Sebi drops appeal against Subhkam

The Securities and Exchange Board of India (Sebi) has decided to drop its proceedings against Subhkam Ventures, a private equity (PE) fund, in the Supreme Court. The market regulator had moved the apex court seeking to force Subhkam to make an open offer for the shares of MSK Projects under a specific provision of the takeover code, which deals with “control” of the company.

The case was keenly watched by the private equity players in the country as the Supreme Court judgment would have thrown some light on what constitutes control in such takeover transactions and established a precedent for future deals. Even the new takeover code, which took effect last month, does not provide any clear definition of the term control.

“The appeal did not go into ruling as both the parties decided not to pursue the matter. The question of law is left undecided,” said Somasekhar Sundaresan, partner, JSA, a Mumbai-based law firm. He said: “With the court not having dealt with the question of law, the opportunity to decide it in the country’s highest court is gone.” Sebi would still have discretion over the matter of control since it was a question of “both law and facts”, he added.

According to the takeover code, separate regulations are provided for acquisition of voting rights and acquisition of control. While acquisition of voting rights need not always result in acquisition of control, the latter could result in the acquirer being designated as “promoter” of the target company.

Private equity investors are not comfortable with being designated as promoters, as it brings several regulatory obligations, including additional disclosures. PE fund officials say the Securities Appellate Tribunal (SAT) order in January 2010 will now take effect. “The SAT order stays. I cannot comment further,” said a company official. Lawyers say private equity investors can now look at the SAT judgment in this case as the guidance for future deals.

In October 2007, Subhkam Ventures increased its stake in MSK Projects (India) Ltd, a listed infrastructure company, from 8.8 per cent to 24.6 per cent. Because the investment crossed the 15 per cent threshold, Subhkam had to make an open offer to acquire another 20 per cent from public shareholders, under Regulation 10 of the old takeover code. However, Sebi asked Subhkam to also make an open offer under Regulation 12, under which it is mandatory for persons who control the company to make the open offer, citing conditions in the share purchase agreement. PE firms are not comfortable taking on the role of a promoter. SAT had set aside the Sebi order saying the clauses in the share purchase agreement did not demonstrate control in the hands of Subhkam. Sebi moved the apex court, where the matter was pending for over a year.