The Securities & Exchange Board of India (Sebi) has take a decision in its board meeting on 22 September, 2009 to amend Regulation 3(2) of the Sebi (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (Takeover Code), which currently exempts the acquisition of Global Depository Receipts (GDRs) or American Depository Receipts (ADRs) from open offer requirements so long as these are not converted into equity shares carrying voting rights.
As per the minutes of Sebi’s board meeting on 22 September, which have been made public, Sebi seeks to amend Regulation 3(2) such that the open offer obligations under the Takeover Code will get triggered where holders of GDRs or ADRs are entitled to exercise voting rights (beyond the prescribed thresholds), on the shares underlying the GDRs or ADRs whether through clauses in the depositary agreement or otherwise.
The proposed amendment has made it clear that the informal guidance issued to Bharti Airtel Limited (Bharti) on 22 June, 2009, represented the correct view of the regulations prior to the proposed amendments. Sebi had clarified that open offer requirements under the Takeover Code would trigger only upon conversion of the GDRs into equity shares with voting rights. As part of the overall transactions contemplated between Bharti and the MTN Group, MTN was to receive GDRs exchangeable for ordinary shares of Bharti. Since the GDRs holders intended to give the voting rights to the depository bank in respect of the underlying shares, Bharti had requested Sebi to clarify whether this would trigger the open offer mandate.
It is also important to note that unlike Foreign Currency Convertible Bonds/ warrants, GDRs are always issued against underlying shares which carry voting rights. It is unclear on whether the exemption for ADRs/GDRs is intended to remain when the voting rights are to be exercised by the depositary under instructions of the board of directors of the issuing company or a person appointed by it instead of by the GDR holders. This will be relevant where an identifiable promoter or promoter group is in a position to exercise control over the composition of the board of the company.
Principally, if the ability of the GDR holders to instruct the depository in respect of voting rights will now trigger the takeover code (if the thresholds are exceeded), likewise there should be no exemption, if some other person is entitled to issue such voting rights which by themselves or aggregated with voting rights already held by such person (or with persons acting in concert, as defined under the Takeover Code) exceed the prescribed threshold.
Ajay Bahl, Co-founder, AZB & Partners