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. The acquirer had the option to convert them within 18 months, and until conversion, did not hold voting rights triggering the takeover code. The appeal was disposed of, allowing the target company or acquirer to apply for exemption post-conversion, to be considered by SEBI in accordance with the law. Timing and conditions for triggering takeover regulations were emphasized, stressing the importance of proper issuance and conversion of securities before seeking exemptions.

---

---

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.

---