2017 (1) TMI 1656 - HC - SEBI

Scheme of arrangement and amalgamation - freezing order of June 4, 2013 passed by SEBI in respect of such part of the promoters shareholding in the amalgamated company that exceeds 75% of the paid-up capital by treating the shares held by the trust to be a part of the promoters quota, till such time that the minimum public shareholding was achieved by the amalgamated company - According to SEBI, the public holding of shares in any listed company may not go below 25% of its paid-up capital - HELD THAT - There is no dispute that 4.32% of the paid-up capital in DPSCL is held by members of the public who have no connection with the promoters. For the public shareholding in the amalgamated company to reach the 25% mark, a further 20.68% of the shares in DPSCL has to be offered to the public by some transparent mechanism so that the holders thereof cannot be seen or regarded as persons acting in concert with the present promoters of the amalgamated company. The amalgamated company reports that out of the 40% shares in the amalgamated company held by the trust, 32,63,16,563 shares need to be sold to the public for the 25% minimum public shareholding in the amalgamated company to be achieved. Such 32,63,16,563 shares should be sold by April 30, 2017. The trust should also transfer the balance shares held by the trust in the amalgamated company in favour of such entities as the trust may, on its own or at the direction of the promoters, deem fit. The transfer of the balance shares, other than the 32,63,16,563 shares, should be completed by March 31, 2017 such that upon the sale of the shares to the public, the trust does not own or control any further shares in the amalgamated company. As to whether the trust will continue for the purpose of the other investments under the scheme, is not required to be gone into for the present purpose. The trust will cite this order and make a public offer for sale of the said 32,63,16,563 shares. Advertisements in such regard will be published in such newspapers as may be suggested by SEBI within a week of the form of the advertisement being forwarded to the office of SEBI in Kolkata. Such form of the advertisement should be forwarded to the relevant office within three weeks from date. The directions herein are in modification of the interim order of February 20, 2015 that restrains the amalgamated company from dealing with its shares. However, the interim order will continue for all other purposes till such time that the trust transfers the balance shares, other than those to be sold to the public, and the shares meant to be sold to the public are so sold. It is made clear that the sale of the 32,63,16,563 shares may be in several tranches as long as the entire quantum is sold by April 30, 2017. At any rate, the entire quantum of the said shares should be offered to be sold to the public at least a fortnight before April 30, 2017. The sale of the shares will be in accordance with the rules and regulations governing the same.

Summary

Issues:
1. Violation of Securities Contracts (Regulation) Rules and Rules and Orders made under the Securities and Exchange Board of India Act, 1992 by parking shares in a trust.
2. Public shareholding in a listed company falling below the mandated 25% of its paid-up capital.
3. Justification of the clause in the scheme of arrangement and amalgamation by the amalgamated company.
4. Creation and legality of the trust and its role in maintaining public shareholding.
5. Sale of shares held by the trust to achieve the minimum public shareholding threshold.
6. Compliance with regulations and directives of SEBI regarding the sale of shares to the public.

Analysis:
1. The Securities and Exchange Board of India (SEBI) raised concerns regarding Clause 3.3 in a scheme of arrangement and amalgamation, alleging a violation of securities regulations due to the substantial shares being parked in a trust, reducing the public shareholding in the amalgamated company to 4.32%.
2. SEBI argued that public shareholding in a listed company should not fall below 25% of its paid-up capital, emphasizing the importance of maintaining transparency and investor protection in the securities market.
3. The amalgamated company defended the clause, citing special circumstances where the majority of shares were held by government entities and one specific company before the merger, leading to the unique shareholding structure post-amalgamation.
4. The legality and purpose of the trust were questioned by SEBI, asserting that the trust's creation was an attempt to bypass the mandatory public shareholding requirement and should be held accountable for the shares it held in the company.
5. To address the issue of inadequate public shareholding, the court directed the trust to sell a specific number of shares to the public by a certain deadline, ensuring compliance with the minimum public shareholding threshold set by regulations.
6. SEBI's directives regarding the sale of shares, the involvement of a committee overseeing the sale process, and the need for transparency in the sale transactions were highlighted to ensure adherence to regulatory standards and investor confidence in the market.