On 29 March 2019, SEBI issued the Securities and Exchange Board of India Substantial Acquisition of Shares and Takeovers) (Amendment) Regulations, 2019 (“March Amendment”). The March Amendment deleted exemptions (a) and (b) above, and added a definition of “lenders” for the purposes of exemption (c) above as an ‘explanation’. The explanation reads, “For the purpose of this clause, “lenders” shall mean all scheduled commercial banks (excluding Regional Rural Banks) and All India Financial Institutions”.

Why did SEBI do this?

• SEBI transparently publishes the agenda for its board meetings on its website. The twenty-seven pages’ agenda memorandum for the meeting where the March Amendment was considered (“Agenda”) contains, amongst others, the following justifications for the amendments:
• In case of a resolution plan under the Insolvency and Bankruptcy Code, 2016 (“IBC”) (for which an exemption from open offer is available), the committee of creditors is required to act in the best interest of all stakeholders. However, in case of a non-IBC resolution, the lenders may not necessarily be aligned to the best interest of all stakeholders.
• Unlike in the case of IBC, lenders are not required to select the best resolution plan in a non-IBC restructuring.
• Exemptions were granted earlier for debt restructuring mechanisms that no longer exist (such as corporate debt restructuring scheme), and therefore the main basis for granting exemption is no longer there.
• There is no longer an institutional framework to oversee debt restructuring, such as corporate debt restructuring standing forum, overseeing committee or the independent evaluation committee.
• The Agenda also concludes that an exemption for lenders to convert their debt into equity should continue as “the same may be a necessity in their ordinary course of business”.

Analysing SEBI’s rational

There are two key takeaways from the March Amendment: (a) an acquirer subscribing to shares or purchasing shares from lenders, as a part of debt restructuring, must do a mandatory open offer, if the Takeover Code triggers are met; and (b) only scheduled commercial banks and all India financial institutions can convert their debt to equity without worrying about a mandatory open offer.

The rational described in the Agenda arguably does not seem to entirely compliment the March Amendment, on account of the following reasons:

• An apprehension that lenders may not act in the best interest of all stakeholders in a non-IBC scenario is not completely addressed, as conversion of debt into equity is exempt from an open offer. In many cases, this conversion could be at one rupee. Upon conversion, the shareholding of the other shareholders (including public shareholders) will be diluted. If the conversion itself is exempt, then a sale post conversion ought to be exempt as well.
• The much awaited Prudential Framework for Resolution of Stressed Assets, dated June 7, 2019 (“June 7 Circular”) issued by the RBI does provide for checks and balances on resolution plan. Illustratively, RBI requires a credit opinion of RP49 or better for the residual debt by credit rating agency specifically authorised by the RBI.
• By limiting the definition of “lenders” to scheduled commercial banks and all Indian financial institutions, other categories of lenders such as asset reconstruction companies, lenders for external commercial borrowing, and other secured lenders are excluded. The rationale of SEBI that debt conversion may be a “necessity in their ordinary course of business” equally applies to such other lenders as well.
• Whilst the IBC process (for which an exemption is still available), results in a final approval from the National Company Law Tribunal (“NCLT”), the scope of review by the NCLT is fairly limited. The Supreme Court of India in K. Sashidhar v. Indian Overseas Bank & Ors. (Civil Appeal No. 10673 OF 2018) has expressly held that the NCLT cannot make any enquiry or issue directions in relation to the commercial wisdom of the financial creditors, and it cannot undertake scrutiny of the justness of opinion of the financial creditors.
• It is possible to delist a listed company pursuant to the IBC process where the public shareholders may not be better-off. If an open offer exemption is not available, the other lenders may choose to initiate IBC process even if cases where a debt restructuring may have worked.

Hopefully, after the issuance of the June 7 Circular by the RBI, SEBI may consider revisiting the March Amendment to restore the exemptions from open offer that were earlier available, in the best interest of all stakeholders.

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