SUPREME COURTS VERDICT ON WITHDRAWAL OF OPEN OFFER BY NIRMA

Introduction

Supreme Court in the case of Nirma Industries Ltd & Anr v. SEBI rejected Nirma Industries‘s (‘Nirma’) plea for withdrawal of public offer. Background Nirma Industries applied to SEBI under Regulation 27 (d) of the SEBI (Substantial Acquisition of Shares and Takeovers Regulations) 1997 (“Takeover Code“) to allow the withdrawal of the open offer alleging fraud and embezzlement of funds by the promoters of the target company.

SEBI rejected the application without giving an opportunity to Nirma to be heard in person in person. SAT upheld the order of SEBI. Hence, Nirma approached the Supreme Court. Applicable Law Regulation 27 of the Takeover Code provides as follows: (reproduced).

No public offer, once made, shall be withdrawn except under the following circumstances:— (a) [***] (b) the statutory approval(s) required have been refused; (c) the sole acquirer, being a natural person, has died; (d) such circumstances as in the opinion of the Board merit withdrawal.” [Note: Underlining supplied for emphasis]

Ruling

The apex court held that discretionary powers of SEBI are limited while considering an application for withdrawal of an open offer. Based on facts of the case, Supreme Court observed that Nirma‘s real reason for seeking withdrawal was for avoiding economic losses. However, the possibility that the acquirer would end up making losses instead of generating a huge profit would not bring the situation within the realm of impossibility and that it should have exercised due care and caution before investing.

The court observed that residuary powers of SEBI under clause (d) of regulation 27 of the Take Over Code to grant exemption had to be considered ejusdem generis 19 the earlier powers. Since the earlier powers conceived of a practical impossibility of the open offer going further, the residuary power of SEBI has also to be restricted to those other situations where there was practical impossibility.

Analysis

By applying the principle of ejusdem generis, the Court has limited the powers of SEBI to grant exemption from making an open offer.

In case of listed companies, insider trading regulations apply and an acquirer may not practically be able to conduct extensive due diligence.

Regulation 23 (1) (d) of the Takeover Code 2011 has the same provision as Regulation 27 (d) of the Takeover Regulation, and therefore ratio of this judgment would squarely apply to exemptions sought under the New Takeover Code.

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