Jul 09, 2004
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Informal Guidance
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Manager
Investment Management Department
IMD/PSP/14910/04
July 9, 2004
M/s Reliance Capital Asset Management Ltd.
Kamala Mills Compound,
Trade World, B Wing, VII Floor, S.B. Marg
Lower Parel (W),
Mumbai 400 013
Dear Sirs,
Sub : Interpretive letter regarding your proposed investment in Reliance Energy Ltd.
You had by your letter dated May 8, 2004 sought informal guidance on certain issues as detailed hereunder. We had given our opinion on the same by our letter dated June 3, 2004. Subsequent to it, you have again by your letter dated June 10, 2004 sought our informal guidance on the same questions in light of certain further facts advanced by you, which is being dealt with in this letter.
By your letters above mentioned you have given the factual position of the mater as under :
- Reliance Mutual Fund (RMF) is a mutual fund sponsored by Reliance Capital Ltd. (RCL) which is part of the Reliance group.
- Reliance Energy Ltd. (hereinafter referred to as the ‘target company’) is also part of the Reliance Group.
- The Reliance group of companies, along with RCL, which is deemed to be a person to be acting in concert (PAC) with them, hold 50.48% in the target company.
- RMC under its various schemes holds 0.22% of the total voting capital of the target company.
On these facts, you had sought an interpretive letter on the following questions :
- Reliance Mutual Fund or any schemes thereunder shall not be considered as Persons Acting in Concert, in respect of their shareholding in the target company i.e. in terms of the SEBI (Substantial Acquisition of shares and Takeovers) Regulations, 1997, and ;
- To allow Reliance Mutual Fund to make investments in the equity shares of Reliance Energy Limited and exempt any further investments made by the schemes of RMF (including the presently opened Reliance Diversified Power Sector Funds, an open ended power sector scheme) from the applicable regulations of the SEBI (Substantial Acquisition of shares an Takeovers) Regulations, 1997.
In this regard, you had represented in letter dated May 8, 2004 that the investments made by the schemes of mutual fund are for and on account of the unit holders who invest in the respective schemes and such benefit, if any, is passed onto them in the form of higher Net Asset Value and that the unit holders remain the beneficial owners of the investment, unlike the investments by any other entities. Mutual Fund cannot by virtue of its shareholding acquire management or control of any company. We had earlier opined that these facts alone do not rebut the presumption under regulation 2(1)(e)(2)(iv) of the Takeover Regulations that RMF is a PAC with RCL and the Reliance Group of Companies.
Now, by your letter dated June 10, 2004 you had advanced the following in light of which you believe that the said presumption would be rebutted, and requested us for a confirmation of the questions in a) and b) above.
- There is no common objective or purpose nor any formal or informal agreement or understanding between RMF and its sponsor trustee or AMC or group companies to acquire shares or voting rights in the target company, REL. Further, REL’s promoter group companies already collectively hold more than 50% shareholding in REL and are already in control of REL.
- Investment decisions of RMF are made by its professional fund managers, who are responsible and answerable solely to RMF and not influenced by any other person or entity.
- The voting rights of RMF shall be exercised in an independent manner in the best interest of the unit holders without any other influence. You have stated that you are also willing to give an undertaking that the voting rights shall be exercised in a manner determined by the independent directors of RCL without any interference of the promoter group companies.
In continuation of our letter, our opinion on the further facts advanced by you is given as under :
Regulation 2(1)(e)(1) says certain persons will be PACs if certain conditions are fulfilled. Sub-clause (2) provides that certain categories of persons are deemed to be PACs with each other, unless the contrary is established, including mutual funds with their sponsors, trustees and asset management companies. Therefore, it follows that if the interested person establishes through evidence that the conditions in regulation 2(1)(e)(1) are not fulfilled in his case, he would be out of the deeming provision contained in regulation 2(1)(e)(2).
Essentially, the determination of whether a person is a PAC with another can be done only after consummation of transaction taking into consideration of all the surrounding circumstances including the working of Chinese walls stated to be adopted by you. Only on a post facto examination of the factual matrix, a clear conclusion can be reached.
The additional factors advanced by you are analysed as below :
- This is a general statement merely to the effect that the conditions in reg. 2(1)(e)(1) are not fulfilled in your case. It has to be noted that the absence of these conditions (absence of commonality of interests, agreement / understanding, cooperation etc.) would have to be affirmatively proved by the concerned person in respect of a consummated transaction and a mere statement to that effect would not go very far in this regard.
- & iii) Investment decisions by professional fund managers & exercise of voting rights independently – These would be factors common to all mutual funds and therefore would not by themselves rebut the presumption as already mentioned in our earlier letter. They may, in conjunction with other circumstances, go to rebut the presumption.
It is therefore opined that a final conclusion as to whether the presumption has been rebutted can be taken only after detailed examination of the factual position which may not be possible before consummation of the transaction.
This letter is based on the representation made to the Division of Funds in your letters. Different facts or conditions might require a different result. This letter expresses the Division’s position on enforcement action only. It does not express decision of the Board on the questions presented.
Yours faithfully,
Prasad P.S.