Informal Guidance Sought by M/s. Reliance Capital Asset Management Ltd Persons Acting in Concert - SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997

Manager

Investment Management Department

IMD/PS/11557/04

June 3, 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: Informal Guidance sought by you regarding your proposed investment in Reliance Energy Ltd.

 

By your letter dated May 8, 2004, you have given the factual position of the matter as under:

 

• Reliance Mutual Fund (RMC) 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:

 

1. 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 ;

 

2. 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 and Takeovers) Regulations, 1997.

 

In this regard, you had represented 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

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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.

Our opinion on the queries raised by you is as under:

 
1. Regulation 2(1)(e)(2)(iv) of the SEBI (Substantial Acquisition of shares and Takeovers) Regulations, 1997 provides that a mutual fund, its sponsor, its trustee and its asset management company will be deemed to be persons acting in concert, unless the contrary is established. It may be noted that regulation 2(1)(e)(2) is a deeming provision wherein certain categories of persons are deemed to be acting in concert. However, such persons, in a group can rebut such presumption by establishing that there were no common objective to acquire control or that there was no agreement or understanding. The burden of proof for this purpose would be on such persons to show that the acquisition was not for the purpose of substantial acquisition of shares, voting rights or control with prior agreement or understanding.

 

2. Your interpretation that the mutual fund cannot acquire control due to provisions of the ‘applicable Guidelines and their regulatory framework’ is misconceived. The SEBI (Mutual Funds) Regulations, 1996 inter alia require that no mutual fund under all its schemes should own more than 10% of any company’s paid up capital carrying voting rights. However, this provision does not preclude acquisition of control by entities with whom the Mutual Fund is deemed to be acting in concert. For the purpose of the Takeover Regulations, the acquisition by all persons acting in concert is relevant and not that of the mutual fund alone.

 

3. You have further opined that the fact that unit holders are the beneficial owners of mutual funds and would be the ultimate beneficiaries would go to show that the mutual funds are not PAC with their sponsor. We do not agree with this analysis as the ultimate beneficiaries (i.e., unit holders in case of mutual funds) have no relevance for acquisition of shares, voting rights or control in a target company. Adopting such an interpretation would also render the said regulation meaningless and would defeat the very purpose of specifying the mutual fund and sponsor as persons deemed to PACs, since this would be a factor common to all mutual funds.

 

4. In view of the above analysis, in response to your first query we opine that the factual representations made by you do not by themselves rebut the presumption given in regulation 2(1)(e)(2)(iv) of the Takeover Regulations that RMF shall be deemed as a PAC with RCL and the Reliance Group of companies. It may be noted that the concept of ‘person acting in concert’ is relevant only in the context of acquisitions or proposed acquisitions. This opinion is given by us in respect of any acquisition that may be made by RMF in the target company.

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5. With regard to your second query we opine that if the acquisitions made by the mutual fund (RMF) taken together with its PACs exceed the relevant limits laid down in the Takeover Regulations, the consequences specified in those Regulations shall follow, unless the said presumption is rebutted by you with reference to some other facts.

 

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)