Takeover Code. Financial investors are uneasy about seeking veto rights in listed companies for fear of triggering the requirement to make an open offer under the Takeover Code.

The SAT ruling came over a petition filed by one private equity investor Subhkam Ventures, which challenged the Sebi direction to go in for an open offer on the grounds that it violated the provision of the Takeover norms by getting the veto right in the target firm MSK Project.

Subhkam had acquired over 15 per cent in MSK Projects, triggering the requirement of making an open offer (an open offer requires the acquirer buying at least 20 per cent more of the public shareholding) under Regulation 10 of the Takeover Code. However, Subkham contended that it was merely a financial investor and acquisition of more stake would not result in a change in the control of the company under Regulation 12 of the Takeover Code.

But Sebi rejected the contention of Subhkam and ordered it to revise its offer document in accordance with Regulations 10 and 12 of the Takeover Code.

Following this, Subhkam moved the SAT, which set aside the Sebi direction saying the veto right did not amount to control of the company. The SAT also reversed the Sebi contention that the power of the acquirer to nominate its directors on the board results in management control and said that one nominee out of 10 directors could not confer control and that the role of the nominee is merely to keep the acquirer apprised of the developments in the company.