2009 (12) TMI 1056 - Board - SEBI

Appellate authority rules on SEBI exemption request timing, stresses importance of compliance with takeover regulations.

The appellate authority found SEBI's reasons for declining exemption to be untenable but ruled the request premature as the warrants were not yet issued. ... Exemption under Regulation 3(1)(l) of the takeover code - premature application for regulatory exemption - optional convertible warrants do not confer voting rights prior to conversion - triggering of takeover obligations upon conversion and acquisition of voting rights - right to seek fresh exemption upon occurrence of triggering eventExemption under Regulation 3(1)(l) of the takeover code - premature application for regulatory exemption - optional convertible warrants do not confer voting rights prior to conversion - triggering of takeover obligations upon conversion and acquisition of voting rights - Application for exemption from Chapter III of the takeover code made prior to issuance and conversion of optionally convertible warrants was premature and could not be granted. - HELD THAT: - The Court found that the proposed preferential allotment was for optionally convertible share warrants which, until converted, do not carry voting rights. The takeover code becomes operative only when conversion occurs and the acquirer acquires the equity shares (and thereby voting rights), or otherwise when facts constituting a trigger under the code arise. Since the warrants had not yet been issued and, if issued, conversion within the 18 month option period remained discretionary for the acquirer, there was no existing event triggering the takeover obligations. Consequently an application for exemption under Regulation 3(1)(l) filed before issuance and before any conversion was premature. Although the Court observed that particular reasons given by the Board in the impugned order were not tenable, that factual and temporal prematurity prevented any substantive relief; the appellant and the acquirer remain free to file a fresh application if and when the warrants are allotted and conversion is exercised, and the Board must consider such application in accordance with law and within the time prescribed by the takeover code.Appeal disposed of on the ground that the exemption application was premature; no substantive relief granted, and liberty granted to seek exemption after allotment/conversion.Final Conclusion: The appeal is dismissed as the request for exemption was premature; if the warrants are allotted and subsequently converted, the appellant or acquirer may apply afresh and the Board shall consider such application in accordance with law within the prescribed time. Issues involved: The issue involves the Securities and Exchange Board of India (SEBI) declining to exempt M/s. Futuristic Garments Pvt. Ltd. from the provisions of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 in relation to its proposed acquisition of 47 lac equity shares of Surya Pharmaceutical Ltd. through preferential allotment of optionally convertible share warrants.Details of the Judgment:1. The target company, in order to comply with the conditions imposed by the Industrial Development Bank of India (IDBI) for financial assistance, decided to issue 47 lac optionally convertible share warrants to the acquirer, one of its promoters. This issuance would increase the stake of promoters in the target company to 51% upon conversion of warrants into equity shares within 18 months. The target company sought exemption from the takeover code regulations before the warrants were issued, which was declined by SEBI.2. The appellate authority found the reasons provided by SEBI for declining the exemption to be untenable. However, it was determined that the request for exemption under Regulation 3(1)(l) of the takeover code was premature as the warrants were yet to be issued, and the acquirer had the option to convert them within 18 months. Until conversion, the acquirer did not hold voting rights, and the takeover code would only be triggered upon conversion. Therefore, the appeal was disposed of with the possibility for the target company or acquirer to apply for exemption post-conversion, which would be considered by SEBI in accordance with the law.This judgment highlights the importance of timing and conditions for triggering takeover regulations, emphasizing the need for proper issuance and conversion of securities before seeking exemptions.