The Supreme Court on the SEBI Takeover Code

The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 [“the Takeover Code”] is among the more important legal instruments regulating acquisitions in India. Earlier this year, the Supreme Court had occasion to consider one of the key issues this instrument addresses – computation of offer price – in Daiichi Sankyo Co. v. Jayaram Chigurupati.

The case arose out of two well-known acquisitions in 2007 and 2008. In October 2007, Ranbaxy Laboratories Ltd. [“Ranbaxy”] entered into an agreement with Zenotech Laboratories Ltd. [“Zenotech”] and with its promoter, Dr. Chigurupati, to purchase a substantial block of Zenotech shares. As Ranbaxy acquired by virtue of this agreement over fifteen percent of the voting rights in Zenotech, it was obliged to make a public offer to Zenotech shareholders, which it priced at Rs. 160. This price was computed in accordance with Regulation 20(4) of the Takeover Code. The public offer was duly completed, and Ranbaxy ended up with around 47 % of Zenotech’s shares, although the promoter continued to retain a substantial stake in the company.

In June 2008, Daiichi Sankyo Co. Ltd. [“Daiichi] entered into an agreement with Ranbaxy and its promoters to acquire around 31 % of the shares in Ranbaxy. As with Ranbaxy’s acquisition of Zenotech, this triggered the public offer requirement in the Takeover Code, which Daiichi priced at Rs. 737 per share. On October 20, 2008, Daiichi’s holding in Ranbaxy crossed 50 %, making the latter a Daiichi subsidiary. However, the Ranbaxy acquisition also meant that Daiichi acquired control over Zenotech, albeit indirectly, and it was accepted by all parties that Daiichi was required as a consequence to make a public offer for Zenotech shares as well. The dispute centered on the price at which it was required to make the offer, and the decision of the Supreme Court turned on the scope of two provisions of the Takeover Code – Regulation 2(1)(e) and 20.

Regulation 20 addresses the computation of “offer price”, and clause 20(12), inserted by way of an amendment in 2002, provides that in the case of an indirect acquisition, the price that prevails on the date of acquisition of the parent company shall be compared with the price prevailing on the date of acquisition of the target company, and that the offer price shall be the higher of these two sums. This was inserted in accordance with recommendations of the Second Bhagwati Committee, which noticed that indirect acquisitions require specific regulation, since its commercial dynamics are materially different. For example, Regulation 14 specifies that a public offer shall be made within four working days of the agreement that triggers it – except that there is never an express agreement in the case of an indirect acquisition.

The method of computing price is determined by Regulation 20(4) or (5), and the applicable provision in Daiichi was 20(4). Regulation 20(4) consists of three sub-regulations, and specifies that the offer price is the highest of the result produced by the three methods. Both parties agreed that clause (a) was inapplicable in the circumstances. Daiichi argued that the applicable provision was Regulation 20(4)(c) – the average of the weekly highs and lows of the share price computed in the specified manner, which turned out to be Rs. 113.50 per share. The promoters of Zenotech, on the other hand, argued that the applicable provision is Regulation 20(4)(b), which provides that the offer price is the price paid by the acquirer or by “persons acting in concert with him” for shares of the target company during the period which is 26 weeks within the date of the public announcement. This produced an offer price of Rs. 160 per share – the price that Ranbaxy had paid for Zenotech shares.

The Supreme Court accepted Daiichi’s contentions, holding that Regulation 20(4)(b) is inapplicable. It cited two reasons for this ruling – first, that Daiichi and Ranbaxy are not “persons acting in concert” for the purposes of Regulation 20(4)(b), and secondly, even if they are, Ranbaxy had purchased Zenotech shares before that relationship had begun. As to the first, the Court referred to the definition of the term “persons acting in concert” in Regulation 2(1)(e) of the Takeover Code. It provides that persons acting in concert are persons who directly or indirectly cooperate by acquiring (or agree to do so) shares/voting rights or control over the target company “for a common objective or purpose of substantial acquisition of shares or voting rights or control”. Regulation 2(1)(e)(2) provides that certain categories of persons are “deemed” to be “persons acting in concert” with each other, and sub-regulation (i) provides that this includes a company, its holding company and its subsidiary. As we have noted, Ranbaxy became a subsidiary of Daiichi in October 2008, and had paid Rs. 160 for Zenotech shares in January 2008. Relying on this fact, the Securities Appellate Tribunal had held that Regulation 20(4)(b) applies.

Examining the term “persons acting in concert”, the Court observed that the deeming provision does not provide that the mere existence of a holding-subsidiary relationship is sufficient to create this relationship. The Court held further that the deeming provision does not dispense with the requirement that the parties must have cooperated for the common objective or purpose of substantial acquisition of shares, and held further that this must be established as a matter of fact, on an analysis of the conduct of the parties. In addition, the Court found the relationship of “persons acting in concert” must exist not at the time of the public announcement, but at the time of acquisition, for the purposes of Regulation 20(4)(b). As a result, even assuming Ranbaxy and Daiichi were “persons acting in concert”, this relationship did persist between the parties at the time Ranbaxy purchased the shares of Zenotech.

This judgment is an important one, for it clarifies the scope of the computation provision in Regulation 20(4), and of the deeming provision in Regulation 2(1)(e). A more technical analysis of the decision is available here, where I have suggested that certain observations of the Court may, with respect, require reconsideration.