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Case No. 5 - Takeover Case

The appellate authority upheld the SEBI order directing five Mehta group companies to make an open offer for at least 20% of Saurashtra Cement Ltd.'s shares. The authority found that the company's first preferential allotment to promoters did not comply with SEBI guidelines by not disclosing the allottee identities, price, or new shareholding structure. While this decision protects shareholders, it raises important questions such as how the 20% is calculated given subsequent allotments, what price the offer must be at, and whether companies can use resolutions to dilute equity without following SEBI rules. The case highlights several issues around preferential allotments, open offers, and SEBI's jurisdiction.

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34 views2 pages

Case No. 5 - Takeover Case

The appellate authority upheld the SEBI order directing five Mehta group companies to make an open offer for at least 20% of Saurashtra Cement Ltd.'s shares. The authority found that the company's first preferential allotment to promoters did not comply with SEBI guidelines by not disclosing the allottee identities, price, or new shareholding structure. While this decision protects shareholders, it raises important questions such as how the 20% is calculated given subsequent allotments, what price the offer must be at, and whether companies can use resolutions to dilute equity without following SEBI rules. The case highlights several issues around preferential allotments, open offers, and SEBI's jurisdiction.

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Faculty of Economics

Subject Name: Venture Capital & Merchant Banking


Case on takeover by SEBI – Case no. 5
Saurashtra Cement Ltd. Case Highlight: The appellate authority's order in favour of the shareholders
against the preferential allotment to promoters.

The Appellate authority in the finance ministry had upheld the SEBI order directing five Mehta group
companies to make an open offer to acquire at least 20 per cent of Saurashtra Cement Ltd.'s voting
capital in accordance with regulations. According to authority's order the promoters did not comply with
SEBI's guidelines as the first preferential allotment did not have the identity of the allottees, the price at
which allotment was proposed and the change in the shareholding pattern post allotment. T

The management of SCL had thus acted in its own interest as per the Appellate authority. This decision,
though laudable, has however raised a few questions important questions too. Firstly, whether 20 per
cent of voting capital should be calculated post the preferential allotments. It was noteworthy that one
more preferential allotment complying with SEBI guidelines was made after the first which did not
comply with it.

Secondly, at what price must the offer be made - the price at which first preferential allotment was
made or the price that was offered by the unsuccessful bidder. Another point was whether companies
can use an enabling resolution for preferential allotment without complying with SEBI guidelines, dilute
the equity by opting for a staggered payment for the preferential allotment upon allotment in one or
more calls. Also, it was worth noting that the SEBI chairman had stated that the issue of whether the
preferential allotment made under Section 81 (l A) of the Companies Act can be declared as void and
null has to be dealt with by the competent authority under the Companies Act 1956 and SEBI has no
jurisdiction in this regard.

Other pertinent points that also came to light in this case are: •

 Given the findings by SEBI about the preferential allotment done to the promoters, what prevented
it from moving the DCA in the interest of the share holders of Saurashtra Cement Ltd. and the
interest of securities market. These were the most logical next steps that SEBI did not take.
 How to ensure that the non management shareholders do not get a raw deal, if the open offer is
made at a price other than at which preferential allotment was made.
 Whether it would be prudent for SEBI to use the excuse of "no jurisdiction over preferential
allotment" if as a defensive measure, the target company exercises the option of preferential
allotment after three months from the date of passing of the resolution.
As per SEBI guidelines, the validity of a resolution authorizing preferential allotment is three months.
It is possible that acquirers might exercise the option after three months and safeguard themselves
from the penalty of making an open offer at the price at which preferential allotment was made.

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