(First published on Linkedin)
A recent SEBI informal guidance has clarified the interplay between shareholding changes through preferential allotments and the trigger of open offer obligations under the Takeover Regulations vis-a-vis change in control.
(a) Present Shareholding and Board Composition: The promoter group currently holds approximately 73% of the listed company. The board consists of 6 directors: 2 executive directors, 3 independent directors, and 1 non-executive, non-independent director.
(b) Shareholding Shift: Pursuant to the preferential allotment of CCPS and CCDs to certain non-promoter investors, the promoter group’s holding will reduce marginally by (-)0.96%.
Further, pursuant to the preferential allotment of CCPS and CCDs to non-promoter investors:
– One foreign investor will hold approximately 24% post-conversion.
– Another foreign investor will hold approximately 10.9% post-conversion.
– Domestic investor entity will hold approximately 5.45% post-conversion.
Substantial equity will be allotted to non-promoter investors, but no single non-promoter entity will breach the 25% individual holding threshold.
(c) Board Composition Post Allotment: The board strength will increase to 14 directors, comprising:
– 2 executive directors,
– 7 independent directors, and
– 5 non-executive, non-independent directors (including nominees of new investors).
No non-promoter will have the right to appoint a majority of directors.
New investors will have rights to nominate:
– 3 directors (plus 1 observer without voting rights) by the foreign investor holding ~24%.
– 1 director (plus 1 observer without voting rights) by the foreign investor holding ~10.9%.
(d) Why It Was Not Considered a Transfer of Control:
– The promoter group will continue to retain majority shareholding.
– Non-promoter investors will not control management or policy decisions.
– The right to appoint nominee directors, without majority control over the board, does not constitute “control” under Regulation 4 of the Takeover Regulations.
– Accordingly, no open offer obligation arises under Regulation 4.
(e) Broader Impact on the Definition of Control:
– Companies Act, 2013: No change in “control” since promoters retain majority shareholding and board influence.
– FEMA Regulations: No fresh foreign direct investment resulting in control
– IndAS (Accounting Standards): No change in control for consolidation purposes under IndAS 110, as the ability to govern financial and operating policies remains with the promoter group.
The guidance reaffirms that control is assessed based on substantive rights over decisions, not merely based on shareholding percentages or board presence alone.