Whereas, it may adhere to every alphabet, every letter, of the
written law (as it stands today), does the principle of offloading the promoter
holding to FIIs with the solitary purpose of encroaching the minority
shareholders' interest so as to deprive them of a fair price for their
shareholding on delisting, carry out the spirit of law? This is a classic
battle between following the law as it is written versus tenaciously and
inexorably circumventing the spirit of the law.
The law which is being referred to over here is in the form of
the Securities And Exchange Board Of India (Delisting Of Equity Shares)
Regulations, 2009(hereinafter referred to as “Delisting Regulations”)
issued by the Indian securities’market watchdog, the Securities and Exchange
Board of India (“SEBI”). And, the principle of outwitting the inherent spirit
of these regulations while strictly and duly not infringing letter of the law,
thereby blatantly condescending upon what the Delisting Regulations integrally
intend to achieve, is in relation to the Indian arm, AstraZeneca Pharma
India Limited (“AstraZeneca”) of the British-Swedish pharmaceutical
multinational company.
At this juncture, it is imperative to briefly recapitulate the
facts of the case. AstraZeneca is a public limited company listed on the Bombay
Stock Exchange (“BSE”) and the National Stock Exchange (“NSE”) engaged in the
pharmaceutical business. As mentioned above, it is promoted by Astra
Pharmaceuticals AB, Sweden which holds 75% stake in AstraZeneca. Prior to 2013,
the promoter company holding in the company was 90% and the balance was held by
the public at large. It subsequently reduced its stake from 90% to 75% in order
to comply with fresh guidelines in the form of Securities Contracts
(Regulations) (Amendment) Rules, 2010 which were issued by SEBI requiring that
there shall be a minimum public shareholding of 25% in listed companies (Rule 19A
read with Rule 19(2)(b) of the Securities Contracts (Regulations) Rules, 1957).
The promoter company of AstraZeneca disposed 15.5% to 6 Foreign Institutional
Investors (“FIIs”) via Offer for Sale (“OFS”) route in 2013 and the price at
which such shares were sold must have been around Rs. 650 (the then market
price of the company). Now, a couple of days back, the company announced to
delist its shares from BSE and NSE.
Regulation 17 of the Delisting Regulations issued by SEBI
requires that, for a company to delist the shareholding of the promoter
company, post-offer, should reach 90% or the aggregate of pre-offer promoter
company shareholding and 50% of the offer size; whichever is higher. Hence, in
this case, AstraZeneca can successfully delist itself if it acquires all the
shares from the FIIs which it had offloaded in the preceding year; thereby
reaching the minimum threshold of 90%.
Here is where the archetypal “Trick of the Trade” comes into
play- AstraZeneca had offloaded about 15.5% to FIIs only a year ago and
suddenly a year after, it plans to delist its share. This move by AstraZeneca
is anything but sudden and rather connived insidious well-laid out plan because,
in order to reach the criterion of 90%, it will buy from the same FIIs that it
had sold to. This is something which is called “Stock Warehousing” where the
promoter company’s stock is held or “parked” by or in some other entity (FIIs,
in this case) so that the promoter company can do away with the Indian
Delisting Regulations when it re-acquires it from these entities.
This, in itself, provides two fold benefits:
1. The FIIs will offer their shares for sale to the promoter
company of AstraZeneca at around Rs. 1300 (the current market price) which is
double the price at which they had acquired the shares; so a win-situation for
the FIIs since they will be able to exit at a hefty gain; and
2. The promoter company of AstraZeneca will not contravene any
provisions of the Delisting Regulations yet it will get its own shares at a
price which will determinably be lower than the price which it would have been
otherwise “discovered” in the market, if the shares had been
acquired from the outside shareholders and not the FIIs. Further, without
shifting much of its resources to the outside shareholders, it de-regulates
itself from the SEBI regime by delisting which would thus ensure greater
control by the promoter company over the Indian operations with much lesser
accountability. Hence, it is a win-situation for the promoter company as well.
Therefore, it can be deduced that it is a win-win situation for
both the entities concerned. So, who loses? It is the minority outside
shareholders who are deprived of their right to get fair valuation for their
shares.
SEBI had amended its regulations in relation to the minimum
public shareholding in case of listed equity shares of the same class and
increased this requirement from 10% to 25%. The intrinsic inference for the
same is that a reasonable minimum public shareholding increases the liquidity
of the shares traded in the market, reduces the possibility of collusion by the
promoters so as to maneuver the prices of shares to their advantage and
ultimately leads to the discovery of a fair market price of the shares of the
company so publicly listed. The role of a market, in general, inter alia,is
to discover the fair market value of anything traded through it by striking a
balance between the demand and supply and absolve the thing traded from any
inequalities in the same.
Here, it is pertinent to note that AstraZeneca had already
offered its shares for delisting way back in 2004 where the discovered price
was Rs. 3000 whereas the floor price (the minimum price above which the bids
from the shareholders were accepted) was Rs. 825. Hence, since the price so
discovered through the market was so high, the delisting was off the table for
AstraZeneca. Recently, in 2010, the promoter company again made a delisting
proposal for which the maximum price set was Rs. 1152 per share. However, the
special resolution to approve the same was lost on account of lack of requisite
votes in favour of the same by the outside public shareholding. These two
instances vehemently suggest that the company, fundamentally, is capable of
commanding a high price for its share in the market since, in the first
instance, the delisting process lapsed due to a much higher price than the
floor price whereas in 2010, the resolution was lost due to the belief of the
outside public shareholders that the value of the share of the company was
higher than what had been set by the promoter company as the maximum price.
Currently, in the previous few quarters, after showing a dismal financial
performance, the gross revenue of the company has been on an upward trend and
has transformed its loss making impasse into a profit making prospect. Thus,
the value of share of AstraZeneca will command a higher price than what will be
bought by the promoter company from the FIIs thereby forcing the outside
shareholders to sell at a lower price than what would have been discovered if
the shares were bought from them. This is precisely the reason why the promoter
company “parked” its shares with the FIIs and re-acquiring the same from them
at a much lower price than the would-be discovered price.
However, in the strictest sense, this transaction is within the
four corners of the law and thus, cannot be touched upon as an illegal
transaction. This does not seem rational since the spirit of the law which is
to provide an exit opportunity to the outside shareholders at a fair price, has
precociously yet clandestinely been averted. In this case, the shareholders are
completely deprived of an opportunity of exiting at a price which the
shareholders would have bargained for in the market and they will be forced to
sell their shares at which the FIIs sell the shares to the promoter company.
Law, at more often instances than not, has ceased to be
rational. Sometimes, it is draconically irrationalized by
amending it only to serve the interests of the government (Re: Finance Act,
2012 to invalidate the ruling of the Supreme Court in the case of Vodafone) and
sometimes, it is naively irrationalized when the Regulators fail
to improve the law which aims at protecting the interests of the investors.
Thus, as an investor, the question that I long to ask is- will the SEBI be
proactive by coming up with better regulations to curb such practices or will
it only be reactive by taking recourse to litigation so as to face such
practices only once they have been culminated?
-Binoy Parikh
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