ONGC-HPCL Deal: Can The Government Get Away With Avoiding An Open Offer?
No open offer following ONGC’s buyout of HPCL, government says.
India’s biggest oil explorer Oil and Natural Gas Corporation Ltd., will buy out the government’s 51 percent stake in refiner Hindustan Petroleum Corporation Ltd. Both the state-owned companies are public listed entities yet the transaction will not be accompanied by the mandatory open offer to HPCL’s public shareholders.
This was confirmed by the ONGC chairman DK Sarraf in an interview to BloombergQuint.
BQ: One big question which has been asked is about the open offer. Since you will acquire more than 25 percent in HPCL, will it trigger an open offer?
Sarraf: My understanding of the law is that it cannot.
But not all lawyers BloombergQuint spoke to agree with Sarraf’s understanding of the law.
Market regulator Securities and Exchange Board of India’s Takeover Regulations require that in matters of change in control or the acquisition of 25 percent or more voting right, the acquirer must give public shareholders of the target company the opportunity to exit by tendering their shares in an open offer. The minimum size of the open offer must be 26 percent.
“It will be argued that directly or indirectly, ONGC and HPCL are government companies and the acquisition will not result in change in management and therefore there is no need for an open offer,” said Mohit Saraf, senior partner at law firm Luthra & Luthra.
There is a precedent contrary to this position. Indian Oil Corporation Ltd. bought IBP Co. and made an open offer (under the old Takeover Code). Both of them were government companies and IBP Co. was sold in the divestment process and there was a change in control. But if the government decides and SEBI plays ball that ONCG’s precious money should not be paid to small shareholders, they can do that.Mohit Saraf, Partner, Luthra & Luthra
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The lack of an open offer in the ONGC - HPCL acquisition can be challenged, Saraf said. Companies are run by the board but in this case, it’s like a shareholder is running the company, he added, commenting on ONGC’s view that an open offer will not be triggered.
Bharat Anand, a partner at law firm Khaitan & Co. agreed. According to him, the government is harking back to the old days of “just changing the pocket” in which it holds assets.
But lawyer and counsel Somasekhar Sundaresan argued that an open offer exemption is indeed defensible since the ultimate shareholder will remain unchanged and there is no real change in control.
If other ingredients are met, Regulation 10(1)(a)(iii) would afford an exemption. SEBI may also grant an exemption under Regulation 11(1) of the Takeover Code on grounds that there is no real change in control since both companies are government-owned and this is merely a restructuring of holding.Somasekhar Sundaresan, Counsel
Regulation 10(1)(a)(iii) of the Takeover Code exempts inter-se transfer of shares among certain qualifying persons, as long as the acquisition price is not higher than 25 percent of the market price for a period of sixty trading days preceding the date of issuance of notice of transfer.
Regulation 11 allows the market regulator to grant such an exemption by recording its reasons in writing.