Request for Interpretive Letter under the SEBI (Informal Guidance) Scheme, 2003 - Welcast Steels Ltd

Aug 05, 2005
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Informal Guidance

 

GENERAL MANAGER

DIVISION OF CORPORATE RESTRUCTURING

 

CFD/DCR/TO/MM/ /05

August 5, 2005

 

AIA Engineering Ltd,

115, G.V.M.M Estate,

Odhav Road, Ahemdabad – 382410.

 

Dear Sirs,

 

Sub.: Request for Interpretive Letter under the SEBI (Informal Guidance) Scheme, 2003

 

Ref : Your letter dated June 8, 2005

 

1.      Please refer to your letter cited above, seeking ‘Interpretive Letter’ under SEBI (Informal Guidance) Scheme, 2003. It is, inter-alia, informed by you that:-

 

  1. Welcast Steels Ltd. (WSL / target company) is a public limited company listed on the stock exchange, Bangalore (BgSE) and BSE. WSL was incorporated on February 20, 1972, at Bangalore under the Companies Act, 1956.
  2. The paid up capital of WSL as on date is Rs.63.81 lacs, represented by 6,38,161 equity shares of Rs.10/- each fully paid-up.
  3. AIA Engineering Ltd. (AIAEL/Acquirer) is a closely held public limited company promoted by Mr. Bhadresh K Shah, a technocrat entrepreneur who, along with his family members held and continues to hold 93.60% of the paid up share capital of AIAEL.
  4. AIAEL has acquired 65,923 equity shares of WSL constituting 10.33% of the voting rights of WSL through an open offer made under the Takeover Regulations through the open offer dated May 19, 2003 and has been admitted as a member of the target company, WSL with effect from September 3, 2003.
  5. There are 6 companies (in which Mr Bhadresh K Shah is in control) holding a total of 3,22,330 shares constituting 50.51% of the voting rights of Target Company.
  6. The promoter of AIAEL, Mr.Bhadresh K Shah is also the promoter and majority shareholder of the above companies (the proposed transferor companies). All the six companies mentioned above are regarded, inter-alia as the PACs in the open offer made on May 19, 2003.
  7. The proposed transferor and transferee companies are also PAC in terms of disclosures made to stock exchanges from the year 2003 onwards.
  8. AIAEL proposes to acquire 3,22,330 equity shares (constituting 50.51% of the voting rights) of WSL from the proposed transferor companies. Mr Bhadresh K Shah has been and is in control of the proposed transferor companies and transferee (AIAEL).

 

 

 

  1. Mr Bhadresh K Shah is a promoter of all the above companies for more than 3 years i.e. transferee company and transferor companies. Therefore, proposed transfer of shares of the target company to the transferee company (AIAEL) is between promoters and should be exempt under Regulation 3(1)(e)(iii)(b) of Takeover Regulations. Based on the above fact, Interpretation is sought as to whether the term ‘promoter’ under Regulation 3(1)(e)(iii) would include the companies where the person in control is the same and whether if the same person is in control for more than 3 years, the transaction would be exempt from the applicability of Regulations 10, 11 and 12.
  2. This request may be given confidential treatment as prescribed in the Scheme as the target company is a listed company and the transaction may have a material impact on the prices.

 

2.      Without necessarily agreeing with your analysis, it is observed that

 

a.      AIAEL acquired 10.32% shares in the Target Company by way of an open offer in April, 2003. It is observed from the Letter of offer issued in this regard that the AIAEL did not hold any shares prior to the said offer. However, promoters of the company who held 59.87% were shown as PACs under the said offer. The PACs included the names of the companies shown to be proposed transferors in the present application.

b.      It is further disclosed in the Letter of Offer that the AIAEL, the PACs and the Target Company are directly or indirectly controlled by Shri Bhadresh K Shah and his family/associates. The instant application reiterates the above disclosure.

c.      Except AIAEL (“Acquirer”) and Vrindavan Alloys Private Ltd (one of the proposed transferors), remaining 5 transferors have been holding shares of the Target Company for the last three years. Further, Shri Bhadresh Shah has been the promoter of the Acquirer and the transferor companies for the last 3 years.

d.      Interpretation is sought on whether based on above the term “promoters” includes companies where person in control is same and such person is in control for more than 3 years. Further, whether such transfer of shares would be exempt under Regulation 3(1)(e)(iii).

e.      As per Regulation 3(1)(e)(iii)(b) of the Takeover Regulations, transfer of shares amongst Promoters is eligible for exemption from the applicability of the Regulations 10, 11 and 12 of the Takeover Regulations subject to the acquirer complying with the following conditions.

 

i.         The transferor(s) and transferee(s) are promoters in terms of explanation to Regulation 3(1)(e)(iii) of the Takeover Regulations.

 

ii.       The transferees collectively as well as transferors collectively have been holding shares in the target company for a period of atleast three years prior to the date of acquisition.

 

iii.      The provisions of Chapter II of the Takeover Regulations have been complied with within the specified time-limit by both the transferees and transferors.

 

 

 

iv.     The inter se transfer price should not exceed 25% of the price determined in terms of Regulation 20(4) and 20(5) of the Takeover Regulations, as applicable.

 

v.       As required under Regulation 3(3) of the Takeover Regulations, the transferee (acquirer) should inform the stock exchanges atleast 4 working days in advance of the date of proposed acquisition in case of acquisition exceeding 5% of the voting share capital of the target company.

 

vi.     The transferee (acquirer) shall file a report with SEBI in the specified format within 21 days of the date of acquisition along with requisite fees prescribed, in terms of Regulations 3(4) and 3(5) of the Takeover Regulations.

 

f.        It appears from the application that the Acquirer and the transferor companies are in collective control of the Target Company and have also been disclosed as persons acting in concert with each other since 2003 i.,e post offer. Therefore, they may be classified as “promoters” in terms of Reg. 2(1)(h) of the Regulations.

 

g.      As per condition stated at point e(ii), the transferors collectively and the transferees collectively should be holding shares for atleast three years prior to the proposed acquisition i.e, even if some of the members of promoters group (transferee or transferor) are not holding shares in target company for the last 3 years prior to the proposed acquisition, the acquisition would be exempted under regulation 3 (1) (e) of the Takeover Regulations provided that the other conditions as mentioned above are fulfilled. In this case under reference, this condition as specified in the proviso to the Regulation 3(1)(e)(iii) is not fulfilled as the acquirer became a member of WSL on 3/9/03 and the 3 years requirement can be met only by 3/9/06.

 

h.      In the instant case, all the proposed transferors except one have been holding shares in the Target Company for atleast 3 years. Therefore, the transferors collectively may be deemed to be holding shares for atleast three years. However, the same theory cannot be applied to the Acquirer as there does not appear to be any other entity acting in concert with the Acquirer for the purpose of acquisition who can be stated to be holding shares for atleast three years.

 

i.         In this regard, the query as to whether by virtue of Shri Bhadresh Shah being in direct/indirect control over transferors/transferee companies for more than 3 years, the proposed acquisition would be exempt u/r 3(1)(e)(iii) is answered in negative as Shri Shah’s shareholding in transferors/transferee companies is not relevant for the proposed transaction.

 

j.         In view of the above, as the transferee (acquirer) is prima-facie not fulfilling the condition of 3 years holding in Target Company, the acquisition may not be deemed to be eligible for exemption u/r 3(1)(e)(iii).

 

 

 

3.      This position is based on the representation made to the Division in your letter under reference. Different facts or conditions might require a different result. This letter does not express decision of the Board on the questions referred.

 

4.      You may note that the above views are expressed only with respect to the clarification sought on SEBI (Substantial Acquisition and Takeovers) Regulations, 1997 and do not affect the applicability of any other law or requirement.

 

Yours faithfully,

 

 

 

S V MURALI DHAR RAO