ORDER
A.K. Batra, Member
1.0 Tata Industries and Tata Sons Ltd (hereinafter collectively referred to as the “Acquirers”) together hold 37.53% shares in the equity share capital of Tata Finance Limited (hereinafter referred to as the “Target company”). The shares of the Target company are listed on The Stock Exchange, Mumbai (BSE), Ahmedabad Stock Exchange and the National Stock Exchange (NSE). The Acquirers propose to acquire 113, 079, 533 equity shares by converting Rs. 300 crores already advanced by the acquirers to the target company.
2.0 The acquirers made an application dated 1.07.2003 to Securities and Exchange Board of India (hereinafter referred to as SEBI) under sub- regulation (2) of regulation 4 of the SEBI (Substantial acquisition of Shares and Takeovers) Regulations 1997 ( hereinafter referred to as the Regulations) seeking exemption from complying with the provisions of Chapter III of the Regulations.
3.0 In the aforesaid application, the Acquirer submitted, inter-alia, the following:
3.1 About in May 2001, the company discovered significant financial irregularities/ fraud committed by its former managing director resulting in the company having a negative networth, as well as, not able to comply with the capital adequacy ratio prescribed by RBI for NBFCs. At that stage, Tata Group gave a commitment to RBI that they would adequately recapitalize the company to ensure that the shareholders, public depositors and other lenders do not suffer on account of the fraud committed on the company. Pursuant to the above commitment, the acquirers have from time to time given intercorporate deposits to the company which were subsequently converted into non refundable interest free advances which as on date aggregate to Rs. 300 crores so as to ensure that the company has a positive networth and RBI prudential norms are duly met. It is now proposed that the sum of Rs. 300 crores alredy advanced to the company be converted into equity capital of the company to comply with the directions given by RBI under Section 45 N of the RBI Act, 1934 vide its letter dated February 3, 2003.
3.2 The acquirers further submitted that the company is essentially a sick company as its entire networth comprising capital and reserves has been eroded by the accumulated losses. However, since it is not an industrial company as defined under the Sick Industrial Companies (Special Provisions) Act, 1985, it is not eligible for the automatic exemption from open offer available under Regulation 3 of the Regulations for sick companies. However, in reality and in substance, the objective is to revive the sick company by additional capitalization from the group companies and hence, the same should qualify for exemption from the provisions of SEBI Takeover Regulations as available to sick industrial companies. Without such conversion, the company will not be in a position to carry out its normal business activities which will cause great hardship to its employees, fixed deposit holders and most importantly its public shareholders .
The proposed allotment of equity shares to the acquirers by converting the non-refundable advances would be pursuant to the Directions issued by RBI under Section 45N of RBI Act, 1934.
4.0 The said application was forwarded to the Takeover Panel in terms of sub regulation (4) of regulation 4 of the Regulations. The Takeover Panel vide its report dated July 24, 2003 has recommended, inter alia, as under:
“In substance, as borne out from the facts disclosed, the objective appears to be to revive the sick company by additional capitalization from the group companies. In the circumstances, grant of exemption as sought is recommended subject to –
i) the target company passing the requisite resolution as per Section 81 (1A) of the Companies Act, 1956 and complying with all procedural formalities in connection therewith; and
ii) allotment price is higher between the price fixed in accordance with pricing formula under SEBI ( Disclosure & Investor Protection ) Guidelines, 2000 and Regulation 20 of the Takeover Code.”
5.0 I have taken into consideration the application dated July 1, 2003, the material available on record and the recommendations of Takeover Panel.
5.1 It is noted that the Acquirers hold 3, 25, 46, 682 equity shares (representing 37.53% ) of the target company.
5.2 It is noted that the Acquirers propose to convert Rs. 300 Crores advanced to the target company in to equity capital of the target company to comply with the directions issued by RBI under Section 45N of the RBI Act 1934 vide its letter dated February 3, 2003.
5.3 It is noted that the preferential allotment of 113, 079, 533 to the Acquirers on conversion of Rs. 300 Crores advanced by the acquirers is to ensure that the target company achieves the capital adequacy norms prescribed by RBI.
5.4 It is noted that in the Annual General Meeting of the company held on August 26, 2003 the shareholders unanimously approved the special resolution under Section 81(1A) of the Companies Act 1956 for preferential issue of 113, 079, 533 shares at a price of Rs. 26.53 per share to the Acquirers.
5.5 The shares of the Target company are frequently traded at BSE and NSE and in terms of Regulation 20(4) of the Regulations the price of the share as on 1.07.2003 is Rs. 23.47 ( date of the application being the referral date)per share and the book value per share of the Target company as on the date of application is Rs 13.33.
6.0 Taking into consideration the above, the recommendations of the Takeover Panel and the interest of the public shareholders of the Target company, 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 the Regulations, hereby grant exemption, to the Acquirers from complying with the provisions Chapter III of the Regulations with regard to the proposed acquisition of 113, 079, 533 at a price of Rs. 26.53 per share in the preferential allotment approved by the share holders of the Target company in the Annual General Meeting held on August 26, 2003.
6.1 The Acquirers are directed to complete the proposed acquisition within 30 days of the order and file a status report with the Board on the same within 15 days thereafter.
6.2 This order shall come into force with immediate effect.