Monitors indicating stock prices are reflected in a glass panel at a brokerage firm in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

SEBI Orders Vakrangee Promoter To Make Public Offer

Pursuant to an investigation into promoter holding company transactions in the years 2013 and 2014 market regulator SEBI has ordered Vakrangee Holdings Private Ltd. to make a public offer to shareholders of Vakrangee Ltd.

It has directed that along with the consideration amount for the shares acquired via the public offer 10 percent interest has to be paid from August 20, 2013 till date of payment of consideration to the shareholders.

What Happened?

Vakrangee’s stock price rose 41 percent between March 28, 2014 - June 06, 2014 on both the BSE and NSE. A volume spurt was also witnessed on both exchanges on June 07, 2013, June 11, 2013 and June 13, 2013 and on November 29, 2013, according to the Securities and Exchange Board of India order. There were no corresponding major corporate announcements on these dates, the order noted.

This prompted an investigation by the regulator in which it found that during the quarter ended June 2013 Vakrangee Holdings Pvt. Ltd. (VHPL) increased its stake in the company from 22.97 percent to 24.93 percent. In doing so at one point VHPL’s stake hit 25.50 percent before it was pared slightly.

This, SEBI noted, exceeded the 25 percent shareholding threshold in its Takeover Regulations, and hence a mandatory 26 percent open offer to public shareholders had been triggered.

SEBI issued a show cause notice in March 2017 asking VHPL why it had failed to announce the open offer. The company’s representative countered that it was owned by Dinesh Nandwana, the promoter of Vakrangee, hence the two should be counted as persons acting in concert (PAC). Also, Nandwana already held an over 38 percent stake in the company and while the breach in the 25 percent threshold by one promoter entity may be a technical violation, it did not amount to a change in control. Hence, no open offer was required.

While SEBI agreed that under Takeover Regulations VHPL, Dinesh Nandwana, Dinesh Nandwana HUF and VCPL (another holding company) are deemed PACs, the order also pointed out that the breach of the 25 percent threshold even by a PAC would trigger an open offer.

Regulation 3(3) unambiguously provides that acquisition of shares or voting rights beyond the threshold of 25 percent, even by a single entity amongst the PACs would attract the obligation to make an open offer. - SEBI Order

VHPL also argued that

  • an open offer made at past prices would be futile given the current price
  • and, there is no logic in making an open offer to present shareholders who were not holding any shares on the date of alleged trigger.

SEBI remained unconvinced and ordered VHPL to make a public announcement to acquire shares of Vakrangee within a period of 45 days from the date of this order.

It also ordered that along with the consideration amount for the shares VHPL shall pay interest at the rate of 10 percent per annum from August 20, 2013 till the date of payment of consideration “to the shareholders who were holding shares in the target company on the date of violation and whose shares are accepted in the open offer, after adjustment of dividend paid, if any”.

Open Offer Participants And Price?

Based on an earlier SEBI order, in the Arun Goenka and others case, the shares of the original shareholders will be accepted first in an open offer.

In that case, SEBI clarified original shareholders as those persons who were shareholders of the target company as on the triggering date (May 27, 2013), and continue to be shareholders of the target company till the date of tendering their shares in the offer.

Also, original shareholders are the only ones who will receive the interest payment.

New shareholders, those who bought after the trigger date and continue to hold the shares, will also be eligible to participate in the open offer but second to original shareholders.

New shareholders will not receive any interest payment.

Using the offer pricing parameters laid down in the Takeover Regulations, BloombergQuint’s calculations indicate an open offer price of Rs 174 per share (including interest Rs 261) versus the current market price of Rs 64, assuming Vakrangee were to make the public announcement immediately.

Shareholders should be cautious as this amount would vary substantially based on the date of the public announcement of the open offer. And that in turn depends on whether Vakrangee will follow the SEBI order or appeal at the Securities Appellate Tribunal.