IN THE MATTER OF PROPOSED ACQUISITION OF SHARES OF SOUTHERN IRON AND STEEL COMPANY LIMITED (EXEMPTION APPLICATION FILED UNDER REGULATION 4 (2) OF THE SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS, 1997)

1.0       BACKGROUND

1.1       Southern Iron and Steel Company Ltd. (hereinafter referred to as ‘the target company’) is a public limited company incorporated under the Companies Act, 1956, having its registered office at 34 A, Kamaraj Road, Coimbatore .          The equity shares of the target company are listed on the Stock Exchange Mumbai, Madras Stock Exchange and Coimbatore Stock Exchange Ltd.

1.2             As the existing management could not run the target company profitably and the target company could not repay its obligations of loan liability towards banks and financial institutions, financial restructuring under Corporate Debt Restructuring (CDR) scheme has been initiated, under which it is proposed that one of the promoters of the target company namely Laxmi Machine Works Ltd. (hereinafter referred to as ‘LMW’) would transfer its holding of 39.71% of the equity capital in the target company to  Vrindavan Services Pvt. Ltd. (hereinafter referred to as ‘the acquirer’) and persons acting in concert namely Jindal South West Groups and its associates. Based on the proposals made by LMW, ‘the acquirer’ showed its interest to acquire the entire shareholding of 39.71% of LMW in the target company.  

2.0             APPLICATION FOR EXEMPTION

2.1             ‘The acquirer’ made an application dated August 23, 2004 under clause (l) of sub-regulation (1) of regulation 3 of SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 (hereinafter referred to as the ‘Takeover Regulations’) seeking exemption from the applicability of regulations 10, 11 and 12 of the ‘Takeover Regulations’, in respect of the proposed acquisition of 3,00,00,000 equity shares (39.71% voting rights) of the target company held by LMW, at the price of Re. 1 per equity share. After the proposed acquisition the voting rights of ‘the acquirer’ in the target company will increase from 0% to 39.71%. ‘The acquirer’ has also sought exemption in respect of its acquisition of fresh issue of equity shares of the target company on preferential allotment basis, at par, or at a price to be determined under clause 13.1.1 under Chapter XIII of SEBI (Disclosure & Investor Protection) Guidelines, 2000, which ever is higher, to the tune of Rs. 120 crores.

2.2             As per the said application, the current shareholding pattern of the target company, is as under:

3.0       SUBMISSIONS IN THE EXEMPTION APPLICATION

3.1   In the application dated August 23, 2004, ‘the acquirer’ has interalia submitted that:

i)                    target company has been facing serious liquidity problems since financial year 1997.  As of March 31, 2004, the loan liability of the target company was Rs. 919.99 crores.  Due to various operational issues, e.g. Market recession, high input cost, constant pressure on margins, working capital crunch, etc., target company could not honour its repayment obligations to banks and financial institutions

ii)                  target company has been co promoted by Laxmi Machine Works Ltd. (“LMW”) along with Tamilnadu Industrial Development Corporation Limited . The day to day management of the company was currently in the hands of LMW.   

iii)                based on ongoing discussions between the target company and its lenders, a mutual understanding had been reached in terms of which LMW has expressed its intent to transfer its equity holding in target company to such parties who had the requisite expertise and knowledge of promoting and managing the steel business.  Thus, LMW was willing to give up control over the day to day management and affairs of the proposed target company. 

iv)                the target company approached ‘the acquirer’ through ICICI Bank and ‘the acquirer’  had expressed its interest to takeover the shareholding of LMW in the target company and the consequent control over the target company, subject to the compliance of certain conditions which are required to be complied with.  

v)                  ICICI Bank had initiated a financial restructuring of the company under a Corporate Debt Restructuring (CDR) scheme and had issued a flash CDR report dated July 26, 2004 and some of the salient feature are ;

a     ‘the acquirer’ to buy 3,00,00,000 equity shares held by existing promoter LMW, at mutually acceptable price.  Price indicated is Rs. 1.00 per equity share of Rs. 10 each fully paid up.

b.         the preference share holders to convert their holdings into equity at a premium of Rs. 52 per share  or at a  price to be determined  under clause 13.1.1 of SEBI (Disclosure & Investor Protection) Guidelines 2000, whichever is higher.

c.         loans aggregating to Rs. 395 Crores would be converted into an optionally convertible instrument with a call option to the target company to convert the same into equity within a period of 18 months from the date of allotment of the optionally convertible instrument.

d.    unsecured loan extended by LMW to the target company to be converted into equity at a premium of Rs. 52 per share  or at a  price to be determined  under clause 13.1.1 of SEBI ( Disclosure & Investor Protection ) Guidelines 2000, whichever is higher.

e.      even after the financial restructuring , the project would be viable only when Rs. 37 crores would be invested in the existing plant to achieve the name plate capacity. Further the production capacity of the plant has to be expanded from 3,00,000 tons to 6,00,000 tons per annum which would require an additional investment of Rs.363 crores.

f.      the above project cost of Rs. 400 crores is proposed to be financed through Rs.  120 crores equity at par and Rs. 280 crore term loan at 9% interest p.a.

3.2   In view of the above ‘the acquirer’, had sought the exemption from the provisions of regulations 10, 11, 12 of the Takeover Regulations in respect of the following:

a)         purchase of 3,00,00,000 equity shares of the target company held by LMW  for a price of Re. 1 /- per equity share of Rs. 10/-  each fully paid up.

b)         subscription by ‘the acquirer’ or Persons Acting in Concert to fresh issue of equity shares of the target company on preferential allotment basis at par , or at a price to be determined  under clause 13.1.1 of SEBI ( Disclosure & Investor Protection ) Guidelines 2000, whichever is higher, to the tune of Rs.120/- crores.

4.0       RECOMMENDATION OF THE TAKEOVER PANEL  

4.1       The aforesaid application dated August 23, 2004 was forwarded to the Takeover Panel in terms of sub-regulation (4) of regulation 4 of the Takeover Regulations. The Takeover Panel vide its report dated August 26, 2004 has recommended as under –

            “On the facts stated, in the application, it appears that the target Company has been consistently making losses from financial year 1997 and the brought forward losses as on March 31, 2003 were to the extent of Rs. 202.42 crores as against shareholders’ Funds of Rs. 236.5 crores.  It further appears that the target company has been facing liquidity problems and has not been able to honour its repayment obligations to banks and financial institutions and if the revival program by way of financial restructuring and change in management is not implemented, the target company may turn into a sick company which may adversely affect the interest of all the stakeholders. 

Taking totality of circumstances into consideration, grant of exemption as sought in respect of intended acquisition of 3,00,00,000 equity shares of the target company held by Laxmi Machine Works Ltd., the promoter of the target company is recommended subject, however, to a Special resolution being passed as per Regulation 12 of the Takeover Code.

As regards the exemption sought with reference to the intended subscription by the Acquirer or PAC to a fresh issue of equity shares of the target company on preferential allotment basis, since there is no specific proposal in this regard, the request of the Acquirer is not considered.”        

5.0             FINDINGS

5.1    I have gone through the application dated August 23, 2004 and taken into consideration the relevant material available on record and the above mentioned recommendation of the Takeover Panel. I observe that ‘the acquirer’ had sought an exemption from the provisions of regulations 10,11 and 12 of the Takeover Regulations with respect to the purchase  of 3,00,00,000 equity shares of the target company held by LMW  for a price of Re. 1 /- per equity share of Rs. 10/-  each fully paid up and for its or Persons Acting in Concert’s  subscription  to fresh issue of equity shares of the target company on preferential allotment basis at par , or at a price to be determined  under clause 13.1.1 of the said Guidelines, whichever is higher, to the tune of Rs.120/- crores.

5.2             However, I find that the Takeover Panel had not considered the request made by ‘the acquirer’ with reference to the intended subscription by ‘the acquirer’ or PAC to a fresh issue of equity shares of the target company on preferential allotment basis as there was no specific proposal made by ‘the acquirer’.       

5.3             As far as the proposed acquisition of 3,00,00,000 equity shares of the target company is concerned , it is noted that the said acquisition is from one of the promoters of the target company , LMW .  I find that the acquisition is pursuant to the proposal made by one of the promoters of the target company to transfer its equity holding to parties that have experience in managing steel business.  ‘The acquirer’ is an investment company of Jindal South West Group, a group that has companies in steel industry as Jindal Vijaynagar Steel Ltd. and Jindal Iron and Steel Company Ltd. and hence equipped with adequate experience in managing steel business.

5.4             I observe that the said proposal was in view of the fact that on account of various operational issues, the target company could not run profitability and could not meet to its repayment obligations towards banks and financial institutions.  I also note that the target company has been consistently making losses from the financial year 1997. I have also noted from the application filed by ‘the acquirer’ that the loan liability of the target company as on March 31, 2004 was approx. Rs. 919.99 crores. ‘The acquirer’ in their application further mentioned that its intention was to run the target company profitably and to turn it into a profitable venture. 

5.5             I have noted that the target company is co-promoted by LMW with Tamilnadu Industrial Development Corporation Ltd. and LMW is largest single shareholder in the target company.   It is also observed from the application filed by ‘the acquirer’ that the entire holding of LMW in the target company would be transferred to ‘the acquirer’.  At present ‘the acquirer’ does not have any shares in the target company and the acquisition is pursuant to the corporate debt restructuring scheme initiated by ICICI Bank.      

5.6             ‘The acquirer’, vide letter dated September 29, 2004, modified their earlier request, mentioned at para 3.2 above and requested SEBI to grant the exemption requested for, only with respect to the purchase of 3,00,00,000 equity shares of the target company, from LMW. 

5.7             In view of the above facts and circumstances, I agree with the recommendations of the Takeover Panel and consider the present case as a fit case for granting exemption from making a public announcement as required under regulation 10 & 12 of the Takeover Regulations.

ORDER

6.0       In view of the above findings , I, in exercise of the powers conferred upon me under section 19 of the Securities and Exchange Board of India Act, 1992, read with sub - regulation (6) of regulation 4 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, hereby grant exemption to ‘the acquirer’, namely Vrindavan Services Pvt. Ltd. from complying with the provisions of Regulation 10 & 12 of SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 with regard to the proposed acquisition of 3,00,00,000 equity shares of Southern Iron and Steel Company Ltd. from Laxmi Machine Works Ltd., one of the promoters,  subject to a special resolution being passed by the shareholders in the general meeting.  The target company shall make use of the facility for voting through postal ballot as specified under the Companies (Passing of the Resolutions by Postal Ballots) Rule, 2001.    

6.1       ‘The acquirer’ shall complete the proposed transaction within 90 days from the date of the order and shall file a report as required under regulation 3(4) read with regulation 3(5) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, with SEBI.