Private equity and other investors (strategic or otherwise), while making minority investments in a listed company (listco), have to navigate a myriad of regulations including the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations), the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Code), and the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations), and grapple with various regulatory challenges, some of which are briefly discussed below.
The Listing Regulations require listed entities to make disclosures regarding “material” events and information. These regulations define “material” in a broad and inclusive manner, and would generally cover minority investments which the listed target is party to. Also, under the Takeover Code the term “acquisition” includes “agreeing to acquire the shares or voting rights in, or control over a target company”. Therefore, any agreement relating to a minority listco investment needs to be carefully assessed from a regulatory perspective.
The PIT Regulations prohibit any communication of unpublished price sensitive information (UPSI), and any person in possession of UPSI is classified as an “insider”. Insiders are restricted from dealing in securities of the listed entity. An incoming investor understandably wants to undertake due diligence of the listed target to evaluate business risks and potential. This could result in the investor being classified as an “insider”.
The PIT Regulations now permit sharing of UPSI with the proposed investor provided that (i) the board finds it to be in best interests of the company, (ii) the UPSI is made generally available two days prior to the proposed transaction (not applicable where an open offer is triggered), and (iii) parties execute suitable confidentiality agreements, which may not be feasible in secondary minority listco Investments, where the listed target may not be a party.
Minority protection rights:
A central issue in minority listco investments arises due to investors wanting certain minority protection rights. Such rights, which are critical to the investor’s interests, must be negotiated carefully since such rights may be viewed as resulting in acquisition of “control” thereby triggering an “open offer” under the Takeover Code. Unfortunately, the scope and ambit of affirmative veto rights continues to remain a grey area. Owing to stakeholder demands for clarity on this issue, SEBI released a discussion paper on bright line tests for “control” in 2015, which under one option noted that veto rights which are protective rather than participative in nature (i.e. rights which are aimed at allowing the investor to protect its investment or prevent dilution of its shareholding) should not be viewed as amounting to acquisition of control.
The discussion paper explained that veto rights in matters that are not part of the ordinary course of business or do not involve governance issues would be considered as protective in nature and provided an illustrative list of such rights. This was generally considered a positive move from SEBI’s earlier position in the Subhkam Ventures case.
In March this year, SEBI revisited the “affirmative veto right” issue in its order in Kamat Hotels, in which SEBI observed that minority protection rights which allow an investor to “exercise certain checks and controls on the existing management for the purpose of protecting their interest as investors rather than formulating policies to run the listed entity”, would not be considered as acquisition of “control”. However, this observation by SEBI, while giving some insight on SEBI’s approach, has not settled the issue, since it is not a part of the order’s ratio. Therefore, there continues to be lack of certainty on how SEBI will view such investor veto rights in minority listco investments in the future.
In this context, many investors tend to adopt a conservative approach, relying on their confidence in the promoter management (coupled with share transfer restrictions on promoters’ shareholding), appointment of investor nominees on the board of directors of the company and board committees, “consultation rights”, a limited set of veto items covering matters that are arguably critical for their investment, or some combination of the above.
To conclude, while the public shareholders in a listco must be protected, minority investors who are investing significant funds also need some protection and regulatory clarity.
Puja Sondhi is a partner and Sumeet Singh is a principal associate at Shardul Amarchand Mangaldas. The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the official view or position of the firm.
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