By: Ashutosh Choudhary
Regulation 23(1) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (hereinafter ‘New Takeover Code’) has been introduced for the withdrawal of the takeover offer. The legislation has inserted a new sub-clause ‘(c)’, which provides that if any condition enumerated under the agreement for acquisition is not met, the agreement is rescinded, provided that the conditions must be fairly disclosed in the detailed public statement and letter of offer and the fulfilment of such conditions must be beyond the reasonable control of an acquirer. The existing provisions of Regulation 27(1) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter ‘Old Takeover Code’) are also brought in Regulation 23(1) of the New Takeover Code.
In the absence of ruling with regards to the application of sub-regulation (c) of Regulation 23 of the New Takeover Code, its interpretation is wide and still open. The article deals with the applicability of the principle of ‘impossibility to perform an open offer‘, in Regulation 23(1)(c) of the New Takeover Code. The principle was substantially evolved, adopted and enshrined in the Old Takeover Code as a requirement to grant a withdrawal, but whether such principle is also extended to Regulation 23(1)(c) of the New Takeover Code is debatable. According to the narrow interpretation, the principle is applicable on the basis of ‘objective’ and ‘judicial intent’ behind the withdrawal of a takeover offer and according to wider interpretation, the principle is not applicable as ejusdem generis doctrine cannot be applied in Regulation 23(1)(c) of the New Takeover Code.
PRINCIPLE OF ‘IMPOSSIBILITY’ FOR THE WITHDRAWAL OF OPEN OFFER
In Nirma Industries Ltd and Anr v Securities Exchange Board of India, the Supreme Court while interpreting the term ‘merit withdrawal’ under Section 27(1)(d) of the Old Takeover Code, applied the principle of ejusdem generis and included the ‘impossibility for the acquirer to perform the public offer’ as a requirement for the withdrawal of takeover offer. The Supreme Court observed that “a certain amount of discretion has been left with the Board to determine as to whether the circumstances fall within the realm of impossibility.” Similarly, in SEBI v Akshya Infrastructure Private Limited the Supreme Court while examining Regulation 27(1) of the Old Takeover Code, inter alia observed that “the ejusdem generis principle is fully applicable for the interpretation of Regulation 27(1)(b)(c) and (d) as there is a common genus of impossibility”.
APPLICABILITY OF THE PRINCIPLE IN REGULATION 23(1)(c) OF THE TAKEOVER CODE
If the principle of ‘impossibility to perform an open offer’ is not applicable in Regulation 23(1)(c) of the New Takeover Code, it will give the Regulation a wider interpretation as the withdrawal can be granted on non-fulfilment of any condition enumerated in takeover agreement. However, if the principle is applicable in Regulation 23(1)(c) of the New Takeover Code, it will give the Regulation a narrow interpretation as the withdrawal can only be granted on the satisfaction of SEBI in ‘compelling circumstances’.
Wide Interpretation of Regulation 23(1)(c) of the New Takeover Code
The Supreme while inserting the principle of ‘impossibility’ under Old Takeover Code, applied the doctrine of ejusdem generis. In Amar Chandra Chakraborty v The Collector of Excise, Supreme Court held that the ejusdem generis doctrine applies when specific entries in a list constitute a class and are followed by a general word, the general word is also limited in scope to that class and there is no indication of a different legislative intent.
Unlike sub-regulation (a), (b) and (d), the Regulation 23(1)(c) does not constitute a class of ‘impossibility’ and the sub-regulation (c) is already an exhaustive clause. Further, a contrary intention of regulation framers appears in Regulation 23(1)(c) by the insertion of the term ‘beyond the control of the acquirer’. It can be gainsaid that the legislature did not intend to insert the principle of ‘impossibility to perform the offer’ and hence, ‘doctrine of ejusdem generis’ cannot be applied.
Further, the Regulation 23(1)(c) is based on the concept of conditional requirements for the fulfilment of the open offer and not giving a wide interpretation to the regulation 23(1)(c) shall violate the essence of concepts of conditional offers enumerated under Regulation 19 of the New Takeover Code. Therefore, the interpretation of ‘impossibility to perform the offer on part of the acquirer’ cannot be read in this clause as it is inconsistent with the nature of the regulation 23(1)(c).
Narrow Interpretation of Regulation 23(1)(c) of the New Takeover Code
In KK Modi v SAT, the Court categorically stated that
the takeover code has been framed with a view to protect the interests of investors in securities. The main objective of the code is to ensure the quality of treatment of opportunity to all shareholders and afford protection to them. SEBI is the guardian of the interest of the shareholders and the protective shield against unscrupulous practices in the securities market. SEBI is mandated to protect the interest of the investors and the securities market and as such, it is expected to exercise the power to grant withdrawal of open offer in genuine circumstances.
Unchecked automatic withdrawal of takeover offer being capable of misuse, the authorities deliberately put the checks and control through the requirement of obtaining SEBI approval.
The acquirer cannot be permitted to take advantage of its inability to justify seeking withdrawal of the public offer. If allowed to withdraw its offer, it would be unfairly prejudicial to the interests of the small shareholders and investors who were neither fraudulent nor lax in their conduct. Further, Regulation 23(c) gives a weapon in the hand of the acquirers that allow them to step back anytime from the fulfilment of the open offer by stipulating the unreasonable, deceptive and ambiguous conditions in the takeover agreement. This violates the very objective of the takeover code and is against the interest of the innocent investors and shareholders in the takeover process.
In Luxottica group SPA v SEBI, the court observed that “requiring an offer to be made conditional upon the occurrence of an uncertain event would result in considerable prejudice to the shareholders and practical difficulties”. Such shares would then remain blocked for an indeterminate period, i.e., till the uncertain contingent event occurred, or till its occurrence became impossible. In the meanwhile, the shareholders would be deprived of their right to deal with/sell their shares in the market.
Even after enforcement of the New Takeover Code, in 2016, SEBI in M/s Jyoti Limited v SEBI case rejected the request for withdrawal of open offer considering the fact that completion of the open offer process was not impossible and observed that the provisions of Regulation 23(1) of the New Takeover Code, are similar to the provisions of Regulation 27(1) of the Old Takeover Code. Consequently, the ratio laid down in the matters of Nirma Industries Limited case and Akshya Infrastructure Private Limited case is squarely applicable to the provisions of Regulation 23(1) of the New Takeover Code.
The term ‘any condition’ incorporated in the Regulation 23(1)(c) can be interpreted as per the principle of ‘impossibility to perform the takeover offer’ same as sub regulations (a), (b), and (d) interpreted by Supreme Court in Nirma’s Case and affirmed in Akshya and Jyoti Case. The withdrawal of offer under Regulation 23(1)(c) can be confined in a limited context to safeguard the objective of the takeover code and interest of shareholders.
The implication of Regulation 23(c) should be restricted with the principle of ‘impossibility to perform the takeover offer on the part of the acquirer’ as to safeguard the purpose of the takeover code and interest of investors. Therefore, on the basis of ‘judicial intent behind giving withdrawal’ and ‘objective of the Regulation’, the withdrawal of takeover offer under regulation 23(1)(c) must only be permitted on the satisfaction of impossibility to complete the offer on the part of the acquirer.
In the context of withdrawal of open offer in Takeover Regulations, since the power is to ensure transparency and prevent abuse of the market, SEBI should exercise such discretionary power as consistent with the objects of the Takeover Regulations. The dilemma regarding the applicability of the principle of ‘impossibility to perform an open offer’ in Regulation 23(1)(c) of the New Takeover Code, still exists. The position is not settled and there is a need to make a harmonious balance between the two interpretations. In light of the above discussions, the intervention of judiciary and legislation is much needed as to provide clarification on the application of either the wide or narrow interpretation in Regulation 23(1)(c) of the New Takeover Code.
(Ashutosh is currently a law undergraduate at National Law University Odisha, Cuttack. He may be contacted via LinkedIn.)
Cite as: Ashutosh Choudhary, ‘Interpreting Regulation 23(1)(c) of the Takeover Code: Applicability of the Principle of Impossibility’ (The RMLNLU Law Review Blog, 24 April 2020) <https://rmlnlulawreview.wordpress.com/2020/04/24/interpreting-regulation-231c-of-the-takeover-code-applicability-of-the-principle-of-impossibility> date of access.