M&A Critique

NSEL Investor Petitions: Sebi Probing FTIL, Promoters

The Securities and Exchange Board of India (Sebi) has told the high court at Mumbai that it is investigating complaints against Financial Technologies (FTIL) and connected entities and promoters, including founder Jignesh Shah.

The complaints by investors of scam-hit National Spot Exchange (NSEL), promoted by FTIL, have alleged violations of the Sebi Act and breach of various Sebi regulations, such as those on insider trading, fraudulent and unfair trade practices, and disclosure failure under the takeover code, among others.

The petitioners had sought to direct Sebi to hear and decide the complaints, within a time-bound schedule. The order from a bench of judges B P Colabawalla and V M Kanade went, “Since this is the only relief claimed by the petitioners, the petition can be disposed of by directing Sebi to look into the complaints and, if necessary, to investigate the same, and the said process to be completed within a time-bound schedule and if possible, within a period of 12 weeks…” The order records Sebi’s counsel saying they’d taken cognizance of the complaints and were probing these.

The complainants are Delhi-based Smita Bhartia and Mumbai-based Meenal Maheshwari. They’d lost Rs 1.3 crore in the Rs 5,600-crore payment crisis that hit NSEL in July 2013. They’d held responsible Jignesh Shah, companies floated by him such as La-Fin Finance Services and key management personnel of the group, including Paras Ajmera, Dewang Neralla, Joseph Massey and Manjay Shah.

They alleged Shah was aware of the state of affairs at NSEL and that some of these entities connected to him had sold shares of FTIL and the Multi Commodity Exchange, also promoted by it, ahead of the payment crisis between January and July 2013.

The duo had also complained about disclosure violations by a firm called Sigma Financial Services, associated with La-Fin, and irregularities in the sale of FT group arm Bourse Africa.

Business Standard had reported the Sigma case and Bourse Africa sale in December 2014.

While disposing of the petition, the bench clarified that “we have not expressed any opinion on merits and only direct Sebi to decide the case on merits and in accordance with law.”

The regulator may consider the request made by the petitioners for a copy of the Kalyaniwala and Mistry report (a forensic audit of the entities in question), the bench said.

In response to an e-mail for comments, an FTIL spokesperson said, “FTIL has not been made a party and has not come across, on the high court website, of any such order. We reserve our right, being the aggrieved party, and will take necessary legal recourse. On your query regarding the K&M report…FTIL was neither given a chance to reply/suggestions nor the final report was shared with us.”

(Source: http://www.businessstandard.com)

Sebi to align governance norms with Cos Act

The Securities and Exchange Board of India (Sebi) will align its corporate governance norms in accordance with amendments to the Companies Act legislated in May this year by Parliament.

The Ministry of Corporate Affairs (MCA) wrote to Sebi after the Companies Act was amended asking it to align its norms with the law. In an interview with Business Standard earlier this week, Sebi Chairman U K Sinha said the norms would be changed.

According to the amended Companies Act, 50 per cent of minority shareholders need to vote for a resolution against the 75 per cent required by Sebi under Clause 49 of listing rules.

“In our draft discussion paper on corporate governance, we had provided for a majority of the minority. But when the final Companies Act was in place, it became a special resolution. The government has realised this is not practical. So it sought our comments.

We recommended that the majority of the minority was the right thing,” Sinha said.

“This will strike the correct balance between interested and disinterested shareholders.

While it will not allow interested shareholders to vote at all, at the same time it will only give a simple majority right to disinterested shareholders, thereby stopping them from blocking genuine related-party transactions,” said Lalit Kumar, a partner at J Sagar Associates.

“By reducing the threshold, the ministry and regulator seem to have yielded to corporate pressure. This is a retrograde step, as it weakens minority shareholders. A good company should ideally not have any related-party transaction, and corporate India has abused such transactions for years,” said Shriram Subramanian, founder and managing director of InGovern Research Services, a proxy adviser firm.

Amit Tandon, founder, IIAS Proxy Advisors, however, said they could live with the 50 percent threshold.  “Coming down from the staunch 75 per cent does seem like a dilution, but governments are elected with a 50 percent majority. So, this will ease business,” said Tandon.

Proxy advisers are more concerned about a change in the clause for determining a related party and are urging Sebi not to go through with it.

According to the MCA, the term related party refers only to those related contractually to the resolution being passed. On the other hand, Clause 49 provides all entities under the definition of related parties must abstain from voting, irrespective of whether they are a party to a particular transaction.

“This provision will make the need for shareholder approval for related-party transactions frivolous, as interest transfers between promoter entities do not need shareholder approval. This will reduce the rights of minority shareholders more than the provision that changes the special resolution to ordinary,” said Subramanian.

“Most promoter shareholding is held through a series of entities (companies, trusts, and partnerships) and is also spread across a catalog of family members. With the amendments, the family and promoter entities not directly involved in the transaction can vote on the transaction, since they are not interested parties. This cuts the powers of minority shareholders at the knees,” said Tandon.

On the other hand, lawyers said even if Sebi amended the approval from special resolution to ordinary resolution, the relief would be limited since, according to Clause 49, the related party would still not be able to vote on any resolution irrespective of whether it was a related party in the context of that particular transaction.

(Source: http://www.businessstandard.com)

Sebi mulls exemption from open offer in forfeiture of shares

Sebi has proposed an exemption from making an open offer for entities whose shareholding in a listed company increases due to forfeiture of shares. The board of Securities and Exchange Board of India (Sebi), which met here today, discussed the matter related to a review of the policy relating to forfeiture of partly paid-up shares.

The proposal is to “provide a general exemption from the open offer obligations under SEBI (SAST) Regulations, 2011 in cases of increase in voting rights as a result of the expiry of call notice period and forfeiture of shares,” Sebi said in a release issued after the board meeting.

Amendments to Sebi (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 would be proposed and a discussion paper would be put for public comments. In the case of forfeiture of shares, there would be changes in existing shareholding pattern and that could trigger open offer obligations for concerned entities.

Under Sebi’s takeover norms, any entity having over 25 per cent stake in a listed firm can hike the shareholding by up to 5 percent in a financial year. If the limit is breached in a fiscal, then that entity would have to make an open offer.

(Source: http://www.businessstandard.com)

Exercise of Esops not under insider trading

The Securities and Exchange Board of India (Sebi) during its board meeting on Monday cleared the air around Employee Stock Ownerships Plan (Esop). Sebi has issued a guidance circular saying trading of Esops would not be restricted and considered contra trades if cleared by the compliance officer.

The new rules on insider trading, which became effective from May this year, prohibit an employee from buying and selling a share within six months. This has raised doubts over buying/selling of shares pursuant to six months of Esops, known as contra trade.

Lawyers and companies had been approaching the regulator for a clarification on Esops.

The stock market regulator plans to allow such trades with the pre-clearance of a company-appointed compliance offer.

Sebi said in a statement that the exercise of Esops shall not be considered to be ‘trading’.

If a designated person acquires shares under an Esop and subsequently sells those shares, such sale shall not be considered contra trade.However, other provisions of the regulations shall apply to such sale.

The definition of “immediate relative” in insider trading regulations meant a spouse who is either financially dependent or consults in taking decisions relating to trading in securities.

However, in the classificatory circular, a spouse is presumed to be an immediate relative and now will need to prove the spouse was financially independent or did not consult for trading decisions.

“Exempting shares arising from the exercise of Esop from contra trade restriction is an important relief, but still, it is not a complete exemption as a sale of shares issued pursuant to Esops will have to comply with other provisions of the regulations,” said Lalit Kumar of J Sagar Associates.

Sebi has also clarified that an approved trading plan will not be subject to contra trade except for pledging securities. Restrictions on contra trade will not apply to cases when a person acquires or sells the securities pursuant to corporate actions such as buy back, rights issue, bonus issues, etc, as these rights are available to all shareholders and not just the designated employees.

“If a designated person sells a part of his shareholding and subsequently the company announces rights issue / follow on public offer / bonus shares, then the designated person would be entitled to subscribe to the rights issue / follow-on public offer or to receive bonus shares. There was an absurd interpretation coming earlier that a designated person would be prohibited from doing so,” said Vanessa Abhishek, a Bombay High Court lawyer.

One important restriction is the applicability of the regulations for the creation of pledge or invocation of pledge while in possession of unpublished price sensitive information (UPSI). “This will affect the financing transactions and other merger and acquisition transactions requiring creation or invocation of pledge while in possession of UPSI. In order to facilitate such transactions, the UPSI will have to be generally made available to public before such pledge is created or invoked,” said Kumar.

(Source: http://www.businessstandard.com)

SEBI notifies norms for listing of start-ups, SMEs

Market regulator Securities and Exchange Board of India (Sebi) has notified new norms for listing of start-ups and small and medium enterprises on stock exchanges without having to make an initial public offer (IPO).

The Securities and Exchange Board of India (Sebi) has made amendments to rules to permit the listing of start-ups and Small and medium-sized enterprises (SMEs) in Institutional Trading platform (ITP) without having to make an IPO.

Lack of exit opportunities for existing investors and restricted access to new investors is a major problem faced by start-ups and SMEs.

In a circular dated October 8, Sebi said that the minimum amount for trading or investment on the ITP would be Rs 10 lakh.

The move is aimed at providing easier exit options for entities such as Angel Investors, Venture Capital Funds, and Private Equities.

Besides, the move would provide better visibility, wider investor base and greater fund raising capabilities to such companies.

Sebi said the company would not make an IPO while its specified securities are listed on ITP but can raise capital through private placement or rights issue “without an option for renunciation of rights.”

According to Sebi, an SME will be eligible to list on the ITP, in case the company, its promoter, director, group company does not appear in the defaulter’s list of Reserve Bank and there is no winding up petition against the firm. Among other conditions, the company, group companies or subsidiaries have not been referred to the Board for Industrial and Financial Reconstruction (BIFR) within a period of five years prior to the date of application for listing.

Besides, no regulatory action has been taken against the company seeking to list on ITP, its promoter or director, by Sebi, RBI, Insurance Regulatory and Development Authority (IRDA) or Corporate Affairs Ministry within five years prior to the date of application for listing.

“The company has at least one full year’s audited financial statements, for the immediately preceding financial year at the time of making listing application,” Sebi said.

Sebi also said that an SME seeking to list on ITP needs to fulfill any of the six criteria including a minimum investment of Rs 50 lakh in its equity shares by at least one alternative investment fund, venture capital fund or another category of investors as approved by the regulator.

An investment of at least Rs 50 lakh by a Qualified institutional buyer (QIB) or a merchant banker in the equity shares of the SME with a lock-in period of three years from the date of the listing. Besides, a specialised international multilateral agency or domestic agency or a public financial institution has invested in the equity capital of the SME.

“The company has received money from a scheduled bank for its project financing or working capital requirements and a period of three years has elapsed from the date of such financing and the funds so received have been fully utilised,” Sebi said.

The regulator said, “not less than 20 per cent of the post listing capital will be held by the promoters at the time of listing of specified securities of the SME which shall be locked- in for a period of three years from the date of the listing.”

Regarding exit norms, Sebi said that a company can exit from ITP if its shareholders approve such proposal by passing a special resolution through postal ballot where 90 percent of total votes and the majority of non-promoter votes have been cast in favor of this and the stock exchange approve such exit.

A company whose securities are listed on ITP will exit the platform “in the event of its specified securities have been listed on this platform for 10 years, the company has paid up capital of over RS 25 crore, revenue of more than Rs 300 crore and a market capitalisation of more than Rs 500 crore.”

A company listed on ITP will be delisted in case it failed to file its periodic filings with the stock exchange for more than one year, or it has not complied with corporate governance norm(s) for more than one year.

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M & A Critique