The question of acquisition of control in listed companies gets even more complex when voting arrangements come into play. The Securities and Exchange Board of India (SEBI) has considered this previously but its recent informal guidance on Cipla offers clarity and consistency on the issue.
The Cipla guidance is an interesting development for private equity players investing in, as well as promoters of, listed Indian companies. In summary, SEBI recently exempted the promoters of Cipla from making a mandatory open offer under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Regulations), based on proposed voting arrangements within the promoter group.
The Hamied family, through various individuals and promoter entities, collectively own about 37% of Cipla. The family proposed to enter into arrangements whereby the entire family shareholding would vote as a single unit in board and shareholders meetings under the overall direction and supervision of YK Hamied, and after his demise or upon his incapacity, his brother MK Hamied. Upon the demise of both YK and MK Hamied, the voting rights would vest with the family member who owns the highest number of shares in Cipla. These arrangements also provide for pre-emptive rights in case any member of the Hamied family proposes to transfer his or her shares.
The proposed arrangement would lead to YK Hamied having voting rights over 37% of the voting share capital of Cipla, even though he personally holds much less than that.
As part of the arrangement, YK Hamied sought guidance from SEBI under the SEBI (Informal Guidance) Scheme, 2003, on whether the proposed voting arrangements would trigger a mandatory open offer and, if they would, whether such arrangements would be exempt under the Takeover Regulations.
He argued that firstly, under the proposed arrangement, there is no “acquisition” of voting rights per se, but rather an arrangement where members of the family would vote together and grant proxies to identified family members in an agreed manner. Secondly, even if the proposed arrangement was considered an acquisition of voting rights, it would be exempt under the exemption provisions of the Takeover Regulations, i.e. exemption granted for inter se acquisition of “shares” among relatives under regulation 10(1) of the Takeover Regulations.
SEBI observed that the voting arrangement proposed to be made in favour of YK Hamied would make him the single largest holder of voting rights in Cipla, leading to a change in control of Cipla and thereby triggering the mandatory open offer obligations under the Takeover Regulations. However, this arrangement would be exempt under exemption provisions of the Takeover Regulations as an arrangement among persons named as promoters and their persons acting in concert.
SEBI clarified that any change in the family member under whose direction the voting and supervision would be done following demise of YK and MK Hamied would also be exempt, provided conditions under exemption provisions are met.
Reading this guidance along with the definition of “control” under the Takeover Regulations, it is clear that voting arrangements will lead to acquisition of voting rights and if the prescribed threshold limits are crossed or conditions for available exemptions are not met, then mandatory open offer obligations will be triggered under the Takeover Regulations.
India’s private equity industry is witnessing a spate of “club” deals where a few private equity investors participate together to acquire listed securities. Likewise, voting arrangements have always been at the heart of the Indian promoter-led succession planning structure. Thus, this guidance is of particular importance to both investors and sponsors and will help private equity investors to structure their investment arrangements carefully such that they are in line with SEBI’s interpretation of permissible play.
The basis of SEBI’s decision is that the exemption is granted for inter se transfer among promoters and persons acting in concert. While SEBI’s opinion has clarified the position of voting arrangements inter se within a promoter group, private equity players and promoters entering into voting arrangements with persons not considered as “qualifying persons” under the exemption provisions should tread carefully and analyse their inter serelationships. Having said this, this guidance needs to be tested in each fact pattern as the guidance was specific to Cipla facts.
The opinion from SEBI in its favour is a crucial one for the Hamied family as the largest stakeholders of one of the leading sought after pharmaceutical companies. The pre-emptive rights and the voting rights effectively protect the family from dilution due to sale of individual shareholdings. In light of various family feuds regarding ownership of assets, the approach adopted by the Hamied family stands out since it provides for succession planning and protection against hostile takeovers.
Aakash Choubey is a partner and Nayantara Kutty is an associate at Khaitan & Co. The views of the authors are personal, and should not be considered as those of the firm.
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